Opportunities and obstacles for US investors in Moscow : office market comparative return study

Abstract

Moscow in recent years has seen significant changes in the amount of investment grade office space. In the period before the financial crisis of 1998, in which Russia defaulted on its debt and the ruble was drastically devalued, many foreign investors saw great opportunity in the Moscow office market. What attracted foreigners then was the scarcity of suitable space for many foreign companies looking for offices in Moscow and the changes taking place in Russian law concerning ownership of land and real property. With the advent of the 1998 crisis the interest of foreigners waned, but that of cash-rich Russian companies and individuals, principally from the natural resources sector, grew in intensity. Since then and for myriad reasons that I shall examine in this study, Russian investors appear to have successfully held the foreigners at bay. Just what advantages do the Russians continue to have over foreigners other than their opportunistic entry post 1998? How are these advantages measured in risk-adjusted terms? What is the source of these advantages? Are they likely to be sustained to the point that foreign investors will be reluctant to compete in Moscow's real estate market? Using US investors as an example, this study seeks to find answers to these questions and, to a modest extent, forecast near-term returns while describing risks involved in the emerging Russian economy.