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Russia's property market forecast 2021 - Part 1

Part One / RESIDENTIAL & OFFICE SEGMENTS

It is always very difficult to make predictions of any kind in a country like the Russian Federation, but on the basis of our daily on-the-ground experience we can share the following considerations.

In the course of 2021 it seems likely that a certain gap will remain (and perhaps even further increase) between the large number of offers on the market and a more timid and limited demand, which more plainly will show in certain segments.

Residential:

The increasing affordability of mortgage loans should help keep demand lively in the segment of new construction homes, especially when the talk is about cheap apartments in the suburbs of large cities, which some buyers usually consider also for investment purposes.

Despite the crisis, average prices on the resale market in Moscow's traditionally "sought-after" districts (e.g. most of the city centre and the South-west) have risen over the last two years, although the average exposure period for finding buyers has definitely increased there as well. In this case, prices could remain more or less at the same level due to the fact that in the centre new developments mainly relate to conversion projects of historic buildings into luxury condominiums with prices that are accessible only to a very limited number of "lucky few".

In St. Petersburg, on the other hand, average prices for flats in good condition in the central districts remain comparatively very appealing and keep attracting interest mainly among domestic buyers from other cities and investors from abroad. Suffice it to say that even today in the Tsentral'ny and Admiralteysky districts it is still possible to find apartments at prices ranging between 130,000 and 170,000 RUB/m2 (equal to about 1500-1900 EUR/m2 as per the current exchange rate) in historic blocks of flats where, however, the condition of the common areas often leaves much to be desired.

As far as residential rentals are concerned, the following key-factors have been observed over the last few years: (a) a sharp decline in the number of foreigners moving to Russia for professional tasks in management roles; (b) many foreigners, by virtue of the worsening economic outlook in the country  have left the country (and, as a consequence, made vacant a large number of high-end properties); (c) the constantly decreasing purchasing power of the population and households; (d) a widespread perception of the risk of job loss and the decline in profits from business activities.

All these elements have contributed to a strong reduction in the 'popularity' of expensive or premium rental solutions, which were previously largely the preserve of expatriates and foreign executives. Demand for these types of options has dropped significantly and - at least in the first half of 2021 - we would not expect this trend to change. This may lead more and more landlords to review their price expectations downwards in order to try to rent their flats within a reasonable timeframe.

In addition to that, some landlords who have resigned themselves to prolonged tenancy vacancy periods may decide to put their flats up for sale, especially once they realize that rental yields have fallen, in the hope for an immediate monetization.

Offices:

In recent years, this segment has perhaps suffered the most from the country's economic downturn and financial crisis. As if that were not enough, in recent months, it has been the one that has felt the impact of the pandemic's effects most strongly.

In fact, while in the previous five years many companies went bankrupt, abandoned the Russian market or at least tried to optimise operating costs by moving to smaller spaces and cutting down on staff, as of this year the impossibility of making full use of rented spaces has made local companies discover "smart working" and convinced many of them that this working system could be maintained even after the restrictive measures linked to COVID have been lifted.

If we add to this the fact that in many sectors the projections for the coming months do not give rise to any particular optimism, it is to be expected that in this segment demand will continue to be exponentially lower than supply, many spaces will remain vacant and the administrations of some office complexes may opt for a conversion of large vacant areas (for which it might be particularly difficult finding tenants in the current situation) into co-working spaces, as is already happening in part.

END PART ONE

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Russia's property market forecast 2021 - Part 2

Part Two / RETAIL & INDUSTRIAL SECTORS

Retail and restaurant premises:

The closures imposed during the spring lockdown not only led to a serious crisis in the retail sector due to lost revenues and the subsequent impossibility to meet their contractual obligations (which affected deeply also the shopping center industry), but also induced a changed perception of the shopping experience among many regular users.

Statistical data published by a number of specialized companies show that during the spring 2020 lockdown the average number of visitors to Moscow's shopping centers (where only supermarkets, pharmacies, children's stores and telecom stores could be visited at that time) plummeted by 70 per cent, but even in the weeks between October and the end of the year - despite the absence of formal restrictions - there was a 30 per cent drop in Moscow and around 25 per cent drop in St Petersburg compared to the same period the previous year.

At the same time, online sales increased by 20% during the year and online grocery sales also rose significantly.

It is no coincidence that even in the most prestigious shopping streets and "luxury districts" the number of vacancies has clearly increased (up to the 15%) compared to the past. This has led to a drop in rents, which - while in the most sought-after areas amounts to an average of 10-15% - has reached peaks of up to 30% in less popular locations. A similar trend can be observed in shopping centers, where the percentage of vacant space averages between 10-15%.

Uncertain times are also being experienced by restaurant operators everywhere. Many establishments have closed their doors permanently in recent months, although most have continued to operate even during the period of introduction of the more restrictive measures thanks to home deliveries and take-away sales. The average expectation for a drop in turnover in the current year for operators in the sector is 20-25%.

Under these assumptions, it is plausible that at least in the first half of 2021 the situation will remain more or less unchanged and landlords will have to resign themselves to offering retailers and restaurateurs cheaper rents than they were used to in better times.

 

Industrial properties (warehouses, storage- and manufacturing spaces):

The segment of light industrial, storage- and manufacturing spaces in and around major cities is the one that probably has been least affected by the upheavals related to the pandemic.

In the Moscow region alone, there has been a total demand for 1.5 million square meters of new properties of this type, which can also be explained by the increasing turnover of e-commerce operators who therefore need more and more space to store their goods. It is no coincidence that the record-breaking deal of the year saw Russian online retail giant "Ozon" sign a lease for some 200,000 m2 of warehousing space on a build-to-suit basis.

This is what many operators in the local market value most: the turnkey construction of warehouses based on their own individual technical requirements and specifications. This keeps the vacancy rate rather low (approx. 5%) in "A" or "B+" category complexes built in recent years and at the same time tends to prevent downward price fluctuations.

It should be noted that the demand for modern, high-quality warehouses is also increasing in the regions, driven here as well in particular by e-commerce operators.

All in all, it is to be expected that prices for industrial (manufacturing and warehousing) spaces will remain virtually unchanged in the coming months, and in some cases may even rise slightly.

 

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