SOCHI Real Estate Market Development Forecasts

After SOCHI was announced as the host of 2014 Winter Olympics, the city became the most interesting place for investments in Russia and development boom is expected right around the corner. In the meantime many developers have already started active construction and most of the suitable land plots are now under intensive development.The Games will significantly change commercial and residential real estate market of the city. It is planned to build premises of more than 1 mln. square meters, including 661,000 sq.m. of residential, 208,000 sq.m. of hotel, 50,000 sq.m. of retail and 50,000 sq.m. of exhibition premises and conference halls.The opportunities of Sochi market are great. The yield is higher than Russian average.PricesMost of the market players agree that annual prices growth will be approximately 15 – 20% during 7 pre-Olympics years. Competition for the Olympics started warming up the market 3-4 years ago. For the last 5 years the average prices in real estate grew 10 fold.The average return on investments is expected to be 100%, while in Moscow it is 20-25% at the moment. At this time Sochi became the most investment attractive and profitable area of Russia.LandIn average land prices grew 40% after Sochi nomination. Market analytics consider the land prices to grow by up to 50% by the end of this year. But this growth will be stimulated by speculators and later the market will stabilize. At Krasnaya Polyana (area, where the Olympics will take place – auth.) average land prices grew 10 fold for the last 5 years and reached USD 50,000 – 80,000 per sotka (sotka = 100 sq.m. – auth.) Commercial real estate marketMarket professionals consider that sale and rent prices for commercial real estate will be approximately 10-15% lower than in Moscow.The most Intensive development in the nearest future is expected in retail and office segments.HotelThere is a high demand in hotels. Currently there are only 2 hotels with international brand names: Radisson Lazurnaya and Grand-hotel Rodina under Steine Hotels management. Right after selection of Sochi to host the Olympics the demand from western investment funds skyrocketed. Prices for rooms are the same as in Moscow. Hotels with total of 26,000 rooms approximately is expected to be built and 30% of them is expected to be ”de luxe”. Projected total investments in hotels are approximately USD 4 milliard. Such operators as Hilton and Sheraton have shown their interest in Sochi. After Olympics Sochi will become the year-round resort and that will increase the load of hotels.RetailSochi has a great demand for high quality retail premises. Before big retail centers were not demanded, because major retail operators didn’t come to Sochi market as anchors and there was no demand for high quality premises from local market players. The seasonal fluctuations of trading activity harmed Sochi attractiveness, but the Olympics will make it the year-round resort and situation will change.At this moment there are maximum 3 high quality retail centers, as Cushman & Wakefield Stiles & Riabokobylko specialists state. They keep rent rates at the level of USD 600 – 700 per sq.m. and it is expected to grow by 15 – 20% soon. But these expenses will be covered by income and assets value growth. OfficeThe only high quality office building in the city is occupied by the Olympic committee. At this moment rent rates in C+ class (Moscow scale) premises is USD 55 – 70 per sq.m., but by the end of the year it is expected to reach USD 90. Blackwood company analytics consider that the city demand is 3 – 4 high quality office centers 10,000 sq.m. each. Residential MarketBusiness-class apartments in Sochi are sold at the price of USD 8,000 – 10,000 per sq.m. what is comparable to Moscow prices. The expected growth is 15 – 20%. The most profitable would be investments in elite and business-class premises. The share of premises bought with investment purposes is expected to reach 50%.It is demanded 3 to 4 years of intensive delivery of residential houses to satisfy the demand. Among premises under construction the share of premium-class is estimated 70% (USD 4,000 – 7,000 per sq.m.) and economy class is 30%.The cost of rent has increased 30%.Most of residential premises in the city are shabby (estimated 80%). Analytics of Blackwood company forecast growth of residential prices up to USD 5,000 – 6,000 in the nearest time (recently it was USD 2,500 – 3,500).The highest demand is expected for premises used as seasonal dwelling. Average prices for cottages by the sea shore are USD 1 – 1,5 mln. BuyersToday many wealthy people have an apartment in Sochi and use it as the second “country dwelling” for summer. In the future it will become an asset in one of the international winter resort. The most active end buyers of residential premises come from northern regions of Russia, Moscow and St. Petersburg. Professionals forecast that share of buyers from former USSR countries should grow from 1 – 3% to 10 – 15%. What’s After?While many investors and market players announce their projects in Sochi they keep in mind that after the Olympics tourist flows will decrease and prices will most probably slide down. Nevertheless the games is the best worldwide PR campaign the city and Krasnodar region could have. It will draw attention to all of the resources and opportunities it has to offer. The nearest years is quite possible not the only period of taking high profits.