Real Estate Quarterly, Q2, 2004
by Patrick Gill
Uderpinned by a stable economy, high oil prices and dollar depreciation, Moscow's residential sale and rental markets ore continuing to show strong growth. With the advent of more widely available mortgages, real estate is rapidly becoming the investment instrument of choice for many Russians.
The average cost of residential property in Moscow at the end of March stood at $ 1,800 per square meter, up from last year's average of $1,600, reported Pulford, a British real estate agency with offices in Moscow and St. Petersburg. Sale prices were up some 35 percent on 2002 last year, while rental prices rose 20 percent to 30 percent year-on-year, according to Knight Frank, another leading real estate consultancy in Moscow.
Even February to March this year saw a month-on-month increase of 3.81 percent, according to IRN.ru. A total of 4.5 million square meters of residential space was built last year, although only approximately 3 percent of this total conforms to international definitions of elite residential realty.
Meanwhile supply volumes for residential property last year were the highest ever seen on the Moscow market, although sale prices are now expected to increase at a slower rate to 2005. Costs have risen particularly at the top end of the market, and agencies report that volumes remained steady throughout last year.
An increase in sale prices from 13 percent to 30 percent is widely expected by the end of this year.
Karina Kheifetz, managing partner with Evans,
said that "the segment that has appreciated most is the middle band of $150,000 to $300,000. This is because of more cash on the market and the rise of mortgages. At the moment everyone is prepared to buy just to rent out because of economic growth, dollar depreciation and people looking for new investments."
People looking at properly purely as an investment tool are also driving the market, she said. "Investors are both Russian and foreign — foreigners know the returns on real estate in the West are maybe 3 percent to 5 percent, whereas here it is 10 percent and higher. Many come for a week, or even a weekend (rom Europe just to buy real estate."
Knight Frank residential manager Patricia Ledeneva agreed that word has spread abroad that the Moscow market is ripe for attention. "Elite property is attracting the attention of overseas buyers. People coming over from London are eager to invest, and a lot of people are investing in property at the time of construction."
"Extremely high levels of demand moke residential real estate a good short-term investment opportunity for small businesses and individuals," said Knight Frank in a recent report.
Kheifetz said that the wider availability of mortgages is a key factor in domestic buyers' decision to plow their money into property. "Mortgages hove reolly been developing over the last couple of years and have found a solid place with the middle class. Even two years ago people wouldn't have thought about taking one out bul now they are building a credit history and more and more banks are offering mortgages."
Demand for the rental market could slacken in the medium term, Kheifetz
said. Even now comparatively few Russians pay rent, as most people inherit apartments from relatives or receive them from the stale. Foreigners therefore comprise a significant chunk of the middle bracket.
However, there is a growing tendency for foreign managers to be replaced by local, cheaper staff without expense packages, who will either rent more cheaply or buy.
Agencies say most apartments on the rental market fall into the $1,500 to $4,000 per month category, and prices have doubled since 2000, returning to pre-1998 crash levels. Indeed, many characteristics of the pre-crash market are reappearing, said Svetlana Bul-gakova, service manager with Pulford.
"Many landlords prefer to receive payments in euros instead of the usual dollars, and people have started asking for deposits equal to one month's rent that will not be returned to the tenant if the contract is terminated before a year," she said. "This practice was common before the crisis and is now returning. The central part of the city is still the most popular sector for rent."
Kheifetz said that prices in the elite sector are expected to grow further if another major foreign company such as oil major BP comes to Russia. With top executives paying up to $12,000 per month on rent, an influx of just 50 or so new people can make a difference to the market.
The most prestigious areas are considered the so-called 'golden mile' area between Ostozhenka and Prechistenskaya Naberezh-naya, Arbat, Frunzenskaya Nabe-rezhnaya, Patriarch's Ponds, and Plyushchikha. Major recent deluxe projects include Park House at Pereulok Kapranova, and Stolnik at Maly Levshinsky Pereulok.
The elite sector is estimated by Knight Frank to occupy only 3 percent of Moscow's residential market. Demand far outstripped supply last year, however, with 140,000 square meters built compared with the 220,000 square meters needed. Last year the average cost of elite living space in the city was estimated at $4,500 per square meter.
Developers are keen to focus on top-end realty, as a 15 percent to 20 percent increase in investment in the property leads to a 40 percent to 60 percent jump in the sale price, Knight Frank said.
Although analysts believe the current pace of elite realty construction will not be sustained for long, the only factor currently slowing developers' plans to build is limitations on the availability of land and the amount of time needed to secure land rights.
However, many apartments in elite complexes are not available for rent, said Pulford sales consultant Mikhail Sablin. There is an increasing tendency for people to purchase such apartments as an investment and then simply leave them empty and resell them a few years later for a profit, he said.
"To be able to rent out the apartment or even live in it you have to fit it out, which often means investing at least $70,000," Sablin said. "This is a good investment if the apartment 'works' for you after a year. But on the other hand, i( you just keep the apartment empty you do not have to invest any money and if you decide to sell it in one or two years you can get more than you spent, as prices keep going up."
Apartments of 250 square meters and above are the most sought-after in the elite sector, Kheifetz said. Many facilities that are now standard, such as underground car parking, barely existed even as recently as 1998, she added. Agents also report high levels of demand for apartments in pre-WWII and pre-Revolutionary buildings, where renovations have generally been carried out to high standards.
One factor that keeps the elite market high is that top foreign executives with fat budgets for housing are not inclined to economize. They are unlikely to buy, and many are prepared to shell out $10,000 and above per month on rent.
With Muscovites increasingly moving out of the city to drive into work every day, properties outside the city are gaining popularity. Prices for country houses vary widely depending on construction quality and distance from Moscow, but Western-standard houses outside the capital are seeing increasing demand, and the number of cottage settlements tripled last year.
