The political and economic uncertainty which took place in Q1 2014, has had a significant negative influence not only on Russian growth forecasts (according to JLL estimates Russian GDP forecast for 2014 was downgraded to 0.0%) but also on the local real estate investment market.
With the economy under pressure and investor sentiment uncertain, JLL analysts have revised down their expectations for investment volumes for 2014 to USD3.4bn from the USD7.0bn forecast at the start of the year.
“This downgrade in our 2014 forecast implies that investment levels could be the lowest in post-crisis period and comparable to total investment volumes in 2009 when investment volume reached USD3.2bn. But there may be some upside if activity increases by July.” - Tom Mundy, Head of Research, JLL, Russia and CIS, noted.
Capitalization rates have also reacted to the current market situation. According to JLL estimates, for shopping centres and offices, rates increased by 25bps to 9.25% and 9.0% respectively. For the warehouse segment rates remain at 11.0%.
As forecasted by JLL analysts, investments into offices dominated the market in Q1 2014, accounting for 46% of total volumes, compared to 37% in the corresponding quarter of previous year. Retail investments fell to 12% of volumes vs. 57% in Q1 2013. We note that it is the sale of Metropolis shopping centre that accounts for this rather than a decline in interest in the retail segment in general.
Investor interest was, as usual, focused on Moscow accounting for 83% of total deal volume. The share of investments into Russian regional cities amounted to 12%. At the same time the share of St. Petersburg was only 5% of total investment volume for the quarter, versus 4% in Q1 2013, while total investment volumes have decreased by USD66m.
The market remains evenly balanced between Russian and foreign investors with their shares amounting to 50% of total investment volume in the first three months of 2014 correspondingly. However, largely because of the uncertain political and economic climate, we expect the share of foreign capital to drop to 10-20% of investment volumes by the end of 2014.
Tom Mundy added: “Investors still understand that the fundamental dynamics of the Russian market – meaning that there is a major undersupply of stock in all sectors – are attractive. However due to the uncertainty of the situation in the Crimea and volatility in the currency, investors remain in “wait and see” mode. This increased level of cautiousness will inevitably have an impact on investment volumes in the short term.”