Real Estate

What Does 2012 Hold for Real Estate

2011 saw quite substantial changes in the Moscow real estate market, which were mostly prompted by the changes in the city’s government in the wake of September 2010 dismissal of mayor Yury Luzhkov.

In a move to bring order to city construction, the team of the new mayor, Sergei Sobyanin, suspended a number of development projects which, experts say, could lead to a shortage of residential property in the city and, consequently, to price hikes.

“The year 2011 was notable for a massive revision of existing investment projects in Moscow,” Yulia Geraskina, head of the new construction department at Est-a-Tet, told PASSPORT. “In February 2011, the city government’s decree #25 launched the biggest revision of investment contracts in Moscow’s history.”

According to Geraskina, the move led to the cancellation of a quarter of all existing contracts by mid-October, involving such big industry players as SU-155, Krost, PIK, Barkly, Gals- Development and Glavstroy.

“In February 2011, the city government’s decree #25 launched the biggest revision of investment contracts in Moscow’s history” - Yulia Geraskina, Est-a-Tet

“Judging by the list of companies, the largest part of these contracts were economy and standard class housing construction,” Geraskina observed. “So, in the nearest future, the city is likely to experience shortages in those segments.”

She went on to say that buyers in those segments react by buying properties in the Moscow region. “One can really call the year 2011 a year in which the vector of demand switched direction, with more and more Muscovites buying apartments in nearby Podmoskovye,” she explained.

Meanwhile, the shortages have already brought about an increase in prices. “Given a limited supply of newly constructed properties, demand for real estate has gone up, pushing up prices as well,” Alexei Shlenov, general director of Miel- Brokerage told PASSPORT. “From the beginning of the fall, we noticed an increase in prices in prestigious neighborhoods of the city, the most sought-after apartments being those in panel buildings, both old and improved-quality.”

Other experts also pointed out that residential property prices gradually climbed throughout the year. “In the elite segment, secondary property prices were up from $26,200 per square metre to $28,900, which is 10%, newly built properties gained 12%, to $23,400 per square metre,” Alexander Ziminsky, director of the elite property sales department at Penny Lane Realty told PASSPORT, adding the business class segment saw an increase from $6,900 per square metre to $7,400 per square metre for newly built properties and from $7,900 to $8,900 for secondary-market properties, which is also around 10%-11%.

“The situation is likely to be heavily dependent on overall economic conditions, but even under the most negative scenario, I think the elite segment will keep its position,” said Alexander Ziminsky

“This kind of growth was predictable, based on the current economic conditions,” Ziminsky said. “In 2011, there were no premises for either decreases in prices or a new upward movement. However, in 2012, in the elite segment, we could see an increase of 20% or more because of a shortage in new offerings in the Central Administrative District.”

The decline in new construction is limiting investment options for those who previously opted for making a deal long before a building is completed, often at early construction stages, obtaining a property with a considerable discount to its market value. But now options of this kind seem to be limited.

“Projects that could be brought to the market are already there, and those which were in earlier stages, are now set to be at least nine months behind schedule because of the revision of contracts,” Geraskina explained. “More than a half of all new properties on sale are in the buildings close to their completion.”

According to Ziminksy, demand for property remained stable for most of 2011, gaining about 15% to 17% from the respective months of 2010. “We observe neither decreases, nor sharp increases,” he said.

Ziminsky added that the majority of deals in the elite segments are in the price range between $1.5 million and $2 million, while apartments with an area under 100 sq. metres remain most wanted. “In the business class segment, apartments of between 100,000 sq. metres and 120,000 sq. metres at about $800,000 to $900,000 sell well,” he went on to say. “Relatively cheap one-room apartments under 70 sq. metres find buyers relatively quickly, too. One trend in the business class that becomes more and more prominent is that [buyers] are interested in apartments that are already fully decorated.”

“At the beginning of the year [2011], we suggested that prices for properties of regular demand could grow over the course of the year by roughly 10%,” Shlenov said. “We see an active market, in which seasonal demand is completely back. This kind of buyers’ activity makes us optimistically suggest that [2012] is going to be just as successful.

“Because of a shortage in good quality offers in the elite segment, it is possible to predict a 25% growth in prices,” Ziminsky said. “The volumes of construction are likely to increase because of active development of the suburbs.”

For most of the year 2011, the situation in the currency market was unstable, with the exchange rate of the rouble against the US dollar fluctuating in the 10% range. That, predictably, had an impact on the real estate sector.

“One of the [recent] trends is that sellers are converting rouble prices into dollars or increase the price by 5% to 10%,” Ziminsky said. “The practice of announcing prices in ‘currency units’ is back, under which the ‘units’ are converted, depending on currency fluctuations, in the direction that is favorable for the seller.”

Meanwhile, experts say that against the background of uncertainty in the world economy, which has an impact on the main currencies, people have been more actively investing in real estate as a means to protect their savings. “The difficult situation of the American currency and fluctuations in the exchange rate of the rouble, coupled with uncertainty in the stock markets all over the world have led to an increase in demand for real estate,” said Geraskina.

Meanwhile, realtors also point to the recuperation of the mortgage lending segment, which fell prey to the 2008 global financial downturn and remained in dire straights even though the economy was recovering from the crisis. According to Esta- Tet, in the first months of 2011, the number of mortgage loans doubled, year-on-year, and between 35% and 40% of all deals brokered by the company involve mortgage loans.

“Today, the proportion of deals involving mortgage loans at Miel-Brokerage in Moscow and the Moscow region is around 30%,” Shlenov said.

“Middle-class buyers either take out a mortgage loan or sell their old property,” Ziminsky said, adding that the purchase of an apartment ready to move into allows buyers to avoid having to rent property while the new apartment is being decorated.

One of the biggest events in the Moscow property market in 2011 was the announcement of the city’s expansion into the Moscow region. Predictably, prices for property in the former Moscow region towns that are now going to become part of the city have gone sharply up. According to information from Est-a-Tet, prices for “new Moscow” properties gained about 18%, compared with an average 5% growth for the Moscow region.

Speaking about possible scenarios for the development of the Moscow real estate market, experts are cautious, but they still note that there is a potential for price increases.

“The situation is likely to be heavily dependent on overall economic conditions, but even under the most negative scenario, I think the elite segment will keep its position,” said Ziminsky, adding that one of the major factors that are going to have an impact on the market in the short term, is City Hall’s policies.

“The outcome of the financial uncertainty is that investors are divided: one part insists that it is time to buy before currencies completely lose their values, the other part are holding their cash in a hope to strike a lucrative deal in a situation of general panic,” he went on to say. “But overall, in a situation like that, interest in properties as a secure investment is steadily growing.”