The unfolding Crimean crisis did nothing to dampen the spirits of Russian participants at this year's annual real estate fair Mipim, held in Cannes, France, in early March. Just as in previous years, Russian exhibitors came to the French Riviera armed with large dioramas and renderings of futuristic buildings. And there is an appetite to warrant such ambitious projects, with figures showing that, in Moscow and St Petersburg at least, Russia's real estate sector is booming.

In 2013, the global real estate industry recorded its worst year since greenfield investment monitor fDi Markets started tracking crossborder investments in 2003, but Russia's two largest cities attracted more than $1bn investment between them. This was a significant improvement on the $222m they recorded the previous year, and put both cities among Europe's leading destinations for new real estate projects.


Soviet legacy

Marat Khusnullin, deputy mayor of Moscow, who is in charge of urban development and construction in the city, says that it is not difficult to understand why investors are showing such a keen interest in Russian real estate. “It is a simple equation. The cost of a new development averages $2000 per square metre, and then it sells for twice as much. No wonder businessmen basically stand in line to invest here,” he says.

Marina Nechay, head of St Petersburg's Agency for Strategic Investments, the city's FDI promotion entity, is similarly confident. “The city's official data shows that our real estate sector is booming, and we have seen a growing number of foreign investments coming into the city,” she says. And it is not just the volume of investment that Mr Khusnullin is encouraged by, but also the fact that these investments are being made by "actual foreigners, not entities registered in Cyprus by Russians, as we observed in the past".

Indeed, data from fDi Markets shows that between 2010 and 2013, the majority of real estate investments in Moscow originated in the UK and the US, while investments in St Petersburg came largely from companies based in Finland and Turkey.

According to data gathered by the Russian Housing Development Foundation (RHDF), a government entity responsible for promoting real estate investments across the country, 61% of Russian households are unsatisfied with their living conditions. Many Russians live in multigenerational households, crammed in small, often municipally owned apartments, a legacy of the Soviet era, when individuals were prohibited from buying property on the free market. While such dissatisfaction is pertinent in many former Soviet cities, the high average salaries in both Moscow and St Petersburg – which is about 20% more than in the rest of Russia – make these cities most attractive to investors.

“People are growing wealthier [in these cities] and there is still not enough residential property,” says Svetlana Kuznetsova, RHDF's deputy general-director. According to RHDF's estimates, while in cities such as Kursk or Vladivostok, developers can see returns on investment of about 20%, in Moscow this figure can be three times as much.

Bulging around the middle

Residential projects are not the only drivers of real estate FDI in Moscow and St Petersburg. In fact, shopping centre projects represented the largest real estate investments in each city in 2013. An estimated $450m was invested by Turkish conglomerate Enka TC in Kuntsevo Plaza, a mixed-use development to include about 250 shops, located in the west of Moscow. In St Petersburg, an investment of $334.3m was announced by Finnish developer SRV Group to construct the Okhta Mall.

The middle class in Russia may not be growing at the same pace as in its BRIC counterparts, Brazil, India and China, but big investments in shopping centres in St Petersburg and Moscow show that foreign investors still believe that there is growing upward mobility, at least in the country's major urban centres.

The investment case for Russia is tainted, however, by the country's poor performance in international business rankings. The most recent Corruption Perception Index, published by Transparency International, ranks the country 127th out of 177 countries, while the most recent Doing Business ranking by the World Bank places Russia 115th out of 189 countries for investor protection and 178th for construction permits. Russia did make a considerable advance in the overall Doing Business ranking, however, climbing 19 places to 92nd.

Grand ambitions

Another breakthrough for Russia is expected to come in May, when Moscow's authorities are expected to announce the preliminary results of the country's first public-private partnership (PPP) tender fully opened to foreign participants. The winner of the tender is expected to build a toll road in south-west Moscow at an estimated cost of $1.1bn. In exchange, the company will receive the rights to operate the toll for 40 years.

According to Artem Barashev, head of the project office at Moscow City Investment Agency, the authorities “really want to make it right and base it on the best PPP practices”. There are high hopes that if this first deal is completed successfully, it will pave the way for more PPPs to be opened up to foreign investors.

According to the Moscow Times, authorities are hoping to attract private investments exceeding $190bn by 2035 for real estate and infrastructure projects in New Moscow, a new district that Moscow expanded into in 2012. For projects of this magnitude, even Russia's wealthiest city will require investments from beyond its borders.

“In the past, we could finance our development ourselves, but as the projects grow, our need for foreign investments grows,” Mr Khusnullin told fDi in Cannes, minutes before stepping onto a stage and addressing delegates gathered at Mipim. “Only Beijing is developing quicker than Moscow. But give us two more years and you will see that we will overtake them.”