Tom Devonshire-Griffin
JLL Russia and CIS

Following a post-crisis lull, the project to build a business district in Moscow City is well underway again. Tom Devonshire-Griffin, managing director at JLL Russia and CIS, explains how investors stand to benefit from the news

What are the current trends in Moscow City?
The Moscow City business district is growing, and there are a lot of projects currently in the process of being completed. There were plans for these developments to be completed by 2012, however, this was delayed because of the crisis in 2009—it takes on average about four-five years to complete a tower, so the construction process is significant.
The Moscow City Supply and Vacancy Rate report shows that the Federation Tower East is expected to be completed by 2017, as well as the Grand Tower, and phase two of the Empire Business High-Rise is expected to be finished in 2018, and Neva Towers in 2019. This is just natural commercial delayed reaction.
How important is Moscow City for the country?
Moscow City was originally seen as somewhat of a vanity project for the previous city mayor, but it has subsequently become a beaming economic symbol of Moscow and Russia as a whole. Part of theproblem is in this symbolism—when you have in there a 40 percent vacancy rate, this becomes more a national embarrassment. With the World Cup tournament coming to Russia in 2018, the government is seriously focusing on making sure the country looks very well polished by that time, nothing should be under construction and everything needs to be completed.

Either intentionally, or driven by the much reduced rental or sale price, Russian state corporations including banks have significantly reduced the vacancy by occupying or renting whole buildings (for example, Evolution Tower and Eurasia Tower). The vacancy rate has decreased to 18 or 19 percent. Moscow City has ended up with a vacancy rate that is the same if not lower than in the rest of Moscow.

What differentiates Moscow City from other major business districts such as La Défense in Paris and London’s Canary Wharf?
Moscow City has been down a different path, which is part of what has led to it having the same vacancy rate as the rest of Moscow.

La Défense in Paris took over 40 years to build and Canary Wharf went bankrupt twice. These are big projects, with major risks involved, and they take time to complete.
Historically, Moscow City got very little city and governmental support, especially compared to the likes of Canary Wharf. Moscow City represented a piece of land (600,000 square metres) cut into more than 20 parts and provided to developers.

In contrast, Canary Wharf had the support from the London Docklands Development Corporation, which helped to build the surrounding metro system and infrastructure.
This is changing, however, and the Moscow City project is starting to get that support. We are seeing federal and city investment into infrastructure including new train stations and metros, roads and flyovers, light rail and more.

From a commercial point of view, it’s becoming very real. The point is that when any project becomes commercially significant—as you can see it from the example of Russian main state banks in Moscow City, everyone else is going to follow. Moscow City has become an important business destination, a true business hub.
Is Moscow City’s future looking promising?
Moscow City will definitely be successful. What will the cost to the government and the city to make it successful is still a question mark, but the trend is definitely positive. There are still few empty land plots, and just a couple of buildings left to be completed. Step-by-step, we are getting there. So the previous mayor’s vision has almost been accomplished.
I get a little bit frustrated with the architecture because, in my opinion, some of it looks a little bit lazy. When you spend billions of dollars on construction, perhaps more creative effort could have been made. The latest towers (for example, Evolution Tower) are a definite improvement. It is important because this landscape will be here for decades to come. The occupational mix will change too. Some of the building designs do not lend well to single tenant occupation: multiple tenants should rent such buildings, so it is probably unsustainable when a single company rents the whole building. This is natural due to the opportunities driven by lower rents for state run companies. 
Do you think Russian real estate is misunderstood?
People often misunderstand Russia. They think of it as a purely natural resource-driven economy. The real secret is that the national resources are the fuel to the economy, and the engine is the consumer.

Up until 2014, more than 80 percent of pre-tax income was distributed on consumer spending. I wouldn’t be surprised if it is more like 20 to 30 percent now.

The challenge we have is that we need the consumers to wake the economy up again, which is quite static at the moment.
In terms of the economic situation, Russia is experiencing more of a stagnation than a recession now. Stability has been a defining feature: GDP growth has approached positive levels for the first time in the past two years; currency has not moved much more than 5 percent for the last five to six months; and even real wage growth has been observed in the last few months.

We face a new reality, and it is definitely less polished than a previous one. One notable trend is that consumers don’t influence the economy as seriously as they used to do.
There are a lot of large funds interested in the real estate market driven partly by the global yield chase. When you have assets available tenanted in Moscow, and you can invest in them and receive double-digit yields compared to the 5 percent in Poland, people will definitely be attracted, despite the perceived political risk.

We get frustrated about the obsession for foreigners to focus on the politics because it affects not only the economy, it also influences investment interest, although realistically it has nothing to do with real estate investing.
I feel confident regarding 2018 as a year in terms of economy wake-up and investment activity. We will also have presidential elections—prior to them, the economy normally has to recover driven by lower interest rates—with pensions and wages to be raised.

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