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Wednesday, November 26, 2014

Russia's economy can't sustain war and economic sanctions -but real estate might be a bargain

Russia's President Putin is reported to be planning a trip to visit Egypt, but his nation's credit card might want to check the balance on his account before he leaves the country. 

In fact, maybe the Egyptians will even ask for advance payment for the cost of his visit.  In other words, Russia's economic woes are worsening even while President Putin continues to support military operations in the Eastern Ukraine as well as in Syria.  It's impossible to figure out how Russia pays the military as well as the cost of operations, while the ruble currency is in a free fall. 

As a matter of fact, the cost of world oil continues to slide as well. Therefore, the financial security Putin once believed would come from Russia's oil reserves is bringing in less revenue.

Nevertheless, according to a report in The New York Times, real estate may be a bargain in Moscow, because vacancy rates for high rise office space are climbing.  Apparently, the luxury office space in Moscow's financial district is being utilized by low rent occupants.  Sounds like a nice place to hang out, on the cheap.

Commercial Real Estate:  

In Moscow, a Financial District in Name Only
NOV. 25, 2014 by Andrew E. Kramer

 
MOSCOW — In the coveted corner office, a bearded man in sweatpants scrambled eggs at a kitchenette, all the while taking in the serene beauty of the city lights twinkling far below.


Moscow’s skyscraper district, formally the Moscow International Business Center, reflects the broader problems in the Russian economy. The country, facing broad-ranging financial sanctions and largely dominated by state-run companies, simply has no need for vast office spaces for stock traders, auditors and bankers.

Vacancy rates in the newly built financial district have become acute. The entire site, some 148 acres that now includes the tallest building in Europe, Mercury City Tower, had a vacancy rate of 32 percent at the end of October, according to Cushman & Wakefield, the real estate consultancy. The rate is projected to rise above 50 percent next year when new buildings open.

 
In the conference room, or as the company prefers to call it, the “common area,” two other men lounged about playing video games on an Xbox. In place of cubicles, there are bunk beds.

High Level Hostel, one of the newest tenants in the financial district here known as Moscow City, sits on prime real estate on the 43rd floor of a multimillion-dollar glass-and-steel tower. It is not a youth-hostel-themed work space, but an actual youth hostel — dirty socks and all.

“We thought, ‘why not open a hostel in a skyscraper?’ ” said Roman Drozdenko, the 25-year-old owner. “Nobody’s done that before.”

The tower, with its marble veneer foyer, banks of elevators and breathtaking views, was clearly built for lawyers, accountants or stock traders. But “there were no questions regarding our guests” from the building management when he opened in September, Mr. Drozdenko said. “In fact, there were no questions at all.”

Moscow’s skyscraper district, formally the Moscow International Business Center, reflects the broader problems in the Russian economy. The country, facing broad-ranging financial sanctions and largely dominated by state-run companies, simply has no need for vast office spaces for stock traders, auditors and bankers.

Vacancy rates in the newly built financial district have become acute. The entire site, some 148 acres that now includes the Mercury City Tower, the tallest in Europe, had a vacancy rate of 32 percent at the end of October, according to Cushman & Wakefield, the real estate consultancy. The rate is projected to rise above 50 percent next year when new buildings open.

“Russians have a great tradition of building things they don’t need,” Sergei Petrov, an office worker in Naberezhnaya tower, said of the emptiness behind the glass facades, a veritable Potemkin Wall Street.

Moscow City was envisioned as a hub of emerging market finance, a shiny skyscraper-dotted testament to Russia’s growing international influence. For a time, the idea was not improbable: From 2000 to 2007, the Russian economy grew on average 7 percent a year.

This herculean undertaking on a bank of the Moskva River was to be Moscow’s answer to the City of London or Manhattan.

One tower, called Evolution, twists in a DNA-evoking double helix. The spires of Federation Towers resemble billowing sails, evoking Russia sailing into a capitalist future. Federation Tower East, when finished, will rise 95 stories to a height of 1,224 feet, surpassing its still mostly empty neighbor Mercury City Tower as the tallest building in Europe.


Eight skyscrapers are finished, including the gold-tinted Mercury tower. Eight others are under construction, and two more are planned. The entire site is scheduled to be finished by 2018.

But Russia’s tanks are now getting more international attention than its banks, leaving Moscow City as a $12 billion reminder of the nation’s economic woes.

Western sanctions, for example, have taken aim at Russia’s largest state financial institutions, Sberbank and VTB, which both own towers or floor space in Moscow City. The two banks now have a limited ability to issue debt on global markets, thus limiting their growth options.

Sanctions by the United States and the European Union are expected to trim about 1 percentage point of growth from Russia’s gross domestic product this year, and slightly more next year if they remain in place. Even without sanctions, problems have been stacking up. Rising inflation, falling oil prices, and a tumbling ruble have left Russia near recession.

The government also accounts for an outsize proportion of the economy, leaving scant jobs for the grunt workers of private enterprise, the bankers, lawyers and traders for whom Moscow City was built. In Russia, 81 percent of the shares of the top 10 companies are owned by the same entity, the state, compared with 11 in Germany, according to a study by Organization for Economic Cooperation and Development economists.

Rather than turning to banks, Russia’s largest company, the sanctioned state oil company Rosneft is now appealing directly to state funds for loans. And the Kremlin this year again delayed shifting pensions into the private sector, dealing another blow to financial sector jobs.

Somebody had the idea that if you build a lot of skyscrapers in one spot you have an international financial center,” Darrell Stanaford, a real estate analyst in Moscow with Romanov Dvor, said in an interview. “But it doesn’t work. You need other things, too.”

Moscow City, which has taken a direct hit from these policies, is now shifting tactics to fill the glut of premier office space.

City, the management company for the development in the neighborhood, says financial services companies are no longer the majority of its new tenants. Of the new Russian occupants signing leases this year, 58 percent were nonfinancial companies as well as local small and midsize businesses, like High Level Hostel, according to the management company.

New buildings are also being repurposed at the development stage. One low-rise will become a 6,000-seat movie theater. (!!!)

In finished towers, various nonfinancial ventures are renting space. One company sells Cambodian citizenship to Russians wanting a second passport. A culinary school and restaurant are opening.

Many multinationals have rented space. IBM, General Electric, KPMG, General Motors, Hyundai, Energizer and Japan Tobacco International are all tenants, as is a major Russian investment bank, Renaissance Capital.

Prices, too, are falling. Mr. Drozdenko, the hostel owner, said a real estate agent offered him the space for about $8,000 a month for 1,600 square feet, or about $5 a square foot.

In Moscow City, office space currently averages $6.90 a square foot each month. That’s below the average of $7.75 for high-grade office space elsewhere in the capital, according to Denis T. Sokolov, senior analyst and a partner at Cushman & Wakefield in Moscow.
 

“We have to do this,” Dmitry Granov, the director of City management, said in an interview of the effort to broaden the range of tenants, because of the dearth of financial sector jobs in Russia.

“If before we were looking for international corporations, today we are looking for Russian companies, and small and medium businesses,” he said. He said dropping rents would attract technology start-ups.

City management company contested the vacancy estimate by Cushman & Wakefield. Cushman & Wakefield counts vacant sublease space in its total, while the management company does not. City says current vacancies are about 20 percent.

Meshing the various constituencies is also creating challenges.

“The cafes, amenities and dress code you need is different for clients of a youth hostel and for investment bankers,” said Mr. Stanaford, the real estate analyst, of settling tenants like High Level Hostel in their high-level location. “What image-conscious business is going to buy office space in the same skyscraper with a youth hostel?”

Empire Tower, the skyscraper where High Level hostel sits, is still largely empty two years after opening. In the foyer, an oval marble sculpture echoes the oval motif of the 60-story tower, designed for a more professional clientele.

Forty-three stories up, High Level Hostel opened in September with 24 beds, with prices starting at $25.50 in a six-person room, including a breakfast of toast, porridge or muesli. The hostel manager, Leonid L. Fedotov, 19, who goes by the nickname the Beard, recalled backpacking guests from Holland named Ron and Eve.

“It was really cool because Ron and I played guitar in the evening,” he said, as they gazed out at the twirling facade of Evolution Tower and the sea of lights of Moscow below.


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It's hard to imagine how Russia can sustain economic growth, when the posh office buildings in the nation's highest rent business district are essentially being lent out to kids in a youth hostel. In other words, some of the world's homeless people are benefiting from the low rents while residing in a high rent neighborhood.  

Meanwhile, the Russian ruble continues to be worth less than the paper it's printed on. It's only a matter of time before Putin will be on the ropes. Consequently, maybe Egypt will be a good hiding place for Putin, as long as his line of credit can cover living costs.

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