Tonic for Fever

Despite the slew of headline-grabbing news in recent months about the arrests of several of Russia’s leading businessmen, the failure of the pro-business liberal parties Yabloko and the Union of Right Forces and the success of the nationalist-oriented Rodina party in the Duma elections, property professionals and real estate investors do not expect any major disruptions to the property market as a result of last December’s parliamentary elections and the forthcoming vote on the presidency in March.

On the contrary, they point to Russia’s underlying political and economic stability. According to Tim Millard, Property Consultant, Investments Division, at Stiles & Riabokobylko, writing in the December 2003 edition of Investment Advisor: “It appears as if the pace of economic growth in Moscow and the Moscow Region is unaffected by recent events (Yukos, Election Fever, Terrorism). Could we be imagining things, or has the local Moscow real estate industry moved into high gear to accommodate the continuing demand for space across all sectors – office, retail, industrial and housing?”

The view that headline-making events have had little effect so far on the property market and that the upcoming presidential elections are unlikely to do so is echoed by others in real estate.

“Even the arrest of Khodorkovsky last October had no negative effect on the economy or the real estate market. Uncertainty only lasted for about a month or so,” says Michael Lange, European Director and Managing Director CIS at Jones Lang LaSalle in Russia. “In fact, investors and analysts took up a relatively brief holding pattern after Khodorkovsky’s arrest, but most people came to the conclusion that the Khodorkovsky affair would not have any long-term economic effect. This is of course crucial for the real estate market, where you are looking at investment horizons of 10-15 years, and so you have very different investment strategies compared to more opportunistic investors with shorter term investment horizons who are looking for quicker returns.”

Lange also feels that the Duma elections in December 2003 and the forthcoming presidential election in March 2004 are having less affect on all kinds of investment, including real estate investment, than previous elections in Russia.

“Several years ago, Moscow was still a volatile emerging market, so for about the 6 months before and the 3 months after parliamentary and presidential elections there was a general slowdown in the economy, with lower levels of both real estate and Foreign Direct Investment (FDI). But with the stability of recent years, things are different this time around and neither the parliamentary nor the presidential elections are regarded as a crucial issue by investors.”

“Now, even if the widespread rumours about the wholesale resignation and replacement of the current government after Putin’s re-election do actually materialize, international investors are unlikely to change their view on Russia since they don’t expect any real change in the country’s economic policies.”

Indeed, the success of the United Russia party in December’s Duma elections augers well for not only for Russia’s continuing stability, but also for its further consolidation and development on the economic and business fronts. This is turn will benefit the real estate market.

Oleg Myshkin, Director at Colliers International in Moscow, is thus optimistic that President Putin’s second term in office will see legislative changes which will help the further development of the property market. “Real estate needs economic and political stability more than many other types of investment, but I don’t expect any downturn now. Even during his first term, President Putin managed to push through new laws to promote business in general, such as the simplification of the tax structure, the reduction of corporate and income tax and the reduction of VAT. And of course real estate has also benefited from this new climate in the shape of the Land Code.”

Myshkin believes that the success of the United Russia party in December’s Duma election and its overall majority in parliament are very positive for the economy in general and real estate in particular. “Since United Russia is very pro-Putin, we now have the president and the Duma pushing in pretty much the same direction,” says Myshkin. “Since little opposition can be expected from parliament now, I would therefore anticipate much more pro-business legislation to be passed, so President Putin’s second term should see a big improvement in various areas. A lot of loopholes in the Land Code remain, for instance, and I would expect these to be closed. So we should see a tightening up of land titles, and I also expect legislation to help develop the mortgage market further. A further reduction in VAT would also be beneficial to the real estate market.”

Looking ahead to 2004, Jones Lang LaSalle points out that Russia has achieved economic stabilization, with a stable currency and a budget surplus of 2.2% in 2003, when the country’s sovereign ratings were upgraded, and is expected to record a surplus in 2004 and 2005 as well. Moreover, Russia remained relatively unaffected by the downturn in the US and EU, the government is boosting demand by increased state spending, and WTO membership for 2005 remains on track

According to research by Jones Lang LaSalle, Russia’s economic and political stability in recent years is reflected in the increasing take up of office space, which rose dramatically from 340,000 square meters in 2001 to 430,000 square meters in 2002 and to 660,000 square meters in 2003, putting Russia among the top 3 European markets in terms of absorption. Jones Lang LaSalle is forecasting a take up of 700,000 square meters plus for 2004.

“In fact, if you look at the take up of office space, it rose dramatically in 2003, and we’re expecting at least that level in 2004 on the back of further economic growth,” says Lange. “So we’re now seeing new, unprecedented levels of confidence among foreign real estate and FDI investors into Russia, which is very encouraging for the mid- and long-term.”

Ian Pryde

Written for The Moscow Times Business Review, Real Estate Quarterly Q1 2004 and published in February 2004.

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