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News Release

​Moscow

2015 Russian Real Estate Investment Volumes Could be the Lowest in 10 Years


Moscow, 15 January, 2015 – Last year was tough for the Russian real estate market as annual investment volume reached USD3.5bn, according to JLL analysts' calculations down 57% YoY. This number reflects particularly weak Q4 investment volume of USD609m; a decreased of 81% YoY. The market moved in line with the macroeconomic environment driven by a weaker oil price and a higher cost of debt.

According to preliminary estimations of JLL analysts, investment volumes into the Russian real estate market will not exceed USD3.0bn in 2015, which would be the lowest level for the last 10 years. "During this year the investment market will be driven by the availability of financing, so the influence of this factor will be constraining in nature. Therefore we predict an increase of acquisitions with the use of equity." – Olesya Dzuba, Deputy Head of Research, JLL, Russia and CIS, told.

Russian Real Estate Investment Volume Dynamics, USD bn*

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* Investment deals, excluding land acquisitions, JVs, direct residential sales to end-users

Source: JLL

Market uncertainty, especially the high volatility of rouble exchange rate, will be a constraint for real estate investment deals, according to JLL experts' opinion. Since the commercial real estate cycle requires a good understanding of future prospects, potential buyers need stability, and are unwilling to take on risk by buying in a declining market.

The deals with the asset used as collateral could again occur on the market, in case lenders have difficulties with servicing loans. If there is one positive take on the current crisis it is that the lower debt burden of developers compared to 2008-2009 is unlikely to lead to many distressed sales and foreclosures.

"The Russian real estate investment market reflects the situation in the economy," - Tom Mundy, Head of Research, JLL, Russia and CIS, commented. – "Internal problems especially the economic downturn is the main negative factor. The conflict in Ukraine, foreign policy tension, the volatile exchange rate and low oil prices have accelerated the deterioration of the Russian investment climate. As a result foreign investors have canceled or put on hold their plans. Limited and expensive financing has provided additional difficulties for local players."

Prime yields continued to react to the current market situation. In Q4, rates in Moscow for prime assets with operating income and debt in place both nominated in foreign currency increased by 50bps to 10.0% and 10.25% for offices and shopping centres respectively. For warehouses rates are at 11.75%. According to JLL analysts' expectations, more expensive and unavailable debt financing will likely lead to further capitalization rate increase through 2015.

Prime Yield Dynamics in Moscow

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Source: JLL

In 2014 foreigners invested USD830m in Russian real estate market, down 78% YoY. The main reason of such a decline is the closure of large deals in 2013 (for example, Metropolis SC). The share of foreign investors decreased to 24% in 2014 compared to 45% in 2013. According to JLL analysts' estimates, local players will continue to dominate on the Russian market in 2015, and the share of foreign capital will not exceed 20%.

Investors by Origin

2013                                                                           2014

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Source: JLL

Olesya Dzuba notes: "Local players are more comfortable with the market during economic difficulties and tend to be more active. Nevertheless, foreign investors will probably have a lower cost of debt financing, and during the next coming months the Russian market could offer good investment opportunities to the companies with strategic vision and risk appetite. Among new investors in the Russian market could be representatives from Asia and the Middle East, for example, from Chine, UAE, and Qatar."

Investments into real estate were more diversified by sector in 2014 compared to the previous year: offices and retail attracted only 19.2% and 14.3% of total investment volume respectively, while deals with multifunctional complexes accounted for 24.7%. In 2013 investments into office and retail were dominant on the market, with a share of 36.7% and 37.4% respectively. Among the largest deals of 2014 were the purchases of Pokrosky Hills residential complex, Novinsky Passazh retail and office centre, 84.1% of Hotel Company JSC, as well as 39 cinemas in Moscow.

Russian Investment Volume Breakdown by Sector

2013                                                                           2014

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Source: JLL

"We expect office assets to be in most demand – the share of office deals could reach 50-70% of total transactions volume, compared to 77% in 2009. The share of retail deals could reach 15-20% (13% in 2009). The rest will be distributed among warehouses, hotels, multifunctional centres and residential." – Dzuba added.

During the current period of uncertainty Moscow assets continued to be the most attractive for investors, accounting for 82% of total investment volume in 2014 compared to 84% in 2013. The share for St. Petersburg accounted for 9% in 2014 (vs 6% in 2013), Russian regions attracted 9%. JLL analysts expect this trend to continue – investor interest will be focused on the most stable Moscow assets.​