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Moscow's Crown Slips in European Realty Survey

Moscow has the second-best real estate development prospects of any city in Europe, but as far as the risks involved are concerned it is bottom of the list, according to Emerging Trends in Real Estate: Europe 2005, a survey prepared jointly by the Urban Land Institute and PricewaterhouseCoopers.

This is the second European version of the report, which has been published in the United States for 26 years. It is based on responses from over 250 property professionals who ranked 27 European cities by their attractiveness as real estate markets.

While in last year's survey Moscow -- as well as its Eastern European sisters Prague, Budapest and Warsaw -- appeared at the top of the list by returns and investment opportunities, this year's results are remarkably different.

Reflecting a new study methodology, Moscow, which was first by total returns and development prospects in the previous survey, has slipped to 21st position by "return/risk prospects." Prague, No. 2 in the 2004 report, is now ranked 15th; Budapest, which was No. 4, is now ranked 19th and Warsaw has fallen from 6th to 20th place. The fact that every city's real estate returns are now risk-adjusted -- as opposed to using absolute figures -- means that less risky but also often less profitable markets such as Paris, Milan and London are now leading the pack. Still, even by risk-adjusted total returns, Moscow is ahead of Athens, Berlin and Amsterdam.

Moscow, which was selected last year as the top choice for investment, is now only 10th -- below Budapest and Istanbul, but ahead of Vienna, Madrid and London -- with 45 percent of respondents recommending buying and 32 percent recommending selling real estate in the city. "Moscow's office and retail sectors have high numbers of both 'buy' and 'sell' recommendations. This may seem inconsistent, but it is probably indicative of the fact that you have to take a view on numerous political and legal issues in addition to the usual risk/return concerns," the study said.

Also, while Moscow returns remain high by European standards, the report said there is a limited scope for investment activity in the city, as there are very few investment-grade properties and the market is dominated by "huge domestic equity capital that does not require the same risk premium as Western capital, nor does it engage in the same level of due diligence."

But Moscow, which was 27th, or last, by risk, was second-best by total returns, rent increases, capital growth and development, surpassed only by Istanbul.

Moscow is undersupplied in all sectors, the survey said. It has the lowest office vacancy rate of all the cities surveyed, it is "significantly undershopped," has strong demand for residential real estate and hotels, while the industrial market is "waiting to explode."

"Potential development risks are high if one can negotiate the obstacles," the report said, citing the difficulties of securing a central land plot, City Hall's tight grip on the real estate market, and difficulties obtaining all the necessary permits among the key setbacks.

"Investors do understand that high returns and high risks often go together," said Olga Arkhangelskaya, head of real estate advisory services at Ernst & Young. "And contrary to what this report might suggest, Moscow risks have not gotten worse since last year -- or, if they have, the change was not significant enough to influence the outcome."

(The Moscow Times 25.i.05)

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