Next week the most expensive Winter Olympics in history will begin under a freezing cloud of controversy. As increasingly bad publicity in the run up to the £31bn Sochi Games overshadows the event, could such intense scrutiny add to fears of corruption across the country and scare off overseas property developers and investors?
When it was announced in July 2007 that Sochi – a city on Russia’s Black Sea coast with a subtropical climate, hardly any snow and temperatures that rarely dip below zero – was to be the host city for the 2014 Winter Olympics, eyebrows, and some serious questions, were raised.
As it is, cynicism has pretty much become the norm in the lead up to any major global sporting event – and with good reason. Research by Oxford University’s Said Business School has found that the average cost overrun for most Olympic Games is 180% and many former host cities, including Athens and Beijing, have been criticised on their legacy delivery. Add to this a bizarre choice of host city in a country not known for setting a shining example when it comes to transparency and it is easy to see why the 2014 Games have attracted a particularly high level of negative press from the outset.
Seven years on, and with just six days to go until the Games begin, it would be fair to say that Russia has not proved the doubters wrong. Cost overruns have hit 500%, having rocketed from £12bn to £31bn – spending £160m on a single ski jump can’t have helped – and there are growing fears over a lack of appropriate legacy planning. This is on top of recent headline-grabbing anti-gay rhetoric, fears of terrorist attacks and guarantees of sun but no snow.
However the Games play out next week, the organisation and budgeting in the run up has been near disastrous – just as confidence among foreign investors eyeing the $620bn Russian real estate market was on the up. Could such a further, and very public, battering to an already fragile reputation dampen interest?
Negative effect
This time last year Russia was looking like a relatively good bet in terms of real estate investment opportunities – certainly compared with other European economies. The country’s GDP grew by nearly 4% in 2012 and is expected to grow by a more modest 2-3% in 2014. The country has a low debt-to-GDP ratio (8.4% at the end of 2012), its banks remain stable, unlike many across Europe, and the country owns more than 30% of the world’s natural resources.
PwC has even predicted that Russia will be the leading European economy by 2030 and could be in the top 10 in the world by 2050. In real estate terms, the country boasts a strong retail pipeline, booming industrial sector and prime office yields in Moscow and St Petersburg.
Alexander Ivlev, country managing partner at Ernst & Young Russia, says: “In recent times the attractiveness of emerging markets has declined slightly as mature markets have started to bounce back. However, medium-term emerging markets, including Russia, are good bets, particularly given the growing middle class.”
But concerns have been raised that increasingly bad publicity in the immediate run up to the Games on top of slowing GDP growth could have a detrimental effect.
Tom Mundy, head of research at Jones Lang LaSalle Russia, explains: “Sochi has been used as a bit of a barometer for the state’s ability to clamp down on corruption and the market has found that when investments in projects have been made, they have not been done transparently.
“It has not been helped by the fact that the Russian government has shut down a bit about the whole thing. At the start they were desperate to talk about how much the Games would cost, how much was going to be invested. Now they do not talk about it all. Particularly how much it has cost.
“I certainly do not think the Games have painted the Kremlin in a very good light – if anything, it has demonstrated that major decisions are still made by individuals. And the investment market does not want to see that. But then what goes on in Sochi is nothing to do with CAP rates in Moscow, and people need to remember that.”
Sochi spotlight
In terms of Sochi more specifically, there is no denying that the city has undergone a mammoth urban transformation both up in the mountains and down in the Olympic Park by the Black Sea, where the opening and closing ceremonies will be held.
A vast proportion of the budget was spent on infrastructure – one rail line alone cost a staggering $8bn – as roads and new rail connections have been built to connect the 30-mile journey from Alder on the coast to the newly built world-class ski resort of Krasnaya Polyana, which is now 10 times its original size – snow or no snow. Alongside the transport connections, a $1bn new power station has been constructed.
Darren Blanchard, senior director of business development at Carlson Rezidor, Eastern Europe, says: “The Olympics has already affected Sochi in an extraordinary way. It has been the catalyst in the delivery of a remarkable expansion and enhancement of the infrastructure of the city and the region.”
But not everyone is convinced. Elena Yurgeneva, head of residential at Knight Frank Russia, argues that a lack of a clear post-Games plan could have a detrimental effect on the area: “Even Russians themselves won’t invest in Sochi. There are strong doubts about the state of the Sochi real estate market in the months after the Olympics.
“All investors are being very cautious because there is no certainty about what will happen after the Olympics and how the market will perform. There is already an over-development in Sochi, and I don’t think all the commercial schemes will bring profit to the investors.”
Lacklustre legacy
The concerns over legacy appear to be twofold and, to make matters more complicated, conflicting. On the one hand there is the aforementioned fear that too much money has been ploughed into a part of the country that is too far away from Moscow and St Petersburg for anyone to have much interest in investing in after the Games end. On the flipside there is an argument that the levels of investment needed to be so high to turn this backward, crumbling 1950s holiday resort into shining new city – in short, to make sure the expenditure was worth it in the first place.
Sergey Riabokobylko, managing partner of Cushman & Wakefield in Russia, explains that Sochi was barely even a city at the start of the process and while it may look as though such huge investment could have gone further towards legacy, people must understand the state the area was in before 2007.
He says: “This is a resort city that has seen no investment for 25 years. The infrastructure there was not sufficient and in some ways the Olympics has been a good way to bring it up to scratch. It is possible that many people are viewing this situation through the prism of Sochi without fully understanding what Sochi was and how much needed doing.
“Russia has its share of problems and I cannot comment on whether it was necessary to spend $50bn on these Games, but I do not think investing in Sochi was a bad judgment call and I do not think it should be singled out as an example of working and property in Russia.”
JLL’s Mundy is not so sure. “So much has been invested in Sochi – especially as the costs rocketed – and there is a feeling here that the money could have been better spent to benefit the entire country, rather than one tiny area on the coast. I mean, $8bn was spent on one railway.
“What the government should have been doing was looking at long-term infrastructure across a wider area. It should have been investigating PPP options or looking at wider rail networks. What is likely to happen now is that if there are any big events, such as G8 summits, then they will always go to Sochi. And that could have a negative effect on the rest of the country.”
Limited returns
Whatever the Kremlin’s plan was for the Sochi Games, any hope of them actually boosting foreign investment into Russian property seems unlikely at best. At most, Sochi may reinstate itself as a high-end holiday resort for Russian tourists, but in terms of investment, the forecast looks pretty bleak, with many investors backing off due to a predicted slowdown in economic growth.
Maxim Petronevich, chief expert at Gazprombank’s centre for economic forecasting, adds that this ?is despite the Olympics – usually an economy-booster – taking place this year.
As Neil Shearing, chief emerging markets economist at Capital Economics, so indifferently puts it: “Unless the Games go spectacularly well, or spectacularly badly, they won’t be particularly transformatory at all.”
Hardly a ringing endorsement for what was meant to be a flagship project to elevate Russia to new heights. And certainly not much return for that heart-stopping £31bn price tag.
