Greg Thain of IMS, Moscow -

Russian tenants locked into super-high rental agreements are desperately trying to wriggle out of their commitments as all around them prices tumble. Happily, the Russian civil code comes with a convenient loophole: clauses 450/451 say: "unusual disruption to the economic situation can make contracts re-negotiable."

Since the start of the year, tenants have been arguing with their landlords that this clause applies to the current crisis. It is not yet clear if they can make this legal dodge stick, but if they can, then developers will be forced to accept falling income from not only unsold space, but also lose those juicy contracts they signed during the boom times of only a few months ago.

The worldwide trend for property in all sectors, residential, office, retail and industrial is down. But are the prospects for Russia, and particularly Moscow, as bleak for the rest of the year? The short answer is yes.

Bottom-up vs top-down

In the West, the crisis started at the bottom with the sub-prime mortgage segment, which then infected the entire market as the banks collapsed under the pressure. In Russia, quite the opposite happened. Almost as soon as the problems started in September, prices for elite residences were slashed by 30-40%, but it took another three or four months for the problems to spread to the middle and lower end of the market.

In the exclusive residential sector, Moscow is now the second-most expensive market in the world at $20,853 per square metre (sqm), according to Global Property Guide, second only to Monaco, which stands as a staggering $47,578 per sqm. So if the markets are so depressed, what is holding up prices in the Russian capital?

One factor is the lack of supply; there is very little quality residential accommodation available in Moscow's prestigious districts. And with developers cutting plans to build 9,911 apartments to an estimated 5,100 in 2009, that supply is only going to get tighter. Moreover, given the real estate market has a long lead time of two-three years, even if the economy does pick up, the supply of apartments will clearly lag the demand, thus keeping prices buoyant.

Assuming Russia will recover earlier than the rest of the world (thanks to its huge natural wealth), then it's possible to see continued demand at the top end as the oligarchs who are suffering now are replaced by new ones created by the government shifting assets from one set of hands to another.

While sales volumes for the last six months have been exceptionally low, there is no discernible trend towards a further decrease. The top price per sqm paid in Moscow this year has been $25,000 sqm, for a property that would have sold for $40,000 sqm in early 2008.

Cash is king

The other important factor to remember is that Moscow, and effectively all of Russia, is essentially a cash market. Most properties are purchased without any need to borrow money from banks, mortgages being very much a phenomenon of newlyweds and the young executives.

Mass residential is a different proposition - the average price here is $6,600 per sqm, with Sberbank forecasting a further significant drop throughout the year. Currently, in Moscow there are 34,200 properties available, which given that the capital is the largest city in Europe, is a rather modest supply.

With regard to investment deals and new developments, the story here is one of projects being cancelled or put on hold. There is very little new activity. There are stories of investors beginning to appear, but just as with the stock market, there will always be bottom feeders. The reality is that developers are facing immense pressure from the banks over current facilities and very little possibility of obtaining new funding.

The action in the office sector is all about trading down. Businesses who have cut their staff costs are now looking to move to cheaper accommodation; there is in many of the old-style Soviet factories cheaper accommodation available as nonviable industrial businesses close. Compared with prime office rents of $900-1,200, class-B accommodation in the $300-400 range is looking very attractive now to some businesses.

Greg Thain is chairman of IMS, a leading Russian-based marketing group

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