In 2006, deals involving office space in Russia made up almost one-quarter of all transactions in eastern and central Europe. In 2007, experts predict that the value of the Russian residential and commercial property business will leap to 11 billion euros. An investor's profits from real estate operations, depending on the type of investment, could vary from 8.5% to 35% per year.
In 2006, investment in commercial real estate worldwide totaled $643 billion (487 billion euros). According to Cushman & Wakefield, a real estate agency, they rose by one-third last year to a record high. The agency forecasts that world investment in real estate will grow in 2007 to $681 billion, with half of it in Europe.
European property has been described as the best investment opportunity compared with other continents. Its estimated returns exceed profits from international and European securities, as well as from U.S. real estate and securities. Experts predict that capital movement will change, too. Instead of direct investments in the purchase of real estate, investors will be putting their money into real estate investment funds.
Russia, and particularly the Moscow real estate market, has, according to major developers, become the world's third largest market after London and Paris. Forecasts by DTZ Holdings, a consultancy, indicate that the value of commercial property deals in Russia in 2007 will reach 5 billion euros, compared with 3 billion euros in 2006 and 1 billion euros in 2005.
Investments in this sector are divided practically half and half between retail and office space. According to Cushman & Wakefield, returns on office investments at the end of 2006 in Moscow were around 8.5% per year, while space rented out to retail stores yielded as much as 9.5%. By 2009, profits in this segment may come down to 7% or 7.5%, but even in that case they will be higher than in Western Europe, where commercial real estate investment returns are only 4% per year.
Office property is the main aim of direct investments. However, some respectable real estate investment funds also invest in housing. Deals on the primary residential market today make up the bulk of the Russian property market. What is more, potential profits for housing investors are far higher than if they invest in commercial real estate. The average cost of one square meter of floorspace in Russia at the end of 2006 was $1,200, a rise of 50% year-on-year. As forecast by Oleg Repchenko, head of a Moscow-based think tank specializing in property market indicators, the figure will climb to $1,500 per square meter in 2007.
"The experience of world real estate markets shows that the average term for planning property investment is 6 to 7 years," said Olga Pobedinskaya, marketing director at Agent 002, a real estate agency. "Over this period, market yields (with the exception of manifestly depressed economies) have not only preserved the capital, but have also generated an income, including from property management. The Moscow capital regional market has several segments which can be successfully exploited for profitable investment. Depending on the type, investment can bring in between 10% and 35% per year. If an investor purchases housing at the construction stage, the recoupment time of the project is cut down to two and a half years."
Figures for the value of all property deals in Russia are only approximate. Based on data from the Federal Agency for Construction, Housing and Utilities (Rosstroi of Russia) and the average cost of one square meter across the country, deals on the primary housing market were estimated in 2006 at $60 billion. Combined with last year's deals on the secondary real estate market, the indicator may be between $140 billion and $380 billion.
Today, according to a report entitled "New Trends on the European Real Estate Market in 2007," drawn up jointly by PricewaterhouseCoopers and the Urban Land Institute, Paris, London and Stockholm remain the most attractive cities in Europe in terms of sound property investment. The economic situation in these cities is predictable and free of high risks. But in terms of development prospects, Moscow's property market shares first place with Istanbul. Continued high growth of office rents, limited availability, and increased demand for all types of property in Russia are attracting both Russian and foreign investors and developers.
The property market in Russia is at present one of the priorities for investors, said Richard Gregson, a partner at PricewaterhouseCoopers, which leads the pack in rendering services to the property sector in Russia. The high potential combined with the shortage of office, residential and hotel space and the population's steadily rising incomes have built a strong basis for the sustainable development of the market. But these positive trends should always be considered alongside the difficulties any investor is liable to meet in a developing market. Indeed, Moscow ranks first among 27 European cities in terms of investment risk. On the other hand, it placed second in future returns on invested capital. The Russian capital was also recommended as the best choice among all surveyed cities for purchasing commercial property.