BRICKS & MORTAR: Russian real estate - back to the bubble

By bne IntelliNews September 12, 2011

Ben Aris in Moscow -

For many cash-strapped Russians, the global downturn seemed to offer a chance to scrape together enough money to get a mortgage and move house. But those hopes have been dashed as the market has recovered more quickly than expected and prices are already back to pre-crisis levels.

At 80%, Russia has the second highest level of home ownership in Europe after Ireland, but unlike the Irish (or indeed any other Europeans) almost no one has a mortgage.

The state simply gave people the public housing they occupied after the collapse of the Soviet Union in what must be one of the biggest transfers of wealth in history. Russians had an average of 16.8 square meters of space per person in 1990, worth nearly $3,000bn today - about twice the value of GDP.

However, estimating property values is pretty arbitrary. While eight out of 10 Russians say they want to move house, very few are able to do so. There are only about 300,000 mortgage contracts in the whole country: less than half of 1% of the population has borrowed from a bank to buy their home. "During the worst of the crisis, the top end of the market was not affected at all. No one wanted to sell. They didn't want the cash as they had nowhere to put it," says Ekaterina Thain, founder of Chesterton Russia, a real estate agency in Moscow. "In business class, prices came down by 30% and in economy class they were down by 50%. However, prices already began to recover in 2009 and now they are almost back to pre-crisis levels."

The average price of Moscow residential real estate has soared from around $900 per square meter in 2003 when mortgages first became available, reaching $4,000 in January 2010 and $5,107 as of August this year, according to the website.

Prices were also propped up, as any Russians with money ploughed it to real estate, the preferred asset class during the worst of the crisis. And as Thain points out, there is still a huge housing shortfall in Moscow and the country as a whole.

Banks have begun issuing mortgages again and volumes have doubled since the start of this year. In August AIZhK, Russia's mortgage agency, said the number of mortgages and housing loans would rise to 741,000 by 2015 and continue climbing to 868,000 by 2020.

It's a similar situation in office space, where there is a huge shortfall in class A properties, though developers have had even more of a rollercoaster ride than home owners. "The crisis arrived at absolutely the worst possible time for the real estate market," says Darrell Stanaford, managing director at CB Richard Ellis Russia.

No vacancies

In the economic boom from about 2006, real estate became a "get rich quick" deal for many businesses that poured money into ill planned projects, says Stanaford. In the spring of 2008, he says, over a million square meters of new office space was added to the city's stock of 12m square meters, so when prices began to fall they collapsed completely.

The reanimation of the market was clearly seen this week when Rosstat, the government statistics agency, reported a jump in July construction volumes, up 17.8% on year after being moribund for most of the previous 18 months. Developers who had borrowed heavily to finance projects have largely restructured their loans - or lost their assets to banks - and are now able to raise fresh money to finish half-completed buildings that were abandoned during the crisis.

Sergei Sobyanin, the new mayor of Moscow, has suspended construction permits issued by his predecessor Yuri Luzhkov so there will be no new office space on the market until 2013, which will also support prices, Stanaford predicts.

At prime locations prices have already passed their pre-bubble peaks, while office vacancy rates in Moscow have fallen to 12.5% from 25% at the end of 2009. Vacancy rates are only around 1% and 3% in the prime retail and logistics sectors, respectively, according to Renaissance Capital. "Before the crisis there were no vacancies and the trick to was to do the deal fast before prices went up further - if you could get the building at all," says Stanaford. "Now there is supply but the gap between supply and demand is closing fast."

Moscow's new administration is working on a development plan for the capital and says it plans to double the size of the city, building suburbs in the western European style. But this will take several years and redevelopment of the centre of Moscow is still badly needed. "A city is like an ocean liner. It takes time to change direction and it is best to do it slowly and get it right," says Stanaford."

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