Wednesday, December 10, 2008

The Real Estate Crunch Comes to Russia

The Real Estate Crunch Comes to Russia

Shares of Russian companies have lost nearly three-quarters of their value in six months. The price of government bonds is down by almost a quarter. The ruble is sliding, losing 20% of its value against the U.S. dollar since August. The price of oil, Russia's chief export, has fallen by 70% since the summer. But for a long time, there was one asset in Russia—real estate—that somehow seemed capable of defying gravity.

Even as property market bubbles burst all over the world, the value of Russian real estate just seemed to go up and up. According to Moscow real estate agency IRN, residential property prices in Moscow did not peak until mid-October, rising by some 50% from a year earlier. With apartments in central Moscow selling for $6,000 per square meter ($557 a square foot), the city regularly tops lists of the world's most expensive cities. Elsewhere in Russia, too, property values have climbed dramatically over recent years.

It couldn't last, and it hasn't. Now that the global economic crisis has hit Russia with full force, real estate prices are finally tumbling. And if recent trends are any guide, the mother of all crashes may be in the offing. "The property market in Russia is on the brink of collapse," says Vasily Koltashov, head of economic research at the Institute for Globalization & Social Movements, a Moscow think tank. "Property prices are very severely inflated, and demand is obviously slumping."

Down 10% in Two Months

According to the widely cited IRN Index, the value of residential property in Moscow fell by 2% in the first week of December alone. That compares with a decline of 2.3% for the whole of November, and just 0.9% in October. Oleg Repchenko, IRN's head of research, says that real estate prices in Russia have fallen on average by around 10% in the last two months. He estimates they'll fall by a further 30% before next summer.

Others go further. Peter Aven, president of Alfa Bank, one of Russia's leading commercial banks, has predicted that Moscow property values will fall "several times over." In an October conference presentation, Aven pointed out that the value of Moscow property prices is some five times the European average. When it comes to choice property in the center of Moscow, the cost for a 100 square meter apartment is 155 times the income of the typical Russian. That compares with a multiple of just 5.9 in Germany.

Little wonder that Moscow property prices are now sinking rapidly. Indeed, some analysts say that the real market situation is way worse than the headline figures suggest. According to Inkom-Nedvizhimost, a Moscow real estate consultancy, the city's major development companies sold an average of five new apartments in the city in November. That compares with around 40 to 50 apartments per month in the summer, and 90 to 100 in the first half of the year. The collapse in demand means that many developers are already offering deep discounts on new apartments, typically ranging between 25% and 40%.

Nor is it just residential property, the most overheated segment of the Russian market, that is now crashing. Commercial property also has taken a dramatic hit. Irina Florova, an analyst at real estate consultancy CB Richard Ellis (CBG) in Moscow, says that average office rents have fallen by 20% since October and are expected to decline by 25% more by early next year. The take-up of new office space has fallen by 50% since a year ago, while the volume of vacant office space has doubled. "Now it's a tenant's market," says Florova. "Landlords were used to increasing prices, and now they are faced with a completely different situation. For them it was a bad surprise, which happened in the space of two or three weeks."

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