Global & Russian Real Estate Markets for Commercial, Residential and Warehouses

Global Market Trends (2020-2024):
Commercial Properties (Office/Retail):

• Trends: Accelerated shift towards "flight to quality" in offices post-pandemic. Demand concentrates on ESG-compliant, flexible, amenity-rich Class A assets, while secondary stock struggles. Vacancy rates remain elevated globally (e.g., US avg. ~18% Q1 2024, EU major cities ~8-12%). Retail bifurcates: experiential & necessity-based anchors thrive; traditional malls face pressure. Hybrid work persists, impacting utilization on offices and business centers in big and mid size cities.
• Growth: Global office investment volumes down significantly (2024: ~ -35% YoY). Prime office yields softened. Rents largely stagnant or slightly negative growth globally (2023: -0.5% to +1% YoY avg. for prime offices).

Residential Developments:

• Trends: Persistent undersupply in major global markets fuels affordability crises. High interest rates (2022-2024) cooled some frenzied markets, leading to price corrections (5-15% peak-to-trough in some areas). Demand remains robust for well-located, affordable/mid-market segments. Build-to-Rent (BTR) sector experiences explosive growth in US/UK/EU.
• Growth: Global residential price growth slowed sharply. Pre-rate hike (2021): Many markets saw +10-20% YoY. Post-hike (2023): Avg. growth ~1-4% YoY in resilient markets (e.g., parts of EU), slight declines (-2% to -5%) in others (e.g., Germany, Sweden). Rental growth remained strong (2023: +5-10% YoY avg. in major cities) due to supply constraints.

Warehouses/Logistics Real Estate:

• Trends: E-commerce growth (even post-pandemic normalization) and supply chain restructuring drive relentless demand. Focus on modern, high-spec (high ceilings, automation-ready, sustainable) facilities near major population/transport hubs. Last-mile logistics is critical. Rising construction costs and land scarcity are challenges.
• Growth: The standout performer globally. EU prime logistics rents +35-50% since 2020 (2023: ~+10% YoY). Vacancy rates remain near record lows (US: ~4%, EU: ~3-5%). Investment volumes peaked in 2021/22 but remained relatively resilient (-15% YoY in 2023 vs. steeper drops in other sectors). Yields compressed significantly pre-2022, now stabilizing/softening slightly.

Russian Real Estate Market Overview (2020-2024):
Commercial Properties:

• Trends: Post-2022: Mass exodus of international tenants & investors. Significant oversupply in Moscow/St. Petersburg Class A offices. Vacancy rates soared (Moscow: 20%+ in 2023). Domestic companies and "friendly" country firms became primary tenants. Retail heavily impacted by brand exits, but domestic chains and F&B partially filled vacancies, very few new projects but rental rates are following inflations and grow at least 10% year for the last 3 years, depending on the city and geography.
• Growth: Investment collapsed. Prime office rents in Moscow declined 25-40% from peak (2021) by end-2023. Retail rents also down significantly. Yield expansion 300-500+ bps. Data reliability decreased post-2022, the lack of free premises highline the fact that the new investments slow down created a situation of scarcity and prices for existing spaces grown.

Residential Developments:

• Trends: The most active sector. Government support became critical: Preferential mortgage programs (initially 0.5%, then 8% for new builds, later revised) fueled massive demand despite economic headwinds. Significant price inflation occurred (2021: ~20%+ YoY, 2022: ~25-35% YoY in major cities). Construction shifted heavily towards state-subsidized projects. "Self-sufficiency" in materials became a focus.
• Growth: Primary market prices surged: Moscow (2021: +22% YoY, 2022: +30% YoY, 2023: +15-20% YoY,2024: +10-15% YoY). St. Petersburg followed similar, sometimes higher, trends. Pre-sale volumes remained high due to preferential mortgages. Secondary market showed more volatility but generally strong growth.

Warehouses:

• Trends: Initially disrupted by sanctions and logistics chaos. Rapid adaptation followed: Surge in demand for storage (import substitution, parallel imports, inventory hoarding). Significant reconfiguration of logistics flows (East/South, domestic production). Development continued, driven by domestic developers/investors. Focus on regions near new trade corridors and major consumption hubs.
• Growth: Rental growth remained robust, arguably the strongest CRE sector post-2022. Moscow region prime rents increased ~15-20% in RUB terms during 2022, followed by ~10-15% in 2023. Vacancy rates stayed low (<5% in key markets). Take-up remained strong. Yields softened but less dramatically than offices/retail.

Saint Petersburg Market: DMA INVEST Opinion
Saint Petersburg's real estate market exhibits unique dynamics within Russia:
Residential: The engine of the market. Demand consistently exceeds Moscow's relative to supply, fueled by:

• Strong in-migration (domestic and CIS).
• Significant state employee presence reliant on housing programs.
• Continued, albeit constrained, appeal as Russia's "European" cultural capital.
• Outlook: Preferential mortgages will continue driving primary market activity and price growth (likely 10-15% YoY in RUB terms in 2025). However, risks are mounting: Affordability is stretched, mortgage rates remain high, and the sheer volume of state-subsidized projects risks long-term oversupply and quality concerns. Secondary market may see more correction.

Commercial (Office/Retail): Challenged, but with niches.

• Outlook: Continued stagnation in the medium term. Selective opportunities may exist in repurposing or acquiring well-located Class B/C assets at steep discounts for conversion or long-term hold, but liquidity is very low.

Warehouses: Relatively strong performer.

• Positioned as a key Baltic logistics hub (though rerouted). Significant port infrastructure.
• Demand remains healthy for modern storage supporting import substitution, domestic manufacturing, and serving the large local population.
• Development continues, though focused on functional rather than premium specs.
• Outlook: The most resilient sector. Expect continued steady demand and moderate rental growth (5-10% YoY RUB), outperforming commercial. Locations with access to port/rail and major highways are preferred.

Overall Opinion on Saint Petersburg:
Saint Petersburg's real estate market is characterized by extreme divergence. The residential sector, supercharged by state subsidies, remains hot but increasingly fragile and artificial. Commercial property is deeply depressed, facing a long road to recovery without major geopolitical shifts. Warehousing offers the clearest fundamentals-driven opportunity.

• Opportunity (High Risk): Residential development leveraging state programs offers cash flow but requires navigating bureaucracy and subsidy dependence. Value-add plays in converting obsolete office/retail to residential (where feasible) or acquiring warehouses at reasonable yields exist but demand deep local expertise and tolerance for illiquidity and political risk.
• Risk: The market is highly sensitive to changes in government subsidy policies (especially mortgages), macroeconomic instability (inflation, currency), and further geopolitical escalation. Exit strategies for non-residential assets are severely limited. Data transparency has decreased.

Conclusion: Saint Petersburg presents a complex, high-risk, high-potential-reward environment. Success hinges entirely on precise sector selection (favouring residential development via subsidies or logistics), deep local partnerships, and a very high tolerance for political and economic volatility. It is emphatically not a market for passive or broad-based investment in the current climate. The residential boom feels unsustainable long-term, while the commercial sector requires a patient, value-oriented approach with a 10+ year horizon. Warehouse fundamentals appear the most robust near-term.

Real Estate as an Asset Class vs. Other Alternatives: Global & Russian Context
Compared to PRIVATE EQUITY (PE) / VENTURE CAPITAL (VC):
Pluses of Real Estate:

• Tangible Underlying Asset: Direct ownership of physical property provides inherent collateral value and a degree of inflation hedging. PE/VC invests in business models/intangibles, carrying higher business model risk.
• Predictable Income Stream (Core/Core+): Stabilized commercial/residential properties (especially with long leases) and warehouses offer regular rental income (yield). PE/VC returns are typically back-ended, reliant on exit events (IPO, sale), creating J-curve effects and cash flow uncertainty.
• Lower Volatility (Generally): While values fluctuate, prime real estate tends to exhibit less short-term price volatility than early-stage VC or highly leveraged PE deals. Value is tied to physical asset and lease income.
• Broader Market Understanding: Real estate fundamentals (location, supply/demand, rents) are often more accessible than deep tech or niche business models in PE/VC.

Minuses of Real Estate:

• Lower Absolute Return Potential (Core): Prime stabilized assets typically offer lower long-term return potential than successful VC investments or high-growth PE buyouts. Value-add/opportunistic real estate can compete but carries higher risk.
• Illiquidity: Direct real estate is highly illiquid. Exiting requires finding a buyer for a specific asset, taking months or years. PE/VC funds also have lock-ups, but secondaries markets are more developed than for single property assets.
• High Transaction Costs & Management Intensity: Acquisition, disposal, and ongoing management (leasing, maintenance) costs are significant. Requires specialized operational expertise. PE/VC involves management fees/carried interest but less direct operational hassle per asset.
• Capital Intensity: Acquiring significant real estate assets requires large upfront capital. PE/VC allows diversification across multiple companies with smaller minimums via funds.

Compared to COMMODITIES (e.g., Gold, Oil, Industrial Metals):
Pluses of Real Estate:

• Income Generation: Real estate produces regular cash flow (rent). Commodities are purely speculative assets (price appreciation only) or involve complex futures strategies; they generate no yield.
• Intrinsic Utility Value: Property provides usable space (housing, work, storage). Commodities derive value from scarcity and industrial use/hedging, but lack direct utility for the holder.
• Lower Pure Speculative Volatility: While volatile, real estate prices are anchored by replacement cost, rental income, and specific location dynamics. Commodities can experience extreme short-term volatility driven by macro events, geopolitics, and speculation.
• Inflation Hedge (Operational): Real estate can provide a direct hedge via rent escalations (often CPI-linked) and property value increases linked to replacement cost inflation. Commodities are a financial hedge but require constant rebalancing and offer no income.

Minuses of Real Estate:

• Extremely Low Liquidity (Direct): Trading physical commodities is impractical for most investors (futures are used). Direct real estate is similarly illiquid. However, listed REITs/commodity ETFs offer liquidity, but these are proxies, not direct ownership.
• Idiosyncratic Risk: Each property has unique risks (tenant default, structural issues, location decline). Commodity prices are driven by global supply/demand; an ounce of gold is fungible globally.
• Storage/Carrying Costs: Real estate incurs property taxes, insurance, maintenance. Commodities involve storage fees (for physical) or roll costs (for futures).
• Geographic Constraint: Real estate value is hyper-local. Commodities are global assets.

Compared to INFRASTRUCTURE (Core - e.g., Utilities, Transport):
Pluses of Real Estate:

• Broader Opportunity Set & Shorter Horizon: More diverse assets and locations are available. Development/value-add cycles can be shorter (3-7 years) than massive greenfield infrastructure projects (10-20+ years).
• Potentially Higher Yield (Value-Add/Opportunistic): Core infrastructure offers very stable, low yields (often inflation-linked). Core real estate yields are comparable, but value-add/development real estate offers higher return potential (with higher risk).
• Less Regulatory/Concession Risk: While real estate has zoning/permitting, core infrastructure is often subject to intense, long-term regulation, price caps, and political interference (renewable subsidies, toll road concessions).
• Easier Entry/Exit (Relatively): The market for buying/selling individual buildings is more established than for single infrastructure assets like airports or transmission networks.

Minuses of Real Estate:

• Lower Monopoly Power / Essentiality: Core infrastructure often has natural monopoly characteristics and provides essential services (water, power, transit), leading to incredibly stable, recession-resistant cash flows. Real estate demand is more cyclical and faces competition.
• Higher Tenant Turnover Risk: Infrastructure assets often have single, creditworthy counterparties (governments, utilities) on very long-term contracts (PPAs, concessions). Real estate has multiple tenants with shorter leases and higher turnover risk.
• Less Predictable Inflation Linkage: While leases can have escalations, infrastructure concessions often have explicit, formulaic CPI linkage built into contracts.

Compared to COLLECTIBLES (Art, Fine Wine, Classic Cars):
Pluses of Real Estate:

• Income Generation: Real estate produces rent. Collectibles produce no income (unless leased, which is niche and risky).
• Objectively Verifiable Value: Property value can be appraised based on income, comparables, and replacement cost. Collectible valuation is highly subjective, driven by trends, provenance, and expert opinion.
• Lower "Passion Asset" Risk: Real estate investment can be purely financial. Collectibles require deep expertise and carry the risk of investing based on personal passion rather than fundamentals.
• More Established Financing: Mortgages are widely available for real estate. Financing collectibles is niche and expensive.

Minuses of Real Estate:

• Higher Ongoing Costs: Property taxes, insurance, maintenance are substantial. Collectibles have insurance and storage costs, but typically lower.
• Correlation to Broader Economy: Real estate is significantly impacted by economic cycles (employment, interest rates). High-end collectibles can be more resilient or even counter-cyclical for the ultra-wealthy.
• Extremely Low Liquidity (Niche Collectibles): While illiquid, major real estate assets are generally easier to sell than a unique piece of art or a rare car, which requires finding a very specific buyer.
• Portability: Collectibles are portable; real estate is fundamentally location-bound.

Implications for the Russian & Saint Petersburg Market:

1. Heightened Illiquidity & Idiosyncratic Risk: The Russian market, especially post-2022, exemplifies the extreme illiquidity and hyper-local/idiosyncratic risks of direct real estate. Exit options for commercial assets are severely limited. This contrasts sharply with the theoretical global fungibility of commodities or gold as a "safe haven."
2. Income vs. Growth Dichotomy: Russian residential development (driven by state subsidies) offers high development returns but carries immense policy risk and questionable long-term sustainability – resembling a high-risk PE play more than stable core real estate. Warehouses offer more reliable, fundamentals-driven income, akin to core infrastructure but with less monopoly protection.
3. Geopolitical Risk Magnifier: Real estate's fixed location makes it uniquely vulnerable to geopolitical shifts – a stark disadvantage compared to the (relative) portability of art/gold or the global nature of commodities. Saint Petersburg's "European" cachet became a liability post-2022. This risk dwarfs the regulatory risk seen in core infrastructure.
4. Inflation Hedge? (Russian Context): While real estate can hedge inflation via RUB-denominated rents and values, rampant Russian inflation (2022: ~12%, 2023: ~7.4%, 2024: ~8.44%) and currency volatility (RUB fluctuations) severely undermine this benefit. Hard commodities (if accessible) or foreign assets are preferred inflation hedges, but sanctions block access for many.
5. Warehouses: The "Commodity-Like" Play: Within Russian real estate, warehouses function somewhat like an industrial commodity play – driven by fundamental supply/demand for storage and logistics capacity due to import substitution/parallel imports. They offer income and scarcity value, making them arguably the most compelling relative real estate play in Russia/St. Petersburg currently, though still highly risky.