Moscow’s Real Estate Market

Real estate and the situation on the real estate market is an issue that interests almost everybody. The housing market is almost entirely transparent – its ruble-denominated prices and their movement are clearly visible to everybody, while the market for corporate real estate is much less understandable fr om a layman's point of view.

We decided to pool and make a comparative analysis of information from a variety of sources: the overviews by professional market participants; statistical data on the real estate entities offered for sale and for lease; targeted interviews with various related parties.
Our study is based on pooled materials from 11 sources (NAIBecar, CBRE, JLL, Knight Frank, Cushman&Wakefield, RRG, GVA Sawyer, Colliers International, MAGAZIN MAGAZINOV (Retail Property Consultants), IRN, RWay), which offer descriptions of the existing situation from the point of view of real estate analysts and consultants; and on our analysis of several databases, including CIAN, WINner, Realto,, AIS MRN [Automated Information System 'Real Estate Market Monitoring'], and data provided by online real estate trading floors and private sources.

We have come to the following conclusions.

Conclusion 1. There are many and varied contributors to the real estate market mythology: real estate agents and real estate consultants; developers and lessors; and property valuators – this is the rather incomplete list of source who, due to their narrow professional outlook and interests, provide only part of true information – only what they know (at best), or only what it is in their best interests to disclose (at worst). Thus, for example, the 'upper-league' consultants look primarily at premium-class properties (office suites and retail buildings). For most part, they are not interested in C and D Class office space situated in 'morally outdated' property complexes and those with disadvantageous location; the information on the latter could only be provided by NAIBecar for the period from 2014 onwards.

Naturally, the available data cannot be reliably compared – the samples of data on offer and actual consumption differ by many parameters. Several of the 'more democratically-minded' observers (RRG, MAGAZIN MAGAZINOV) provided information on part of the existing 'mass demand' segment, which we estimate to amount to no less than half of the entire turnover (or, more likely, close to two-thirds).

In order to achieve a more accurate reconstruction, we must compile the available data.

Below is Table 1, which shows the movement of the index of general availability of premium-class office and retail space, the amount of office and retail space put in operation, and the share of unoccupied office and retail space. 2014 was a record year in terms of the number of new properties put in operation, and so the offer of unoccupied office and retail space was on the rise not only as a result of demand shrinkage associated with the currently unfavorable economic situation, but also due to some surplus supply, especially with regard to A Class office suites situated beyond Moscow's Third Transport Ring.

The Movement of Office and Retail Floor Space Supply vs. Demand

Conclusion 2. The situation is strongly distorted due to the fact that the rent rates are denominated in US dollars.

That the amount of rent is denominated in US dollars can be largely explained by the fact that the real estate construction and reconstruction projects were funded by loans denominated in foreign currencies, and so the income inflow generated by property lease, to be used for loan repayment, must also be pegged to foreign exchange rates. However, a fixed foreign exchange rate of the 'coin of account' has been applied in contracts on a routine basis for a relatively long time, dating back to that (rather short-lived) period when the ruble was strengthening its position, and the lessors were looking at the currency corridor's boundaries.

In addition to the market foreign exchange rate play, the spectrum of methods of settlement with lessors is expanding, including 'rent holidays', running expenditures being included in rent payments, and free-of-charge repairs offered as a bonus.

At present, in every segment of the retail space market we are observing a trend towards the calculation of rent as a percentage of lessee's turnover, a fact that points to a fair distribution of risks between the lessor and the lessee typical of a well-balanced market.
The ruble-denominated market segment, wh ere prices are not pegged to the premium-class office and retail rent rates, displays a sufficiently stable movement pattern.

Source: RRG data; the amount denominated in US dollars is recalculated in ruble terms at the mean nominal exchange rate for a given month; for February 2015 – author's calculations based on data released by CIAN.

Fig. 1. Average Corporate Real Estate Rent Rates in Moscow, Rb /m2 per annum

In Fig. 1, the movement of ruble-denominated rent is shown; it demonstrates a rather flat pattern for offices and two short periods of growth for retail space, which were caused by demand shrinkage, the replacement of the 'seller's market' by a 'buyer's market' in the summer of 2014, and the ruble's depreciationя (November 2014 – January 2015).

Conclusion 3. The anecdotes of the effects of the altered taxation regime and of the switchover to the rate of tax on property of organizations based on the cadastre value of properties point to the anticipated course of events rather than to the real situation. The rates of rent neither significantly increased nor markedly dropped over the period 2013–2014.

The effects of other factors – whose movement was multi-vectored during the spring and summer of 2014 – played down the amplitude of fluctuations; the switchover from the 'lessor's dictatorship' to that of the lessee took place against the backdrop of rent stability. It should be emphasized that the premium-class real estate market segment demonstrated declining prices and an increasing share of unoccupied space supply, but this has nothing to do with taxes. The rent index will certainly be on the decline, which is the opinion of experts based on the general logic of the current situation's development: supply has increased, demand is shrinking, unoccupied space is in abundance, and lessors will inevitably have to make concessions to lessees.

By way of summing up, it should be admitted that the process of de-dollarization and disclosure of true information on prices and the terms of real estate deals will ultimately be beneficial for all market participants.

The regulatory interference on the market will also become more appropriate if based on independent monitoring results and valid representative samples of marketable properties (and not only on data on premium-class and new properties), with due regard for the specific interests of relevant market players.

To ensure information disclosure and the conduct of studies based on valid samples and comparable data must be the common lofty goal for both the marker players and the regulator. They must move in the same direction: the quality of information that is currently applied for the purpose of cadastre property valuation makes it problematic to correctly calculate the tax base.

Information quality improvement can be successfully achieved only if the relevant federal departments (Rosreestr (Federal Service for State Registration, Cadastre and Cartography), the Federal Tax Service) get properly involved in this task. In the final analysis, real estate value is determined by the availability of services funded from the city budget, and it is not only necessary, but also feasible to adequately sustain it with revenue.

The time of crisis offers opportunities for increasing transparency, improving mutual understanding, and setting the goal of ensuring long-term stability of conditions for doing business and rules of the game, including reasonable tax regulation oriented to the distribution of revenues between the city and property owners based on a proper balance of interests.

Natalia Krivova, Candidate of Economic Sciences
Natalia Kornienko, Candidate of Legal Sciences