Credit crunch comes to real estate

Over the past decade, Moscow real estate has experienced a boom – with sky-high building projects going up over the Russian capital. But the fate of future developments is up in the air as the economic crisis works its way into Russia.

Moscow is the third most expensive property market in the world.  But now the global credit crunch is biting  – with record-high interest rates all but shutting off credit for developers wanting to start new projects. On Thursday, Russia's second biggest bank, VTB, said it would cease issuing mortgages for new building projects.

Denis Sokolov, Head of Research Department, Cushman & Wakefield, Moscow says the financial crisis will hit real estate, but possibly less than some other sectors, and with a delayed effect.

“The financial crisis is affecting all the sides of Russian economy – Russian business and Russian life.  However, residential market and real estate market is probably the most inert sector.  So we do not see immediate reaction. Usually it takes about 3 to 4 months to come down from B-to-B level to B-to-C level.”

In the first 6 months of 2008, prices for residential properties increased 25% – with an average sq. m cost of over $5,000.  But now, investors have been warned to stay clear of real estate stocks – saying they will be the hardest hit in the event of a global recession.

As analysts speculate the fate of Russia's real estate market, developers say their plans will continue.  The head of MIRAX GROUP, Sergey Polonsky, made the American Forbes ranking of world billionaires this March – with a net worth of $1.2 billion.  Earlier this week, he played up the situation – but acknowledged prices for both residential and commercial real estate could drop by as much as 25%.

“You've seen that everything is working – that we are building – that people are buying flats, right?  That is cranes are running and projects are being done – you've got to show the real situation.  People are buying apartments – full stop.”

MIRAX says its current projects will be completed – but future projects are on hold. The Moscow city government has pledged support for developers of up to 2 billion dollars in loans – an indication of just how nervous the local market is.