Expert opinion: how the life of a building after construction affects attracting investment in commercial real estate - Denis Sokolov

Denis Sokolov, General Director of Commonwealth Partnership, discusses in a column for Spot why Tashkent is attractive, the role of commercial real estate, and the importance of changing attitudes toward a building's life cycle.

Urbanization is Underway

Uzbekistan's economy is one of the most dynamic in the region. High growth rates in the coming years will be achieved not only through industrial development but primarily through the growth of urban culture and the post-industrial economy.

Globally, economic activity is concentrated in cities, and the size of a city matters significantly.

As the largest urban agglomeration in the region, Tashkent has yet to claim its rightful place in Central Asia's economy.

Today, the city is drawing significant international attention, as it has all the necessary conditions to become a key point on Central Asia's investment map and show rapid growth over the next decade.

However, it’s not that simple. Many have likely faced difficulties in attracting international investors to seemingly attractive projects in Uzbekistan.

The Hunt for Investors

In the West, there's a common joke that while regular people have five senses, investors have only two—greed and fear.

In financial terms, any investment decision is made based solely on a balance of returns and risks.

At a basic level, risks are often understood as the threat of property confiscation, administrative pressure, and similar concerns. However, the primary risk factor for investors is market opacity.

We may think we understand the market, but an investor who reads the Financial Times, relies on analytical reports prepared to international standards, and trusts the success stories of familiar companies, unfortunately, lacks sufficient information about Uzbekistan’s market.

Often, we see media reports about major investment deals, which frequently involve the state and subsequently help develop entire industries.

However, as practice shows, it is medium and large investments—particularly in commercial real estate—that fundamentally change urban life.

When purchasing an asset, an investor expects it to generate annual income and appreciate in value. And here is where the first challenges arise.

In developed Western markets, office buildings and shopping centers sign lease agreements for 5, 10, or 15 years, with every detail specified. This ensures the owner knows exactly how much income they will receive in 5 or even 15 years.

The asset's value depends on monetary policy, urban development, the emergence of competing properties, and many other factors.

In other words, revenue and value forecasting—routine tasks in developed markets—become highly creative endeavors in Tashkent, relying on assumptions, models, and expert evaluations.

Investors who rely on calculations and models are called institutional investors. The entry of such companies into the market brings with it the development of banking finance, the insurance industry, and modern management systems.

Today, Uzbekistan cannot yet offer assets that meet institutional investors' requirements. However, such assets are being created—this requires only a shift from the "build and sell" approach to "build, lease, manage, and sell."

Real estate investors are always searching for new markets, as this industry involves massive amounts of money.

For example, before 2014, institutional investments in Russian commercial real estate amounted to €7–8 billion annually. After 2015, this volume fell to €3–4 billion, while investments in Poland exceeded €6 billion annually, and those in the Czech Republic and Hungary tripled.

In other words, a shift in regional risk dynamics instantly redirected capital flows. Investors included not only European and American companies but also South African, Australian, and others.

A Long and Prosperous Life After Construction

For many developers in Tashkent, a building's life ends when it is constructed and sold. But this is not the case. If we look at the GDP structure, construction accounts for 6% of Uzbekistan's GDP—a figure similar to other countries like the U.S., China, Russia, and Kazakhstan (5–7%).

In other words, regardless of development level, construction's contribution to the economy is consistent.

However, when it comes to "real estate operations," the contribution to GDP ranges from 10% in Russia to 18% in China. In the U.S., it's about 12%, while in Uzbekistan, this sector isn’t even highlighted in statistics.

This is the life of buildings after construction: the rent paid by tenants, maintenance, repair, and improvement services, as well as the work of designers and architects who handle interior finishes, along with financial, insurance, and consulting services.

There’s another often-overlooked factor. While a factory simply produces goods, a building is like a person whose salary grows over the years thanks to skills and experience.

Urban development, improvements in transportation infrastructure, and rising living and education standards lead to increased efficiency in using offices and shopping centers.

This phenomenon has been observed in almost all major cities, where the value of commercial real estate has grown several times due to urban development. Paradoxically, commercial buildings themselves often drive urban investments in public spaces and parks, ultimately yielding financial returns.

In the next 2–3 years, Tashkent will transition to a long-term real estate management model, where buildings and even apartments become financial assets used to attract credit resources. This requires a developed financial system. However, even today, those purchasing or constructing their own properties should view them as investment assets.

Source: Spot.uz