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Overview of the market

In the boom years, Russia was one of Europe's largest property markets, with investment volumes of US$8 billion–US$10 billion annually; the figure briefly decreased during the 2008–2009 financial crisis.

However, a downward trend on the property market began in 2014 in sync with the political challenges that Russia is facing as a result of continuing Western sanctions and low oil prices (on average), which has brought about a weakening of the Russian currency.

Despite stabilisation of the Russian economy in recent years, the 4.9 per cent inflation rate for 2020 is the highest one for the past four years.2 The Central Bank of Russia has updated its forecast in April 2021, anticipating a 4.7–5.2 per cent inflation rate in 2021.3 Nevertheless, at the beginning of 2021, a number of international institutions issued improved forecasts for economic recovery in Russia, anticipating that GDP growth will remain relatively high with 2.5–3.8 per cent in 2021 and 2.6–3.8 per cent in 2022.4

The report of Knight Frank for 2020 highlighted the influence of the general economic uncertainty on the investment volume in commercial real estate in Russia (20 per cent devaluation of the rouble against the US dollar, unstable geopolitical and epidemiological situation).5 The volume of investment transactions in commercial real estate in 2020 reached approximately US$3.44 billion,6 which is 8 per cent lower than the results of the previous year. Investment activity increased in Q3 and Q4 of 2020 as a result of a slight economic recovery.

The share of foreign investors has dramatically decreased, now amounting to 6 per cent compared with 18 per cent in 2019.7 The share of foreign investors dropped to the lowest level since 2008. The underlying factors were the covid-19 pandemic, oil price drop and announced 15 per cent tax on the income of foreign companies taken abroad. Knight Frank expects that in 2021 and in the next few years, the figure will not exceed 10 per cent of the total investment volume.8

Development site investments have prevailed in 2020 with the record 49 per cent in commercial real estate investment structure. Office, retail and hotel property have shown a downward dynamic and stopped at 27.6 per cent and 2 per cent respectively. The warehouse segment reached a historic maximum with the 16 per cent share (more than US$540 million). Such strong demand for quality warehouse premises can be attributed to a boom in the e-commerce sector.9

Moscow remains the biggest and most active real estate market with a share of 72 per cent of the total transaction value. The share of Saint Petersburg decreased to 22 per cent together with the share attributable to other Russian regions, which is now 6 per cent of the total investment amount.10

The average transaction amount in 2020 decreased by half compared with the previous year and amounts to approximately US$21.3 million.11

In Q1 2021, the cumulative volume of investments increased by 4 per cent and amounted to approximately US$946.6 million compared with US$906.6 million in January–March 2020.12 However, the volume of investment in commercial real estate dramatically decreased to the record lowest point of 31 per cent of the total real estate investment. The reason for this decrease is the record investment in land plots for residential construction (69 per cent of the total volume). In Q1 2020, the ratio was 27 residential and 73 commercial real estate.13 Despite the end of the monetary policy easing period, with the Central Bank of Russia increasing its key rate up to 4.5 per cent for the first time in 2 years,14 the forecast on essential financial indicators remains relatively stable. Real estate investment volume and segment allocation are expected to be in line with the 2020 figures with the smooth post-pandemic recovery.15

The Russian commercial real estate market remains fairly diverse and institutionalised, with about 30 major players, including seven foreign companies (e.g., Ingka Centres (formerly IKEA), Raven Property Group, Hines, Morgan Stanley Real Estate Investing and Malltech), with annual rental revenue ranging from US$1.28 billion (Kiyevskaya Square group companies owned by Zarah Iliev and God Nisanov) to US$40 million (Ingeokom) in 2020.16 The Russian real estate market lacks any substantial public real estate companies, except for several residential developers listed on the Moscow Stock Exchange (e.g., PIK Group and LSR), as well as the major warehouse owner – Raven Property Group – listed on the London Stock Exchange, so deals are more often structured through non-public sale and purchase agreements of shares in a company holding the desired properties.

Real estate investment trusts (REITs) are not present on the Russian real estate market, although a common way of investing in real estate is through investment funds, especially those that possess certain analogous characteristics to REITs (Section III). The most common investment fund in the Russian real estate market is a closed-ended investment fund (CEMIF).

In 2020, despite the general increase of the real estate CEMIFs' combined value of the net assets, the share of the net asset value of real estate CEMIFs in the total assets of all CEMIFs has decreased compared with 2019. In parallel, the return on the assets of real estate CEMIFs showed a decline but positive yield has remained.17

Recent market activity

i M&A transactions

As mentioned above, the Russian real estate market does not have a significant public sector, and therefore we have selected the following transactions involving CEMIFs, sophisticated market players that focus on real estate investments, as well as major corporate real estate transactions:18

  1. Sberbank Rental Business-3 fund acquired the industrial park PNK Park Veshki with a total area of around 108,000 square metres; the estimated deal value is US$120–133.3 million;19
  2. VTB Capital – Rental Income purchased two warehouse sites – PNK Park Valischevo and PNK Park Tolmachevo with a total area of around 45,000 square metres; the deal value was not publicly disclosed;20
  3. Hals Assets Management LLC sold the office building – Tower A in the Skylight business centre (more than 49,000 square metres); the estimated deal value is US$173.3–186.6 million.21 The name of the acquirer was not publicly disclosed, but it has been suggested that it was a large-scale developer or an investment fund;22 and
  4. Sberbank Assets Management purchased the Diamond Hall business centre (around 61,000 square metres); the estimated deal value is US$93.3–106.6 million.23

Notably, Knight Frank experts point out growing activity of investment funds on the market in 2020. The share of transactions closed in 2020 with such Russian funds as Sberbank Asset Management, Alfa Capital Management Company, VTB Capital – Rental Income amounted to about 8 per cent of the total investment volume.24 A further rise in the positions of such players in the investment market is expected.

ii Private equity transactions

We have selected the following significant private equity transactions involving, inter alia, foreign real estate private equity (PE) firms:

  1. Metrika Investments purchased the office part of Neva Towers in Moscow; the deal value was not publicly disclosed;25
  2. Maxidom purchased the Castorama Russia – a retail chain from the UK company Kingfisher; the deal value was about US$98.6 million;26
  3. Sindika Group acquired the Moskvoretsky marketplace (total area is around 25,000 square metres); the estimated deal value was US$24 million;27
  4. Sberbank Investment purchased 50 per cent in each Mayak LLC (project Fairmont & Vesper) and Prima LLC (project Lucky) being two builders for a luxury residential developer Vesper company; the estimated combined deal value was US$80–93.3 million for 50 per cent portion;28 and
  5. PIK Group purchased development site with an area of about 775,500 square metres; the estimated construction amount was US$533.3–666.6 million.29