Will St. Petersburg Ever Catch Up?

While the speed with which new apartment blocks seem to mushroom on the outskirts of the city and the endless restoration of historic facades around the city center could give the impression that nowhere is developing faster than St. Petersburg, the city's real estate market still lags far behind that of the capital, according to experts.

"St. Petersburg is currently three to five years behind Moscow," said Boris Moshensky, general director of Maris | Part of the CBRE Affiliate Network. "There is not such a huge demand for commercial real estate as in Moscow," he said. "In Moscow, there are far more deals on the market for offices covering 5,000 square meters than there were four years ago. The average size of an office in St. Petersburg is 250 square meters, and in Moscow that figure is 500 to 1,000 square meters."

Vladislav Zabrodin, managing partner of Capital Legal Services, estimated the time lag between the cities at two to three years. "It would be unrealistic to think that St. Petersburg could catch up with Moscow any time soon," he said. "However, there are some interesting exceptions. For example, according to published statistics, there is more high-quality decent retail space available in St. Petersburg than in Moscow - about 300 square meters per 1,000 inhabitants in the former, compared to 180 in the latter."

Office space, however, is more abundant in the capital, where there are about 500 square meters per 1,000 people, compared to 200 square meters in St. Petersburg, according to Zabrodin. However, the difference between the Russian cities seems negligible when compared foreign statistics. There are 7,000 square meters of office space per 1,000 people in London, and 5,500 square meters in Stockholm, he added.

However, when it comes to profitability, Russia's second city outstrips not only its traditional rival Moscow, but other European cities too.

"The profitability of real estate in London stands at five percent, and at 13-14 percent in Moscow," said Zabrodin. "That figure is 17-20 percent in St. Petersburg."

Many trends can be seen on both markets. For example, business centers in both cities are gradually moving out of the city center, but the rate at which they are doing so is slightly faster in St. Petersburg due to the restrictions on building in the center, according to Zabrodin.

The cities also share a lack of logistics space. This year, the volume of new logistics space in St. Petersburg and the Leningrad oblast is for the first time comparable to that in the Moscow region, according to Alla Solovieva, chief operating officer of Multinational Logistics Partnership. "On both markets, demand for logistics complexes significantly outstrips the market's ability to supply, as there is still a deficit of logistics space," she said. She predicts that after several large-scale logistics projects are completed by early 2009, there will be no new influx of space due to the current situation on the financial markets, though MLP is currently waiting for planning permission to build a logistics center in Shushary in the Leningrad oblast.