Other commercial properties in Russia Market insight: «Overview of Russia’s property market end 2021»

Moscow, Polyanka

Renovated historical mansion (sale of lease rights).

Possible uses: offices, clinic, boutique-hotel or else.

Saint Petersburg Residential mansion (ca.600 sqm) for sale in close proximity to Nevsky Prospekt. Price: 150,000,000 RUB.

Moscow, Novokuznetskaya Showroom premises (255 sqm) in premium house. Rent: 638,500 RUB/month.

The residential segment:

The Central Bank of Russia has estimated that housing prices in Russia have risen more in the past year and a half than in the previous 7 years combined: from the beginning of 2013 to 2020, apartment prices per square metre had increased by 33%, while since the start of the pandemic they additionally increased by a staggering 39%.

The main factors behind this trend were: the reduced mortgage rates that came into force in mid-2020 for the purchase of new builds, but also, and above all, the rise in the price of building materials (for which the Federal Statistical Office recorded an increase of more than 25% compared to the previous year) and the inflation in the country (official figures are close to 8%, while «real» ones plausibly exceed 10-12%).

The situation on the market began to change gradually in the spring of 2021, when, especially because of a surge in inflation in practically all sectors of the economy, the Central Bank of Russia was forced to tighten its monetary policy by gradually increasing its refinancing rate between March and October 2021. Against this backdrop, mortgage interest rates rose again and bank deposit yields also increased (from 4.5 to 6.3% per year on average), making the property market less attractive to investors.

Already in the summer, therefore, the interest rates applied to the above-mentioned «subsidised» mortgage programmes for the purchase of new flats became much less attractive, which significantly «cooled» demand, which is estimated to have fallen by almost 30%. There has also been a decline in the «resale» segment, albeit less noticeable. For the time being, however, there is still no significant downward correction in average prices.

Forecast for the coming months

Many analysts expect a partial stagnation in the Moscow region market in the first months of 2022. The previously widespread «buying spree», no longer supported by incentives to purchase, clashes with the reality of the facts: in the last 5/6 years, the average incomes of the population have gradually decreased and the exponential increase of the abovementioned inflation has only further reduced their purchasing power.

According to some insiders, prices will «settle» at current levels in the coming months. Depending on the segment, there could be a reduction of 3-7%, but this would rather be due to individual discounts. The potential for further growth in apartment prices seems to have been (at least temporarily) exhausted, but certainly in the medium term the unpredictable inflation rates will still have a «say» in this respect.

Offices:

Restrictions and countermeasures introduced by the authorities to hinder the spread of the pandemic have put a strain on the office segment over the last two years and demand has not fully recovered compared to pre-COVID times. As of today, there are still around 3 million employees working remotely in Russia, compared to around 5-6 million in mid2020. The return of half of this workforce to offices has partially helped to lift demand, but it does not seem to be enough yet.

During the period of the first lockdown in the spring of 2020, demand had plummeted by 50%, but after the gradual removal of restrictions, a timid reversal of the trend was recorded, particularly in the spring of 2021. According to the CIAN portal, demand in Moscow continues to be mainly concentrated in the ‘B’ class office segment (76%), with the share of ‘A’ class offices declining slightly as a result of companies’ attempts to optimise costs. In spite of this it should be noted that few tenants seem to be willing to move away from the centre (despite proportionally higher prices): about 40% of demand in Moscow continues to be concentrated in the central administrative district, almost as in pre-pandemic times.

Warehouses and light industrial:

Among all the commercial real estate segments, the warehouse and light industrial market seem to have been the least affected by the effects of the pandemic. The restrictions have almost exclusively benefited online sales companies, which have seen growth of almost 60% in 2020 alone and have had to take on huge storage and sorting complexes.

This led to a sharp increase in demand for large warehouse and storage spaces as early as 2020, with some fluctuations in the following months.

By the end of winter 2021 a recordsetting demand is being witnessed especially in the regions (+70%) in comparison with the pre-pandemic period. Even in the metropolitan areas of Moscow and St Petersburg, however, the increases were significant (ca. +10-15% and +30% respectively). In the 2nd and 3rd quarters of 2021, demand, although still strong, declined slightly, but still recorded higher figures if compared to pre-COVID times.

The general expectation is that this trend will continue into the first half of 2022, which will support the current price levels, perhaps even allowing for a slight further increase.

Retail premises and shopping centres:

The growing popularity of online shopping and the unfavourable epidemiological situation have led to a sharp decline in footfall in shopping centres. On the one hand, shopping centres have to try to attract an increasing number of visitors, on the other hand, they have to comply with all the measures imposed by the authorities to avoid being fined and closed down. In this context, the demand for spaces for rent in shopping centres has declined much more than for offices or warehouses and despite the gradual removal of restrictions, it still seems far from pre-pandemic levels.

On the other hand, the street-retail space segment seems to be recovering better than the shopping centres and had shown signs of some (timid) liveliness already after the lifting of the restrictive measures. This applies above all to St Petersburg and the large regional cities with a population of over one million. In the capital, however, demand has not returned to pre-pandemic levels to this day (around -20%).

As a result, it seems reasonable to expect a drop in rents for commercial premises and retail space in Moscow in the coming months for a variety of reasons, including the impossibility of ruling out new restrictions in the future, the decline in the population’s purchasing power (which usually implies people being less inclined to buy «non-essential» items, with a consequent reduction in the turnover of most shops), and, last but not least, the rapidly spreading habit of making online purchases with home deliveries or at pick-up points (now scattered throughout the city districts), which seem to leave fewer and fewer reasons to big-city denizens for offline store visits.

Alessandro Alessio a.alessio@regens-international.com