Rising interest rates fail to hinder Russian real estate market

A clutch of data to be released next week, including the April industrial production figures and retail sales, unemployment and investment numbers, will provide further evidence of the underlying strength of the Russian economy. Indeed, recent revisions to official data suggest the growth picture remains firm in the country.

Rosstat* upgraded its estimate of 2010 retail sales by close to 2% and added around 2.5% to this year’s forecast. As a result, the March year on year gain in household spending climbed to 4.8%, suggesting strong economic performance and renewed confidence.

Echoing this upbeat trend, the latest RICS Global Commercial Property Survey reveals that the real estate market in Russia remains firm with positive rent and capital value expectations.

“This optimistic outlook is illustrated by estimates from Jones Lang LaSalle that Moscow office rents dramatically increased by more than 17% in the last quarter and capital values by almost 25%”, commented Simon Rubinsohn, RICS Chief Economist. “On a year on year basis, capital values have risen by almost 50%”.

Furthermore, the survey also indicates that this more favourable environment is feeding through the construction sector which has recorded a positive net balance for new development starts for the second consecutive quarter.

In this context, the central bank surprised financial markets by raising the refinancing rate in late April. This move finds some justification in the latest reading on inflation with the headline rate now standing at 9.7%. While most of this can be explained by a surge in food prices resulting from last summer’s drought, RICS believes that the central bank is likely to hike interest rates over the course of the year.

“This will inevitably have some impact on the economy”, added Simon Rubinsohn. “However, we still believe that growth will reach 4.5% this year, which should provide a reasonably favourable backdrop for the real estate sector.”