Investment Advice
What makes the Russian real estate market so interesting for real estate investors is simply the deep structural shortage of all kinds of buildings and space which are suitable for a capitalistic society. The centrally planned economy which existed in Russia from 1917-1991 systematically underproduced many goods, particularly buildings. It will take some decades of intensive development to bring the real estate markets into equilibrium.
The shortage of various types of space, combined with demand created by the relatively strong local economy in Moscow, has created some of the highest rents in the world. The 1998 ruble devaluation and resulting economic crisis produced a pause in new office absorption which led to a sharp decline in prime office rents, but these are still the highest in Central and Eastern Europe and still very high by world standards. At the same time, construction and land costs have fallen sharply, maintaining real yields in the range of 20% to 30%. Today it is possible to construct an “A” class office building in the Central Business District of Moscow for about $1,600/m2; and net rent for such space may be expected to be in the range of $400 — $500/m2.
The Moscow office market was the hardest hit by the 1998 ruble devaluation, and today higher returns can be found in the residential and retail markets. Really good residential space is still almost non-existent, and the closest approximations thereof currently sell for $5,000/m2 and more. Such space can be constructed for less than $2,000/m2 including land. Residential space can also be built for lease to Western managers; net rents are currently close to the rates applicable to “A” class office space in the CBD. Lowrise residential projects are particularly interesting because the relatively high rate of free cash flow allows construction of small phases, with the construction of subsequent phases financed out of free cash flow.
The Russian real estate market currently lacks any significant amount of available debt capital, either construction financing or permanent debt financing, and this fact contributes to the high prevalent yields. The high yields prevalent in all market segments create interesting investment opportunities, and create the prospect of rising sales prices as debt capital becomes available in the market and cap rates fall. This phenomenon has already taken place in other Eastern European markets where the availability of debt capital has already reduced cap rates to 10%-11% on the secondary market.
GVA Sawyer, drawing on its experience, local market knowledge, and technical and financial expertise, is able to assist individual and institutional investors in various phases of the development and implementation of investment strategies for the Russian real estate markets, including:
- Commissioned empirical research and economic and property markets forecasting
- Investment strategy development
- Financial engineering of individual projects or real estate portfolios
- Technical and financial evaluation of projects; feasibility studies
- Development management
- Management of acquisition and disposal of real estate assets
- Asset management
- Fund management
GVA Sawyer’s efficient management structure, diversified operations, and moderate overhead provide the possibility of flexible fee structures which are strongly performance-linked.
GVA Sawyer is an institution-friendly organization which follows the highest standards of internal control and reporting, and which uses state of the art information technology systems in all aspects of its work. GVA Sawyer is therefore able to satisfy the most rigorous institutional standards for reporting and control.
