Newly released market study: Russia Real Estate Report 2016

From: Fast Market Research, Inc.
Published: Sun Feb 28 2016

Rental rates and occupancy levels are both expected fall over the course of 2016, following a poor performance in 2015. We expect demand from foreign players to remain low and barriers to entry to remain high. The main catalysts for the downward trend across most of the real estate market are the weak economy and trade sanctions. Weak GDP figures and falling income levels are restricting consumer spending, and reducing the attractiveness of the Russian market to new players. We do not forecast a major turn-around over the course of our forecast period to 2020.

We expect only a modest recovery in GDP in 2016 as consumers remain under pressure, from both the sharp depreciation in the rouble and elevated inflation. Declining fiscal revenues mean the government will struggle to prop up the economy and we do not expect government consumption to be a significant driver of growth. We maintain our forecast for the Russian economy to grow by 0.5% in 2016, and have downgraded our 2017 real GDP growth forecast from 2.3% to 1.6%.

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Moscow is the political, economic and cultural centre of Russia and is the largest city in the country, with the highest rental rates across the board. In St Petersburg, the second largest city, the commercial property market is dominated by industrial and office space, as it is a major trade gateway, and a financial and industrial centre. Ekaterinburg is Russia's fourth largest city and the administrative centre of Sverdlovsk Oblast. It is dominated by industrial properties as it is the main industrial and cultural centre of the Ural Federal District. Samara, the sixth largest city in Russia and the administrative centre of Samara Oblast, is a major transport hub and a leading industrial centre in the Volga region.

The office sector is set to see falling rental rates, in US dollar terms, in 2016, with occupancy rates also in decline. Demand for new space is low, although due to falling wages, companies are avoiding downsizing staffing levels and we expect that once the economy begins its resurgence, growth in the office real estate sector will be quick to respond.

Russia's retail sector is one of the largest commercial sectors globally, but we expect that in 2016 demand from new tenants will be low, and therefore rental rates and occupancy rates will remain in decline over the year. The mass grocery retail (MGR) sector is one of the largest globally and will support demand levels somewhat.

Industrial real estate rents are also expected to fall in dollar terms in 2016. Exports are weak due to Western sanctions. Even if sanctions are lifted, demand will remain subdued due to economic slowdown in key trading partners, and the fall in the price of oil, while economic and political uncertainty at home will keep domestic demand drivers down. This has led us to maintain our negative outlook on rental rates and occupancy levels.

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