Russian investment volumes forecast to be lowest since before the credit crunch

The political and economic uncertainty of Q1 2014 has had a significant negative influence not only on Russian growth forecasts (according to our estimates the Russian GDP forecast for 2014 was downgraded to 0 pct), but also on the local real estate investment market. With the economy under pressure and investor sentiment uncertain, our analysts have revised down their expectations for investment volumes for 2014 to USD 3.4 bln from the USD 7 bln forecast at the start of the year. This downgrade in our 2014 forecast implies that investment levels could be the lowest in the post-crisis period and comparable to total investment volumes in 2009 when the investment volume reached USD 3.2 bln. But there may be some upside if activity increases by July. Total investment volume in Russia reached USD 472 mln in Q1 2014, down 77 pct compared with Q1 2013. It should be noted that this downward dynamic is largely a result of the record high volume in Q1 2013 (due to the sale of the Metropolis shopping centre) and the quite large volume of deals that closed at the end of 2013. Yields have also been impacted by the current market situation. According to our estimates, for shopping centres and offices yields increased by 25 bps to 9.25 pct and 9 pct respectively. For the warehouse segment yields remain at 11 pct. The market remains evenly balanced between Russian and foreign investors, with each having around a 50 pct share of the total investment volume for the first three months of 2014. However, largely because of the uncertain political and economic climate, we expect the share of foreign capital to drop to 10–20 pct of the investment volume by the end of the year. Investors still understand that the fundamental dynamics of the Russian market – with the main factor being the major undersupply of stock in all sectors – are attractive. However, due to the uncertainty of the situation in the Crimea and the volatility of the currency, investors are remaining in a ‘wait and see’ mode. This increased level of cautiousness will inevitably have an impact on investment volumes in the short term.