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Knight Frank: Moscow property market collapses

Office leasing figures plummet to below levels last seen in 2009, while investment figures also drop by a quarter as Russia faces a 3 percent fall in GDP this year, research by brokerage Knight Frank says.

Ongoing economic difficulties in Russia have led to a significant slump in Moscow Class A office rents as well as office investment volume, according to research published today.

According to broker Knight Frank, office leasing take-up in Moscow for the whole of 2014 sank to a net total of just 3.76 million square feet – less than half the level of 2013 and below even 2009 levels during the height of the global financial crisis. There was a commensurately severe decline in asking rents in the Russian capital said Knight Frank in the Q1, 2015 Office Market Outlook paper.

Class A rents, it said, fell to $590 per square meter ($6,350 per square foot) in 2014, some 26 percent down on 2013. Class B rents slumped even more – by 36 percent. In its report, Knight Frank said: “Q4 saw the steepest fall owing to a volatile Russian ruble, which went to an all-time low against the dollar of $68 in December 2014, before re-gaining some strength in January 2015 and again falling in early February. Until the currency finds some form of stability, landlords are offering short-term ruble- only tenancy agreements, or adopting fixed exchange rates to prevent loss by converting to US dollar (or euro).”

The startling statistics come against a background of an economic slump in Russia. GDP in Russia is expected to fall by at least 3 percent this year as the country suffers from recession like conditions. 

Accordingly, investment volumes also fell last year. Knight Frank said: “Ongoing geopolitical conflicts, such as the Russia-Ukraine crisis, caused investment sentiment in Moscow to decline throughout 2014, as many investors cancelled, delayed or put investment plans on hold”. 

Office investment suffered as a result, falling 25 percent on 2013 to reach $2.2 billion. However, although volumes fell, offices performed better than other commercial sectors, some of which declined by as much as 90 percent in the same period. Russia’s key interest rate, which increased by 650 basis points in December 2014 to reach an all-time high of 17 percent, also contributed to this fall and left many purchasers unable to complete their transactions. 

The statistics might present some private real estate investment firms with a reason to take a closer look at Russia, including opportunistic buyers moving into distressed markets.

Indeed, some, but not many, firms have raised dedicated Russia property funds in the recent past. In 2012, Hines closed its Hines Russia & Poland Fund on $515 million of equity commitments in one of the most noteworthy fund raises.