In the first half of 2014, investment activity in Russia declined significantly due slower economic growth and exchange rate fluctuations caused by the unstable political situation in Ukraine. The commercial real estate market in Russia saw investment deals totalling $1.2 billion, which was approximately 30 percent of the volume for the same period in 2013. The main market players have adopted a wait-and-see approach, but they are also continuing to express interest in quality properties with good location. During the first six months of the year the hotel segment accounted for the largest share of investment, with deals totalling $420 million, according to Colliers International.
The second most appealing segment for investment during the period was retail real estate, where investment deals totalled $395 million. The office sector generated $325 million in investment transactions compared to $28 million in warehouses. Small investment deals were the most popular during the first half of the year, as transactions under $50 million accounted for more than 80 percent of all transactions.
In the first half of the year most investment activity was focused on the hotel sector, which accounted for 35 percent of the total investment volume. At the same time, it is worth noting, that basically this is a result of one deal in hotel sector – VTB Capital Asset Management purchases an 84.06 percent stake in Hotel Company, which is one of the largest consolidated hotel players in the Moscow market with a portfolio of 13 hotels. It should also be noted that this deal was a non-cash transaction involving an asset swap. Deals were also made in the retail and office segments and land was acquired for future construction projects.
As in the previous year, investor interest was largely focused on assets in Moscow. The Russian capital accounted for 87 percent of the total investment volume. In addition to the direct real estate market transactions, which were included in the tally of Colliers International’s analysts, there were also a number of transactions, which involved indirect investment in commercial real estate. These investments were made in an already established portfolio of institutional assets managed by an experience market player, for example, the acquisition of stakes in O1 Properties by ICT Group (26 percent) and Goldman Sachs (6 percent).
There were no public transactions on the market during the first half of the year, which indicated a change in capitalization rates. Thus yields remained the same as in 2013 and for prime commercial properties were as follows: 8.5 percent in the office sector, 9 percent in the retail sector and 11 percent in the warehouse sector. In the forecast, capitalization rates may change within +0,5 p. p. until the end of the year.
Stanislav Bibik, Executive Director, Head of Capital Markets, Colliers International Russia, commented: “The Russian commercial real estate market remains appealing for investment, and we see interest from both Russian and international investors. As the geopolitical and economic situation stabilizes, new deals will emerge on the market. The high volume of investment transactions last year was driven by a number of large deals, and that situation is not likely to be repeated this year. In light of the crisis in Ukraine, we prognosis a 50-55 percent drop in the investment volume to the range of $3.7-4 billion.”