Real Estate

Macroeconomics Drives Property Investment

A review by Intermark Savills

During 2006 the general economic situation in the Russian Federation boosted demand for residential real estate. The progressive improvement of key macroeconomic indicators during 2003-2005 continued in 2006 with a further decrease in the inflation rate and refinancing rate. The dynamic growth of GDP, a tangible increase in average salaries and real personal incomes, and a strengthening of the ruble against the US dollar also fueled these indicators.

Substantial growth of federal budget income, primarily due to rising oil prices worldwide (benchmark Urals blend oil rose to an annual average price of US$60 per barrel in 2006 compared with US$51 in 2005) enabled the Russian government to settle its accounts with the Paris Club creditors by repaying more than US$22 billion of the former USSRнs debt and to substantially increase gold and exchange currency reserves (by US$120.8 billion in 2005-2006).

The continued success of the Russian economy fueled by the repayment of state foreign debt, could not but catch the attention of international rating agencies. In September 2006 Standard&Poor's raised the sovereign credit rating of the Russian Federation from BBB to BBB+ for foreign currency liabilities and from BBB+ to A- for national currency liabilities. Other representatives of the "big three" namely Fitch and Moody's, also assigned similar credit ratings to the RF in 2006. The growing investment desirability of the economy including the property market, encouraged national and foreign investors alike. During 2006 investment in the fixed capital of Russian companies increased by 13.5% (RUR 4,482.7 billion). Foreign direct investment for the first 9 months of 2006 amounted to $10.9 billion, a 55.5 % increase compared to 2005.

Foreign investors are still predominantly focused on the commercial (non-residential) property sector. Over the past year the total volume of foreign investment in large office and logistics projects reached $4 billion, 1.5 times more than last year. Even though foreign investors are only just starting to explore the construction and purchase of large housing estates, investments in this sector in 2006 reached a very respectable $0.5 billion. As for housing development and construction, the focus in 2006 was on the implementation of the 1st phase of the national project, "affordable and comfortable housing for citizens of Russia". A substantial increase in the volume of housing construction was within the framework of the special federal program, "Housing" which by 2010 is to be building 80 million SQM of housing per year. It is one of the main goals of this project, which aims to cut the housing deficit, to stabilize or even reduce the level of market prices.

The Government has set the following tasks for the first phase of the national projectнs implementation for 2006-2007: increase the volume of mortgages by creating a unified system of refinancing real estate loans; step up housing construction and to update public infrastructure facilities; improve the affordability of housing and to support young families; i provide citizens of specific categories such as the military, with housing, in compliance with obligations undertaken by the Government.

Funding of the 1st phase will amount to RUR 212.9 billion, of which 122.9 billion is direct costs, and the rest government liabilities. The state will begin funding pilot private investment projects in 2007 to ensure sufficient infrastructure at selected land plots. The 10 largest construction projects of at least 1 billion sqm each is currently being implemented in various regions of the Russian Federation, including in the Moscow Region.

As reported by Goskomstat (Federal State Statistics Service) in 2006, 50.2 million sqm of housing (604,700 flats) was commissioned, exceeding last year's level by 15.2%. These indicators on the whole comply with those planned under the Federal "Housing" project and attest to the fact that the project is on track with these first substantial results.

Similar to previous years, Moscow and the Moscow Region were leaders in the number of newly developed sites in 2006 (4.9 million sqm and 6.4 million sqm). Although the volume of new housing commissioned has increased in the past few years, the housing market in the Moscow Region remains undersupplied. Given the ever-increasing demand for housing from both local residents and population migration from other regions, the undersupplied market has generated a dynamic rise in prices for apartments. Over the past year, average dollar prices in the housing market grew by 82% in Moscow, and by 112% in the Moscow Region.

As a result of steep price rises, residential real estate in Moscow and the Moscow Region has become an attractive investment tool for private investors, which has further contributed to rising prices. In some housing projects the number of so-called "investment transactions" accounts for more than half of total sales. The elite property sector is represented in Moscow primarily by apartments in buildings of top quality and value, and in the Moscow Region by cottages in organized cottage estates of premium and business class. These categories could not avoid the impact of the trends, common for the entire market. The lack of a supply of elite property demanded by high-budget buyers caused a substantial rise in prices for all types of elite property in 2006, significantly surpassing parameters set in 2005.