Russian recession stimulates commercial property investments abroad

Russian and CIS investment activity abroad has been significantly weakened since late 2014 but commercial property is not suffering as much as demand for residential real estate.

It has now been one year since the cumulative effect of oil price turmoil, flailing commodities’ markets and the Ukraine crisis gave ex-Soviet Union currencies a major battering. Once touted as the most opulent of investors in the world’s most expensive cities, the great fall of the Russian ruble, leading currency in the ex-USSR, along with the Ukrainian hryvna and Kazakhstani tenge, has greatly affected their investor activity abroad.

 

Russian-speaking investors prefer commercial property in stable countries

 

Photo: nikkytok / Depositphotos

Their absence from the market has been felt by falling transactions abroad according to the new Tranio report on Russian and CIS real estate investment activity abroad in 2015. The vast majority of respondents from a pool of 500 real estate stakeholders (agencies and developers) report falling interest and transactions but, conversely, higher demand for commercial property.

Russian-speaking buyers are going offline

Nearly three quarters (74%) of the survey respondents say that interest in foreign property has declined since the currency crisis (Q3 2014) when asked whether the number of transactions had risen and declined since Q4 2014 (referred to as Buyer Interest Index). For example, agencies in Thailand and France report 100% decline, meaning that every respondent confirmed falling transactions. Buyer activity has been sharply reduced in all top destinations with the almost every respondent in Montenegro (92%), Bulgaria (89%) and Turkey (85%) reporting a significant decline in interest from Russian-speaking buyers (see chart below).

The survey’s findings are confirmed by Google search results showing less interest in most online searches for popular destinations except for the UK (+1.2%) and Hungary (+0.3%) property.

In its most recent report on cross-border purchases of property, the Central Bank of Russia also revealed the damage of the ruble crisis. It showed plummeting foreign real estate activity in Q2 2015, when investments fell 50% to $229 million against $473 million in Q2 2014.

Commercial property picks up the residential slack

The downturn has not affected all property types however, and respondents highlight a newfound interest in commercial property. So, although 2015 has ushered in an era of austerity proven by decreasing Russia and CIS transactions, three quarters of survey participants (73%) note that commercial property is now of key interest, compared to 44% of respondents in 2013 for the same survey by Tranio.

Demand for commercial property has gone up in locations where Russian-speaking buyers used to purchase resort properties for residential purposes — confirmed by Google search statistics that show a 10% increase in commercial property after the ruble devaluation.

France has witnessed the starkest increase, from none in 2013 to 50% of respondents now reporting interest in commercial property, followed by Italy (+43%). Spain’s growing attraction (+28%) is facilitated easier access to credit, which allows investors to leverage their investment and increase yields. It has led to Russian and CIS buyers outspending local budgets by 40% during 2015 (see our article “Russians choose most expensive property abroad despite crisis” from November 24, 2015).

The UK has confirmed its dominant position as a commercial property destination thanks to its strong economic recovery. In fact, despite falling numbers of Russian-speaking buyers, British property is also benefitting from higher spending, 10% above the local average budget.

Survey results in Germany, on the other hand, demonstrate a slight decline in interest and although the country is still a mainstay for commercial investments, Russian and CIS buyers spend 10% less on average. Nevertheless, a key measure in this equation is yields and Germany’s commercial property offers stability, liquidity and yields ranging from 4–6% per year.

The results of Tranio’s upcoming survey, and investor interest in particular, are part of a larger trend in BRICS countries. Russian and CIS investors (and the Chinese also) are moving their funds abroad amid instability at home, looking to secure the value of their assets and focusing on reliable revenue. The 2013 Russian and CIS buyer survey highlighted the key importance of political and economic stability in Germany and the UK when investing abroad; now confirmed in practice following a recession in one of the world’s most powerful nations, Russia, and countries in its area of influence.

In brief and to come

Russian and CIS investments have changed in the wake of the currency crisis and ensuing recession. Tranio experts expect the trends to stay in place until the Russian economy improves: investor appetites will be modest and transaction volume will remain weak. The full analysis will be released in January 2016.