Monday, April 20, 2009

Moscow's Property Market Set For A Hard Fall

Somewhat surprisingly to many real estate observers, Moscow has become one of the most expensive cities in the world. While Moscow's real estate market held off longer than most, it appears that the gloom is catching up to the city now, and the aftermath isn't going to be pretty. Overseas Property Mall takes a closer look at the situation brewing in Moscow, Russia in their blog post below.

Moscow investors and banks are playing a deadly game of Russian roulette in a stand-off to see who flinches first as the city’s once booming property market falls to ruins around them.

Billions of rubles are tied up in commercial and residential property portfolios.

Homes, offices and shops are standing empty as rents are unaffordable, new build projects are being canceled, investors can’t refinance and the banks are sitting on a pile of yet to be realized toxic debt.

Russia’s fledgling property market has never seen a recession – since democracy and privatization prices have only gone one way – up.

Fueled by oil and gas profits, Russia is lagging a few months behind the rest of the world’s recession problems.

But the property market has the same intrinsic problems as those in the US, UK and other European countries:

  • Oversupply of commercial and top-end residential accommodation
  • Rents outstripping earnings
  • Real estate prices starting to adjust downwards

According to the Moscow News, a professional couple with 75,000 rubles (£1,500) a month to spend on rent can only afford a two-roomed apartment.

Even at that price, which is quite low for a Moscow apartment in a reasonable area, there seems to be plenty of availability and some agents are struggling to move property, or are closing down.

In commercial markets, over the past few months, vacant office space has rocketed from 7.5% to 17.5%, says the Moscow Times .

Prestigious commercial projects have been canceled. Rents have fallen from £1,400 per square foot to £500 per square foot in the same period. Property prices have plummeted by at least 50%.

One Moscow property observer, Andre Bar’yudin says the market adjustment was a disaster waiting to happen because Russians are too naive in property dealing.

Under communism, a worker was allocated a property according to his job.

After the collapse of the Soviet Union, state-owned real estate was given away. Families were given the flats in which they lived. This created a large population of new homeowners with little of no knowledge of how a free market works.

Rather than buying and selling residential property, families swap and offer cash compensation to make up any unfairness in the pricing. About 80% of Russian residential deals are struck this way rather than through estate agent sales like in the UK.

The conclusion is outgoings outstrip yield and incomes, so the market adjustment was inevitable.

The bubble is about to burst as predicted, and this evidenced by Russia’s richest woman, billionairess Yelena Baturina reportedly going cap in hand to the government for cash aid as her property empire starts to disintegrate.

Ms Baturina won contracts worth billions of rubles from the Moscow authorities – coincidentally led by her husband, who is the mayor.

Her construction company has applied for a £570 million loan guarantee to stave off the creditors.

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