The impact of foreign investors leaving Russia on the commercial real estate market

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Most adopt a “wait and see” policy, with the end of June likely to be the critical time for lease decision-making

Although foreign investors in Russia may have declared a desire to evacuate the Russian market and move foreign employees out of the country, Russian real estate agents are not reporting a glut of available properties coming back on the market. This means that despite the hype, most foreign investors in Russia are actually waiting to see what the outcome of the situation in Ukraine will be before making final exit decisions.

Russian firm R&B Property Consulting, along with Colliers International, said there was little development in the amount of retail space coming to market. Foreign tenants seem both reluctant to give up prime commercial rental space and incur costly penalty clauses for early termination.

A major driver in recent years in terms of commercial property rentals has been the IT sector, responsible for around 30% of all commercial rentals, although only around half of these have been foreign investors. However, there was still little apparent appetite to exit the market. Ivan Pochinshchikov, managing partner of IPG.Estate, reportedly told Investia that “we hear emotional statements about leaving the Russian market less often from IT specialists than from companies in other industries.”

Available commercial rental prices also remained stable, again suggesting that there is little real demand to exit the Russian market. Pochinshchikov says the rent per square meter for a class A property at the end of 2021 was 2,103 rubles, and that Tuesday, March 22 was the same, although he forecast a relative decline of around 7% to expected by the end of the year. There is also a shortage of Class A property rentals in major commercial cities such as Moscow and St. Petersburg, which means that if tenants leave, there are plenty of alternative tenants willing to move into that space.

However, new market trends are emerging in Russia.

Coworking spaces are currently in demand and attract the highest rents, as they have the advantage of having more flexible contract terms. This benefits tenants, who can act quickly in response to market conditions back and forth, and landlords, who do not currently wish to be tied to longer-term contracts, which could depreciate further due to volatile market conditions. market and exchange rate fluctuations.

The sanctions have also had an impact, with Russian companies facing sanctions or trading in dual-use goods unable to lease property from foreign-owned offices. This has led to a sharp increase in the complexity of Russian rental contracts, with landlords and tenants racing to find solutions. The resolution of property leases is currently a hot topic for Russian law firms.

With regard to retail, the National Association of Investors (NAI.RF), in Moscow and St. Petersburg, reports that shopping center owners report that foreign tenants, including those who have suspended their activities , have so far continued to pay rising rents. until the end of June, in accordance with the quarterly payment schedules. It remains to be seen what happens after that, with two potential options:

According to IPG.Estate, a positive scenario would be that mall retailers, who have announced the suspension of their activities in Russia, will resume their activities in the next 2-3 months, with the end of June considered as the likely crucial moment for the development. decision. manufacturing.

Overall retail real estate market losses would be less than those of the Covid pandemic, as there are retailers operating while before all malls were closed. Incomes, however, could fall due to a decline in Russian purchasing power and an increased tendency to save.

In the negative scenario, all retailers who have announced a suspension of their activities will leave the Russian market. In this case, the availability of vacant rental units will reach 40-75% of all available space, leaving shopping centers with a lot of catching up to do and a drop in property values, including the inability to make against development loans. This will require government intervention in the form of incentives and subsidies not only for landlords, but also for banks as lenders.

The complications and consequences of the sanctions against Russia and the volatile nature of the current market situation continue to play out, with June being the likely date when the situation will somehow resolve. Meanwhile, there are hints that the conflict in Ukraine may soon be over. Russian state media said Russia’s border with Kazakhstan and Mongolia will open on April 1 and the current closure of airports in southern Russia will continue until the same date. South Korea has decided to restore visa-free entry to Russian nationals from April 1. At present, the situation remains “wait and see”.

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About Us

Briefing Russia is written by Dezan Shira & Associates. The company has 28 offices across Eurasia, including China, Russia, India and ASEAN countries, assisting foreign investors in the Eurasian region. Please contact Maria Kotova at [email protected] for Russian investment advice or assistance with market information, legal, tax and compliance issues throughout Asia.

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