BRICKS & MORTAR: Russian property market prices reach their zenith

By bne IntelliNews March 15, 2007

Anna Chapman of -

Property prices in Moscow have risen intensively over the last 2 years, but after gaining last year by between 75% and 120% - depending on your method of calculation – the cost of property is probably close to its zenith today.

For 2007, experts say the number of real estate deals won't rise by more than 5% in the year. A year ago it took just two weeks to sell a flat, but now it takes two or three months.

This will be felt in the real estate services market. Frenetic activity in real estate usually happens either during times when prices are either falling or rising rapidly. But now the market is more stable the estate agencies that benefited from last year's easy profits will have to operate in a much tougher competitive environment. A shake-out is coming and those real estate agents that invested some of their windfall profits into improving services, like mortgage advisory services, are the ones that stand to benefit from the slowdown.

Commercial property is still on the upswing. Prices grew by 70% in 2006 and demand for rented office space and especially purchased space will remain high.

In residential, if sales start to flatten, the cost of renting a flat is still expected to rise. The price of buying a square meter of residential property doubled last year and in the most extreme cases rose 150%, making it unaffordable for nine out of 10 buyers in Moscow. While the cost of purchasing residential space was skyrocketing, the price of renting the same space only rose 15% in 2006 and the income that owners earn on this rent has fallen to only 5% of the capital invested to buy a flat, which experts say could reach 8-10% by the end of the year.

As the centre of Russia's capital becomes the preserve of the very wealthy, more and more deals are being done in the suburbs – the so-called "second belt" that starts some 10-20 kilometres from city border. Currently eight out of 10 construction projects are in this second belt.

The average price of a flat in Moscow including the central area is now $500,000, where just a parking space can cost $70,000 these days. But prices in the second belt start from typically $300,000, an attractive alternative for most of the city's inhabitants.

At present, the flow of money from investment funds into the Moscow property market appears to have dropped off and this year's expected cooling in the rise in property prices should mean this flow will continue to slow.

Anna Chapman is the director of new aggregator property database website in Russia

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