Russia was the leader among East European countries in attracting foreign direct investment into real estate in the first half of 2007, according to research by real estate consultancy Knight Frank.

A number of western investment funds and banks, including Morgan Stanley, Aberdeen Property Investors, Merrill Lynch, Goldman Sachs, Immoeast, Quinn Group and Rutley Russia, have recently announced plans to invest millions of dollars into commercial and residential real estate in Moscow, St Petersburg and the other big Russian cities.

Jeremy Oates, managing director of Knight Frank Russia and CIS, said: "The rates of capitalisation in Russia are substantially higher than those in the rest of Europe. Primary yields for Class A offices being purchased by investors are estimated to be 8 to 10.5 per cent, for high quality retail premises – 9 to 11 per cent, industrial – 10 to 12 per cent."

Based on market yields Russia is followed by Poland, Czech Republic and Romania. The annual rate of capitalisation on these markets varies from 6 to 8 per cent.

According to Knight Frank, major problems for foreign investors in Russia include the lack of completed projects that meet market requirements, and high asking prices.

"In a situation like this, investors often agree to pay higher prices to finish uncompleted projects before they enter the market," Mr Oates said.

Instead of purchasing uncompleted projects investors can also set up joint ventures with Russian companies, such as the partnerships carried out by Raven Russia, London Regional Property Fund, Quinn Group and TriGranit.