Investment into Russian real estate is gaining momentum, with the total volume of Q2 2011 investment in Russia up 139% YoY; to USD2.5bn. Commercial real estate investments increased 164% YoY in Q2 2011, to USD2.4bn. We expect a further increase in real estate investment volumes in 2011, with the annual volume reaching USD7bn, of which the commercial real estate component will account for about USD6.4bn.
For the first time since 2008, Q2 2011 market activity in Russia was characterised by the dominance of foreign investors, who accounted for 67% of the total Q2 investment volume, and 47% of the capital invested in H1 2011.
Sector wise, investments were much diversified. The office segment attracted 39% of all investment volumes in Q2 2011. Hotel investment volumes accounted for 29% of the total invested in real estate in Q2. Retail were also in relatively high demand, accounting for 18% of the total volume in Q2. Moreover, deal sizes were larger, with those exceeding USD300mn accounting for 53% in H1 2011 vs. 43% in 2010.
The local credit market continued to recover in Q2 2011, with the average rouble lending rate declining to 8.4%, and the US dollar rate to 4% in April 2011. The volume of liquidity available on the market is high and commercial real estate lending is now easier to access.
Retail investment: Move to regional cities
With the political uncertainties and pipeline limited by projects started before crisis in Moscow, developers and investors are now looking at retail property in regional cities. This is supported by the elevated interest of retailers in regional markets in 2011.
The regional retail market attracted 32% of the Q2 retail investment volumes. One of the factors driving this interest is the increased availability of debt financing, both senior and construction. As a result, investors have access to more liquidity to make new investments or unfreeze projects that had been started before the crisis.
The share of development projects increased in Q2 2011 to 26% of all completed regional retail deals. As there are very few projects and standing assets available for sale in Moscow, we expect greater investor interest in the regional retail investment market.