Russia Property Review : St. Petersburg

September 13, 2018

 

https://investorchronicle.com/2018/09/13/property-analysis-st-petersburg-russia-by-kevin-murphy/

 

In the past seven years since my first visit to St. Petersburg noticeable changes can be found in this sprawling city’s skyline. With its industrial plants, ports and city centre the St. Petersburg is now rapidly growing and as a result so are the changes to its property market for commercial,  hotel, retail and residential sectors. 

 

In the past seven years since my first visit to St. Petersburg noticeable changes can be found in this sprawling city’s skyline. With its industrial plants, ports and city centre the St. Petersburg is now rapidly growing and as a result so are the changes to its property market for commercial,  hotel, retail and residential sectors. 

 

As you go outside of the city one particular growth sector of the property market is in privately owned detached-residential housing. What benefits these new property developments is the abundance of land served by an efficient toll highway system into the city.  St. Petersburg also does not seem to have the burden of auto traffic that is abundant in Moscow.

 

New residential construction in the heart of St Petersburg includes mostly upscale apartment towers. It is still not uncommon to see the remnants of the large concrete block drab and gray Soviet-era housing blocks in the city centre of St. Petersburg. Gradually these old and dilapidated buildings are being replaced by new modern apartment towers commercial businesses. During the time of Soviet rule it was not uncommon for families to share in the austerity of crowded apartments with a single kitchen and bathroom. Buildings from the previous Soviet times are scattered throughout the former satellite countries such as Lithuania where former country homes of the elites are being renovated as private residences or in other cases being demolished for private new home construction.

 

           Soviet-Era housing which are now being replaced with new modern apartments 

 

 

Flow of Money

 

The ability to attract outside investment is no different in Russia than any other country regardless of the business sector. Foreign Direct Investment (FDI) and trade between the United Kingdom and the United States continues in Russia but at much smaller level compared with other countries such as China and other global emerging markets. Chemical products, energy and machinery are the main products for export and trade.

 

The amount of (FDI) into Russia had declined in 2014 due mostly to geopolitical issues between the West especially over the Russian actions regarding Ukraine. However, by 2016 the flow of FDI increased to $37.7 billion USD with the result mostly due to the privatisation of the Rosneft  oil company. British Petroleum (BP) has a 19.75 percent stake and a board seat in the state-owned oil and gas company. Santander reports for the period of the first nine months of 2017 FDI in Russia reached $24.83 billion USD. 

 

Statista reports that in 2017, the U.S. investments made in Russia were valued at approximately 13.88 billion U.S. dollars. Trade between the UK and Russia is worth about $14 billion a year.

 

Russians have invested nearly $4.6 billion in U.S.-based businesses, according to data from the U.S. Bureau of Economic Analysis. 

 

But problems continue even though economic reforms have been made. The Ukraine situation, tension with Britain and the United States along with continuing corruption have have been obstacles in the overall economy. 

 

Overall FDI is not expected to make a dramatic return and currently Russia is ranked by the World Bank at 35th out of 190 countries in their Doing Business ranking which is an increase of five points from the previous year of 2017.

 

Real Estate Investment

 

Real estate investment for Russia in the 1Q of 2018 reached $728 million USD a decrease of 8% year-over-year when compared to 1Q of 2017 at $729 million USD.

 

Olesya Dzuba, Head of Research, Jones, Lang & LaSalle (JLL), Russia & CIS, reports:

 

“Russia real estate market continues to recover, although an element of uncertainty remained. Main positive factors include economic recovery, rouble stabilisation and historically low inflation. The financing is getting cheaper on the back of Central Bank rate cuts driving commercial rates down. However, investors have seemingly decided to take a break before the presidential election, which resulted in lower investment volume in Q1. Meanwhile, key market players show their interest in Russian assets, and a number of deals are being negotiated. We expect that these factors will support positive market dynamics during the year.”

 

             The Gazprom Tower expected to open in 2019 on the St. Petersburg waterfront

 

 

        The new Krestovsky Stadium in St. Petersburg known as the 'Flying Saucer' by locals

 

 

The JLL reports that St. Petersburg has become the most popular investment destination in Russia with 50% of all deals being made in the city for 1Q of 2018 compared with the 1Q of 2017 being at 22%. The cash equivalent amount has doubled  from $172 million USD year-over-year to $361 million USD in the same period. 

 

Housing Market 

 

The prime residential market over the past year saw a supply increase of 10% or 166.4 thousand sq. metres with an increase in one bedroom flats and a decrease in three bedroom units. For 2017 54 thousand sq. metres of prime residential units were sold which was a decrease of 14% compared to 2016.

 

Prime residential prices have been averaging from $290,000 USD to 430,000 USD for the more popular  areas of the St. Petersburg market. 

 

St. Petersburg has four new residential projects providing 495 new flats comprising of 58 thousand sq. metres throughout the city on Krestovsky and Petrovsky Island. The largest amount was provided by the first phase of the new Neva Haus at 9-11, Petrovsky Avenue by the LSR Group according to JLL. This helped to double the number of available flats in the city market compared to the supply in 2017.  This has made Petrovsky Island one the most popular new construction zones and future plans include a second phase to Neva Haus on the islands south coast in a review by Knight Frank in St. Petersburg.

 

The plans will provide residents a ‘high quality environment’ with new social, transport and commercial infrastructure facilities. Another large second prime housing property complex includes One Trinity Place at Admirala Lazareva Embankment which has already launched its marketing of units.

 

            One Trinity Place, Admirala Lazareva Embankment, St. Petersburg, Russia

 

Ekaterina Nemchenko of Knight Frank says:

 

“The most popular in 2017 were fully fitted out flats in residential settlements built in the last 5 years. Again, buyers carefully studied the characteristics of a building, internal and surrounding

infrastructure.’

 

‘The main share consisted of buyers aged 30−40 (while a year earlier the activity was recorded from the age category of 40−50 years), living in St. Petersburg.’

 

‘The main demand was for the properties in the final stages of construction, as well as for the already commissioned residential complexes. That demand was reflected in the types of flats purchased.Traditionally, large-size flats were popular in the final stages of construction. As a rule, such real estate was purchased to improve living conditions, expand living space, for example, due to the changed composition of the family.’ 

 

Hotels & Hospitality

 

At the year-end of 2016 Colliers International reports that the St. Petersburg hotel market had 149 hotels with 20.6 thousand rooms with 43% of the rooms under the management of international hotel operators.

 

As a result of the FIFA World Cup in 2018 American hotel operators opened properties in St. Petersburg including ExpoForum, Hampton by Hilton, Best Western Plus Centre Hotel along with the expansion of local hotels Station, Hotel Group Eurasia and Nevsky Hotel Group.

 

One new branded hotel is expected for 2018, the Holiday Inn Express on Sadovaya St. with 244 rooms which will be the first hotel for budget and cost-conscious visitors to the city.

 

Tourism for 2016 reached almost 7 million visitors to St. Petersburg with 6.5 million visitors in 2015. An increase by Russian nationals to visit the city also increased by 14% year-over-year compared to 2015. 

 

Certain to bring more visitors and hotel customers is the continued passenger flow at Pulkovo International Airport serving the St. Petersburg region which had 300,000 more passenger pass through the Northern Capital hub in 1Q of 2018 when compared to 2017 passenger traffic.

 

EY the assurance, tax, transaction and advisory services reports overall for Russia in 2018 to 2022:

 

‘More than half of the existing room supply is concentrated in Moscow and St. Petersburg (52%), followed by Sochi (11%), the Moscow Region (6%), Ekaterinburg (3%), and other locations.’

 

‘It is planned that by 2022 the number of hotels under international management will increase by 102 new properties (20,249 rooms). Thus, if by 2022 all announced hotels open, the number of hotels under international management in Russia will reach 281 (58,954 rooms), located in 59 cities.’

 

Additional tourism visits from top brand cruise ships are typical in the late spring and summer usually for three days visits. St. Petersburg has any number of must see sites such as Catherine's Palace in nearby Pushkin and the amazing State Hermitage Museum with its collection of art along with other palaces and cathedrals.

 

Retail Market

 

St. Petersburg leads the nation for the highest availability in in retail property though new developments for the retail sector have not been constructed in a number of years. The amount of space is 10% more than what is available in Moscow. Almost 40% of the current retail space for St. Petersburg was built between 2002 and 2006. Knight Frank reports that many of these retail outlets are in need of updating and refreshing. 

 

‘High competition forces retail players (both operators and developers) to permanently increase the efficiency of their facilities and their attractiveness to visitors.’

 

For the H1 of 2018 Colliers reports that retail vacancy trends for the largest growth sector are in specialised furniture centres. Another trend found in Q2 for 2018 is the expansion of shopping centres for entertainment and fashion with play and educational areas for children along with fashion space for the adults such as Levi’s. 

 

Colliers states:

 

‘Retail space may grow this year due to the increase in specialised shopping centres. The opening of new centres remains at the minimum level of 2017, and the vacancy rate will not exceed 3%. The specialised shopping centre segment may increase due not only to furniture centres but also the constantly growing fashion segment: by the end of the year we expect the second phase of Outlet Village Pulkovo to open with a total area of 6 500 sq m.’

 

The total stock of of retail space has increased from 2,590 sq. metres in Q2 2016 to 3,056 sq. metres in Q2 2018.  In the same period vacancy rates have gone from 8% to 4.2% in 2018.

 

                                     A mix of old and New in St. Petersburg, Russia

 

Office Space Market

 

It has been almost ten years since any new speculative construction in the office sector has been made.  For the H1 2016 total stock in the office market was 2,650 million sq. metres and in H1 2018 the total was at 3.06 sq. metres.

 

For 2018 speculative properties under construction are now unavailable for rent as they have secured a tenancy or are under  serious consideration for occupation. Most developers are reluctant to start new construction particularly for large scale projects unless they have a commitment from a large tenant for the whole facility.

 

In the coming year Colliers predicts that tenants will have increasing problems for available space especially for premises that have lower retal rates. Many of the new tenants are part of the growing IT sector in the city of St. Petersburg.

 

Next year, many tenants will face increasing difficulty finding premises due to shortage of available buildings with low rental rates.

 

One prediction for the rest of 2018 by Colliers:

 

'Despite the fact that there was no increase in investment volume during first half of 2018, we forecast an increase in activity on the St. Petersburg market in the second half of the year, primarily in the segment of classic investment transactions, which could total $1 billion in 2018. The main focus of investors’ interest will be on the retail and office segments.'

 

 

 

 

 

 

 

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