Moscow leapfrogs City of London to become second most expensive office location in Europe

Moscow has leapfrogged the City of London to become the second most expensive office location in Europe after rents there rocketed 46.2% in one year, reaching €1,025.9 per square metre per annum, according to research by NB Real Estate, the commercial property agency, and ONCOR International, the global commercial real estate network.

At the peak of its growth, City of London rents reached €890 per square metre per annum. The West End of London remains the most expensive office district in Europe as rents rose 22.7% to hit €1,758.6 per square metre per annum.

According to NB Real Estate, rental inflation in the Moscow office market is to a significant extent being driven by the Russian commodities boom, whereas the City is much more dependent on the financial services sector, which has reduced its demand for space as a result of the credit crunch.

James Gillett, Director of City Agency at NB Real Estate comments: “This is the first time office rents in Moscow have surpassed the City, and is illustrative of how Russia has become a European economic powerhouse in recent years.”

“A lot of financial institutions in the City scaled back their requirements for new office space as the credit crisis unfolded. This has taken the edge off strong rental growth earlier in the year. A fall in rental values in the City looks increasingly probable, which will allow Moscow to pull even further ahead.”

“The shortage of grade A office space in the City last year edged rents upwards as potential occupiers competed for limited space, but the credit crisis has turned the tables, with landlords increasingly having to discount space.”

According to NB Real Estate, there was very little development of new offices in Russia during the late 90s economic crisis. Since the commodities boom began in 2002, domestic and foreign demand for office space in Moscow has rocketed, and supply has failed to keep pace.

James Gillett says: “Russian commodities companies are making record profits and this has intensified competition for scarce grade A office space. Occupiers are out-bidding each other, which is creating an upward rent spiral. There is also tremendous demand for space from professional and financial services companies that support the resources sector in Russia.”

NB Real Estate points out that developers in Moscow are even converting former industrial and research facilities to office space in a desperate attempt to meet demand, and the current moratorium on office development in Moscow city centre is further exacerbating short-term supply problems.

Commenting on the West End office market, Ray Walker of West End Agency at NB Real Estate says: “Mayfair and St James’s have become home to many of the hedge funds who are willing to pay top rents for prestige properties. By and large hedge funds have been less affected by the credit crunch than the investment banks located in the City of London.”

He further points out: “The West End has a more diversified occupier base, making it more insulated from the credit crunch than the City.”

source : NB Real Estate