Russian Real Estate Market Weathers the Financial Storm
“The crisis won’t affect the developers already known in the market, and it will be much easier for them to obtain borrowed funds, than for semi-professional stock market players.”
Director of Capital Markets and Investments department of Knight Frank
By Sonya Rinkus
In the financial world, no country is an island. A U.S. sub-prime mortgage meltdown, which began at the start of the year, had by summer turned into a global financial crisis. Europe proved itself not to be immune: two German banks and Britain’s Barclays required emergency resuscitation in the same fateful week in August. To control a liquidity crunch, central banks have injected hundreds of billions of dollars into banking systems across the world. As the effects of the crisis continue to reverberate throughout financially interdependent countries, the question everyone’s asking is “How will it affect us?” At a roundtable hosted by real estate consultancy Knight Frank on September 19 at the Ritz-Charlton Hotel in Moscow, industry specialists discussed the consequences of the US fi nancial crisis for the Russian real estate market. They agreed that so far, the answer to the looming question seems to be “Not much.”
The biggest problem for Russia in the wake of the crises is a shortage of free cash assets. Borrowed money is becoming more expensive, leading fewer people to invest in real estate projects, at least in the short-term. “If we consider the worst-case scenario, the possible consequence will be a power supply price fall on the world markets, and as a consequence — growth deceleration in Russia,” says Maxim Sterlyagov, Associate Director in the department of Real Estate Investment Management at Morgan Stanley.
In Russia, people are rushing to buy residential real estate, especially high-end residential real estate. And it is precisely because of Russia’s supply shortage of this that its market will remain stable. “With relatively stable demand for premium real estate units, there is a shortage of high-quality supply on the market. No signifi cant increase in supply is expected within the next few years,” said Ekaterina Tain, Partner and Director of the Residential Real Estate department of Knight Frank. Residential real estate prices peaked in February of 2007, and have started to decline — slowly. Furthermore, according to Tain, Russia will not see the same steep drop in housing prices as the American market following the increase of mortgage crediting rates, simply because the majority of houses here (95%) are not bought on credit.
Decreased investments are slightly worse news for the commercial real estate sector. Ivan Sitnikov, General Director of RosEuro- Development, commented, “With the increase in the cost of borrowed funds, the developers’ margin will shrink, and the market consumption power will lower.” As investors pull out of projects, Mr. Sterlyagov admits, “It is possible, that in the short-run there will be less purchase and sale transactions with completed real estate units. A capitalization rates increase is also anticipated.” However, he remains confident that Russia’s real estate market will sort itself out: “Developers will solve the problem of financing by means of bringing in strategic investors.”
Evgeny Semenov, Director of Capital Markets and Investments department of Knight Frank, predicts, “The crisis won’t affect the developers already known in the market, and it will be much easier for them to obtain borrowed funds, than for semi-professional stock market players.” In the best-case scenario, the crisis cleanses the Russian fi nancial market of its weakest players. Mr. Sitnikov identifi ed “small semi-professional developer’s companies” as among the country’s most flagrant insolvent borrowers, putting the entire banking sector at risk. “If a small bank has a big number of such clients, it will hardly make it through the coming market crisis,” he says. On the real estate market, Alexander Olhovsky, Vice President of the corporate department of Vneshtorgbank, foresees “further market consolidation through the takeover of marginal players.” Real estate projects will be taken over by more able-bodied developers which have survived a Darwinian process of natural selection.
As global turmoil continues and the longest-lasting effects of the crisis are not yet evident, it can be said that the Russian real estate market isn’t in the clear — yet. But industry specialists agree that it is probably robust enough to weather the storm with minimal corrections. “Due to its growing potential and high profitability rates, the interest of the Western investors towards this sector will only grow stronger. We are expecting a certain correction of the Russian market, due to temporary instability at the European and American financial markets, but there won’t be serious changes in the proportion between demand and supply cost,” concludes Jeremy Oates, Managing Director of Knight Frank Russia and the CIS. Riding a wave of positive dynamics over the past few years, the strong Russian real estate market seems poised to prevail.