Real Estate

Traffic-jamboree

Last autumn’s sacking of Moscow’s mayor, Yuri Luzhkov, and his replacement with Sergei Sobyanin is likely to have an impact on the city’s real estate market, which, industry insiders and observers hope, is going to become more transparent and efficient.

“It is already clear that [Sobyanin] acts very fast,” Georgy Dzagurov, general director of Penny Lane Realty, told PASSPORT. “He has not only been able to stop the rapid development of projects whose impact on the city’s infrastructure has not yet been examined, but he has also waged a tough war on traffic jams.”

“And while at the beginning I was skeptical about such ‘war-like’ activities, now nearly all Muscovites have been able to see a radical improvement in the traffic situation,” he added, controversially.

Since Sobyanin took office in late October, he has taken some steps aimed at improving the traffic situation in the city. The most drastic measure was a ban on street parking in the city center, including the main shopping street Tverskaya. He also introduced the earlier beginning of the work day for City Hall officials so that their cars wouldn’t be on the streets during the rush hour.

According to Dmitry Khalin, head of the strategic consulting and evaluation department at IntermarkSavills, the economy class residential segment is likely to get a boost under the new mayor.

“This is in line with both the current structure of demand in the capital and the policies of federal authorities who pay special attention to the issue of affordable housing,” he told PASSPORT. “It is quite likely that within the next few years, there is going to be a substantial increase in the amount of annually-built residential property.”

Khalin explained that more transparent regulations over access to land and engineering networks, as well as active development of the transport network are likely to be the main factors contributing to the sector’s growth.

Although observers have been pointing out to inefficiency of the city government’s policies regarding construction and development, head of the Moscow government construction block, Vladimir Resin, wasn’t immediately replaced under the new city government. Only in early December, Marat Khunsnullin was appointed mayor’s deputy in charge of construction issues, basically taking over from Resin.

But this kind of gradual transfer of control over the construction sector was necessary “to avoid the disorganization of the construction complex and global issues, such as deceived individual investors in residential construction,” Khalin explained. And the fact that some key figures in the Moscow government’s construction sector under Luzhkov didn’t immediately lose their jobs should not be considered as recognition that city development policies in Luzhkov’s era were effective, he added.

“Luzhkov worked under pressure of his earlier promises and in an entourage made up by people who were hardly free from their own past, either,” Dzagurov said. “Sobyanin, at least to this day, has not been burdened by any vows from the past or people responsible for their own areas. He proceeds only from tasks that were clearly set up even before his appointment as mayor, and from the interest of the city.”

Observers say that Moscow’s construction and development market is likely to face major changes, as its leaders enjoying direct or indirect support from the city’s previous government will have to make room for new players. For years, Inteko, the company of Luzhkov’s wife Yelena Baturina, has occupied a special position in the city’s development market, but now things are likely to change.

“It is quite likely that regulations over access to plots of land are going to become more transparent and clear,” said Khalin. “In that case companies from the country’s other regions, primarily Moscow Oblast and bigger cities, like St. Petersburg, would be able to enter Moscow’s market.”

According to Dzagurov, changes are going to be positive for the market, attracting new developers not burdened with financial problems. “In a situation where Baturina will no longer be able to dictate to them the rules of the game, some [developers] are likely to return to the capital,” he said. “The [market shares are] likely to change. Those who were in an advantageous position exclusively due to their connections— which are being broken now—may not able to continue to work in a situation of tough competition.

“Inteko’s role as a company, a conflict which meant pulling out of all construction projects in the capital [for a developer], is to change,” he went on to say. “Inteko’s positions are to weaken, which will lead to the strengthening of all other players’ positions, and especially those not linked to Inteko.”

Meanwhile, observers are also concerned that the changing of power in the city may lead to delays in the execution of some previously announced development projects.

“I do think that there will be an impact on the real estate market,” Michael Bartley, General Director of Four Squares, told PASSPORT.

“Each real estate development requires a large number of approvals and licenses. A change in the senior levels of the city government creates uncertainty for both developers and the bureaucrats. Why spend considerable money and time (for developers) and planning reviews (bureaucrats) if the key decision makers may no longer be in their posts in 6 months time?”

“I am sure that some slowing down is set to take place due to objective factors, but the new mayor’s task will be to avoid serious delays,” said Dzagurov. “Luzhkov was concerned about the city, and Sobyanin will make any effort to make sure that effective work is not jeopardized and the best of what is planed, the most important, is implemented with maximum speed, regardless of who the author is. Sobyanin already has an established reputation, and expecting populist steps from him would be silly, I think.”

However, Dzagurov added that developers in the Moscow market are still to face a difficult period of between six months to a year, during which obtaining applicable permissions is going to be difficult, while they’ll still have to spend cash on projects already launched and pay interest on loans taken.

One issue that the city’s new government will have to tackle is the exorbitant prices for residential property. “The price/ quality ratio in our situation couldn’t be compared with not only developed Western countries, where prices are generally lower than in Moscow, but also with developing nations, where one square meter of elite property costs $2,000 to $3,000,” Dzagurov said. “In our situation, the main reason for the high prices is the market, in which there is a shortage of supply.”

One issue that the city’s new government will have to tackle is the exorbitant prices for residential property. “The price/ quality ratio in our situation couldn’t be compared with not only developed Western countries, where prices are generally lower than in Moscow, but also with developing nations, where one square meter of elite property costs $2,000 to $3,000,” Dzagurov said. “In our situation, the main reason for the high prices is the market, in which there is a shortage of supply.”

But, the main problem, according to Dzagurov is not the high prices for elite property but the fact that just about any type of property is overpriced. “Frankly, I am not really frightened or upset by the exorbitant prices for high-end residential property, which are justified by the existing shortage,” he said. “What causes unpleasant surprises and disappointment are high prices for business-class and economy class property.”

“With regard to the effect this will have on prices, the issue is muddied by the continued drag on construction due to the lack of financing in the market. Any restriction on supply will inflate prices. My own opinion is that we can expect a short-term property bubble in 2012-2013 due to lack of development 2009-2010, then stability as more stock comes to market,” Bartley said. “The impact on the end user depends upon which sub-segment they choose—some are more profitable than others.”

Other experts believe that no major changes in property prices in Moscow are likely. “In the near future, a balance between demand and supply could be achieved,” Khalin concluded. “In such a situation, property prices remain quasi-stable and increase only adjusting to inflation.”