The long-awaited release of Russia's GDP by expenditure breakdown for Q211 has confirmed our longheld concerns over the state of the economy, as Russian households kept their purse strings tight amid high inflation and private sector investments only tentatively returned in light of a more uncertain policy environment ahead of key elections. Accordingly, as we initially alluded to in August, we have revised down Russian economic growth to the low side of the 3-4% range for 2011 and are now projecting a real GDP growth rate of 3.3% in 2011, down from our previous forecast of 4.6%.
Importantly, we have revised our outlook on the state of the global economy since our last economic activity update in August, as the escalating eurozone debt crisis and our below-consensus outlook on Chinese growth have triggered forecast downgrades across the board. With little in the form of a meaningful policy response in the eurozone, we are growing increasingly concerned about contagion spreading towards the wider banking sector in the region, and note that our risk scenario, which we outlined back in August, is now being factored into our baseline scenario for the Russian economy, resulting in our lower GDP expectations.
These global economic headwinds should translate into greater volatility in the Russian real estate market. When these risks are combined with political risk concerns, the picture becomes bleaker. A total of US$49.3bn in private sector capital left Russia over the first nine months of 2011, surpassed only by the US$64.9bn in net private sector capital outflows seen in the first three quarters of 2009.
Our political risk concerns remain in place. We believe that Vladimir Putin's return to the presidency in March 2012 remains assured. However, future government policy will undoubtedly be shaped by growing voter dissatisfaction and an emboldened political opposition. We maintain our long-held view that a return to the presidency by Putin must not mean a diversion from earlier plans to bolster the country's business environment and its appeal to foreign investors. Russia's energy-dependent economy is facing yet another gloomy global backdrop, which, to the embarrassment of the authorities, starkly exposed the economy's vulnerability to global business cycles back in 2009. With the eurozone entering recession and China braced for a hard landing in 2012, the government will be looking to attract foreign investment to help raise capital for major infrastructure upgrades and real estate projects.
The Russian real estate market has rapidly recovered after the 2008-2009 global economic crisis, with the reported volume of deals in Moscow for Q111 totalling US$2.37bn and US$2.15bn for Q211, compared to US$1.74bn for Q108. BMI's reports on Russia's real estate sector have previously highlighted the excess of projects under development. It is clear that vacant property levels have dropped, although there is still plenty of space. Development projects have stalled and slowed over recent years. Cushman & Wakefield reports that in Q211, just eight office space projects were delivered in Moscow. CB Richard Ellis (CBRE) puts the figure at 97,500 square metres of new office space in market that was completed in Q211, about one-third of the average completed even in 2010.
However, we caution that the recovery we have been seeing in the sector looks set to slow. CBRE reports there was 200% growth in the market in 2011 over 2010, stemming from nearly double the amount of transactions including a shopping centre purchase in St Petersburg by Morgan Stanley in December for EUR840mn. Despite the impressive rebound, slower economic growth is likely to drive down investor demand. Nevertheless, Russia is well positioned to outperform the eurozone.
Some of the key opportunities currently in the real estate market are:
- CBRE has identified Shanghai and Moscow as the most popular business locations across all emerging markets, reports the Moscow Times. According to CBRE's research, which is compiled from 280 major companies in 101 countries and 232 cities, Shanghai houses 61.4% of the companies profiled, followed by 60.7% in Moscow. The figures mirror the report's findings that 17 of the top 30 most popular company office locations are in emerging markets.
- The World Cup in 2018 is beginning to produce activity in the construction sector.
- The Russian government's decision to create a US$10bn investment fund highlights the state's commitment to sharing the risks inherent in investment in Russia with the private sector, in an effort to attract a greater level of private capital. The government aims to use this investment fund as seed money to mobilise between US$50bn and US$90bn over the next five years, by financing up to 20% of the cost of privately procured development projects.
Some key risks to the current real estate market are:
- The global economy, and especially the debt crisis in Europe, may have downside effects on the investment market this year. International investors may apply wait-and-see attitude towards the real estate sector.
- Any increase in political instability would affect the real estate sector, particularly the sub sectors which stand to benefit from international investment.
- The Moscow city government has announced that there are no new shopping centres to be built in the centre of Moscow