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Thu, Jul 10, 2003 - Page 12 News List

The land of Lenin now `office-world'


Cranes stand at a construction site in southwest Moscow on June 25. Russia, where buying and selling land was taboo a decade ago, is now one of the world's fastest growing commercial property markets, with sky-high prices and soaring demand fueling investor interest.


Across the river from a wedding cake Stalinist skyscraper that once housed the cream of Soviet society, teams of workers drill round the clock to finish a shiny glass and steel office complex.

Down the road, a slick tower block rises over a row of Soviet-era tenements.

Russia, where buying and selling land was taboo a decade ago, is now one of the world's fastest growing commercial property markets, with sky-high prices and soaring demand fuelling investor interest.

"We are experiencing one of the most booming real estate markets in the world," said Michael Lange, a managing director of property services company Jones Lang LaSalle.

"People have started saying it might not be such a bad market after all ... especially with economic downturn in United States and a severe downturn in markets like Europe," he said.

The market is still embryonic and largely confined to Moscow, with only a handful of investors keen to try their luck in St Petersburg or the industrial cities of Siberia.

Though it is the world's largest country, Russia is plagued by a shortage of land, particularly in Moscow.

There, supply is tightly controlled by the city government. And an underdeveloped banking system has held back funding for investors.

But Russia is riding a wave of unprecedented economic and political stability, with President Vladimir Putin set to be re-elected for a second four-year term next year and the economy buoyant as oil prices climb.

And, for the first time since the 1998 financial crisis, newcomers are appearing on the Russian market.

"Demand since 1998 hasn't been from new arrivals, it has been from people that are already here, so it has been from improved business conditions and expansion within Russia," said Gerald Gaige, head of Ernst & Young's real estate consulting practice in Moscow.

"And after 2001, there started to be new arrivals again," Gaige said.

Soaring prices

Moscow, where most office blocks are still grey, sprawling state buildings, also has some of the highest rents in Europe as top companies scramble for first-class sites.

Prime office rents hover around US$625 per square meter per year, according to Jones Lang LaSalle, making it the most expensive office rent in Europe after London. Vacancy rates are just 4 percent.

With only a handful of major developments due to come on stream in the near future, prices are likely to rise still further.

Moscow, Europe's largest city, has only 0.5 square meters of office space for every inhabitant -- Europe's average is 4.6.

"If you calculate this up and spread it over the next five years you can imagine what kind of demand, what kind of upside potential there is," Lange said.

And institutional investors are finally expressing an interest in the market.

Scottish banking dynasty Fleming Family and Partners in May set up the first institutional fund for investing in Class A office buildings.

The fund, which has already raised US$60 million will be leveraged up to US$120 million to US$150 million.

"This is a very small sum by European standards," Maksim Kunin, manager of the FF&P fund, said.

"It is a first step before going into more complicated ventures," Kunin said.

The flurry of construction sites, cranes and cement mixers could also spread beyond Moscow, long the sole center of foreign investment and the focus of institutional interest.

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