The Impact Of Foreign Investors Leaving Russia On The Commercial Real Estate Market
Most are adopting a ‘wait and see’ policy with end June being the likely crunch time for rental contract decision making
Although foreign investors in Russia may have stated their willingness to evacuate the Russian market and moved foreign employees out of the country, Russian real estate agents are not reporting a glut of available properties coming back onto the market. This means that despite the hype, most Foreign investors in Russia are in fact waiting to see what an outcome to the Ukraine situation will be before making final exit decisions.
Russia’s R&B Property Consulting, as well as Colliers International have stated that there is little development in the amount of commercial retail space arriving on the market. Foreign tenants appear both reluctant to give up prime commercial rental space as well as incurring expensive penalty clauses for early termination.
A major driver in recent years in terms of renting commercial property has been the IT sector, responsible for about 30% of all commercial rentals, although only about half of these have been foreign investors. However, there has again been little apparent appetite for leaving the market. Ivan Pochinshchikov, managing partner of IPG.Estate, has been quoted as saying in Investia that “we hear emotional statements about leaving the Russia market from IT specialists less often than from companies from other sectors.”
Available commercial rental prices have also remained steady, again suggesting there is little real demand in leaving the Russian market. Pochinshchikov says that the rental per sqm for Class A property at the end of 2021 was Rubles 2,103, and as of this Tuesday, March 22 was the same, although he did forecast a relative decline of about 7% to be expected by the year end . There is also a shortage of Class A real estate rental in primary commercial cities such as Moscow and St.Petersburg, meaning if tenants do leave, there are adequate numbers of alternative tenants wanting to move into that space.
There are new market trends appearing in Russia, however.
Co-working spaces are currently in demand and are attracting the highest rentals, as they have the advantage of having more flexible contractual terms. This benefits tenants, who can move quickly in reaction to market conditions either way, and landlords, who at present do not wish to be tied to longer term contracts, which could depreciate further due to the unstable market conditions and exchange rate fluctuations.
Sanctions have also had an impact, with Russian companies under sanctions or trading in dual-use products unable to rent property from foreign-invested offices. That has led to a great rise in the complexity of Russian rental contracts with both landlords and tenants rushing to find solutions. Property rental contract resolution is a hot area for Russian law firms right now.
In terms of retail, the National Association of Investors (NAI.RF), in Moscow and St. Petersburg reports that the owners of shopping centers are reporting that foreign tenants, including those who have suspended operations, have continued thus far to pay rental up until the end of June, in line with quarterly payment schedules. It remains to be seen what happens after this, with two potential options:
According to IPG.Estate, a positive scenario would be that shopping mall retailers, who announced the suspension of their activities in Russia, will resume their activities within the coming 2-3 months, with end June seen as the likely crunch time for decision- making.
Overall losses of the retail real estate market would be lower than during the Covid pandemic, as there are retailers operating whereas before all malls were closed. Revenues could drop however due to a decline in Russian spending power and an increased bias towards savings.
In the negative scenario, all retailers who announced a suspension of their activities will leave the Russian market. In this case, the rental property vacancy availability will reach from 40 to 75% of all available space, leaving malls with a lot of catching up to do and a decline in property values, including inability to meet development loans. This will require government intervention in the form of incentives and subsidies not only for owners, but also for banks as lenders.
The complications and consequences of sanctions on Russia and the volatile nature of the current market situation continues to reverberate, with June being the likely date when the situation will resolve itself one way or another. Meanwhile, there are some hints the Ukraine conflict may shortly be over. Russia State Media has said that the Russian border with Kazakhstan and Mongolia will open on April 1st, and that the current closure of Russia’s Southern Airports will continue until that same date. South Korea has meanwhile decided to reinstate visa-free entry to Russian nationals from April 1st. At the present, the situation remains ‘wait and see.’
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Russia briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Eurasia, including China, Russia, India, and the ASEAN nations, assisting foreign investors into the Eurasian region. Please contact Maria Kotova at [email protected] for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.