#10 - JRL 7013
New England Real Estate Journal
January 10, 2003
Investors seek opportunities overseas; Real Estate in
Moscow.
By Oleg Uritsky (uritsky@obugroup.com)
Cap rates of 15% and overall risk-adjusted yields exceeding 21% per annum for class A office buildings - even higher for retail, residential, hotel and parking - start attracting American investors to the Moscow real estate market. A number of funds and joint ventures are capitalizing on the high demand and undersupply which characterize this untapped real estate market.
With a stable and growing economy government surplus, and an annual GDP above 4%, the Russian market is considered one of the most promising markets in the world. Every real estate sub-sector is underdeveloped. The current real estate infrastructure is old and inefficient. It is unable to support the growing number of Western companies that are rapidly entering the Russian market.
Demand for prime office space is about 25% to 35% higher than supply. Moscow's 2001 supply of office space was about 7% of London's supply and 4.7% of New York's supply. In the residential sector, most Muscovites still live in small Stalin-era units. People have the money to buy better apartments but are unable to do so because of the undersupply. Residential developers often lack outside financing, but are able to cover construction costs through pre-construction sales. Developers often sell an entire complex prior to its completion, thereby avoiding speculative risk. Consumers in turn receive a discount of 30% to 40% through the purchase of pre-construction units. The retail real estate market has experienced unprecedented growth in the past two years. This year alone, Russians' buying power grew by 25%. But the present number of shopping malls is unable to accommodate the growing demand since the availability of standard-quality shopping facilities is only 10% of the required capacity. As a result many retail companies have sought to sell and lease back real estate to use the proceeds for expansion. In the hotel sub-sector, developers are just starting to construct three-star (budget) hotels. The tourism industry in Moscow is on the rise, but Soviet-era hotels are dilapidated, making it difficult to find accommodations for $85-$95 per night. Over the past several years, U.S.-based chains have developed almost exclusively five-star and high-end hotels. Parking facilities may become another big-ticket item in the near future. Major congestion on roadways is hurting Moscow's effort to build a reputation as a world-class city and the lack of parking space adds to the problem. Parking space availability is about 26% of demand, which means that for every one car parked in a designated space, two cars are not.
Under President Putin, the government has started many reforms to attract foreign investment. After 70 years of Soviet rule, a new Land Code was recently introduced allowing private land ownership. Russia has the lowest tax rate for individuals in Europe. Problems with organized crime no longer concern foreign investors. Corruption still generally exists but it is manageable and predictable. In November 2002, S&P upgraded Russia's credit rating prompting higher interest from institutional investors. The current risk for investing in Russia is relatively low in comparison with other emerging markets. However, risk perception among U.S. investors has prevented them from diversifying their portfolios with Russian real estate assets. The Russian real estate market is therefore a well-kept secret and a lucrative opportunity for bold investors who think outside of the box.
Oleg Uritsky, JD/MBA is a principal of a number of real estate holding companies, which acquire and operate multi-unit rental properties in Boston and nearby suburbs. Uritsky is affiliated with OBU Group that is creating a real estate joint venture/fund for entry into the Russian real estate market.
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