Russian Property Prices Falling Along With Economy

Make no mistake – Russia is building.  In 2013, Russia built more apartments that at any time since 1989, with around 912 thousand apartments built. Yet despite Russia’s …

Make no mistake – Russia is building.  In 2013, Russia built more apartments that at any time since 1989, with around 912 thousand apartments built.

Yet despite Russia’s enormous oil output, Russia’s economy is slowing.  Excess power in the hands of Putin, plus the Ukraine crisis, are stoking ‘hot money’ outflows.

Not surprising that with all this new supply and a slowing economy, Moscow´s resale apartment prices fell by 2.13% during the year to Q1 2014 – an 8% fall when adjusted for inflation. Prices of "used" Moscow housing fell more than all other Russian cities in 2013, according to the portal Mir Kvartir, to an average of RUB 189,200 (US$ 5,381) per sq. m.

Nevertheless, there was a surge in buying activity during the first half of 2014, most likely associated with the Ukraine crisis, according to Mir Kvartir. 

“Demand has grown significantly – it is clear that buyers are seeking to get rid of the ruble,”  comments Mir Kvartir.

“In part, this is an emotional reaction, the excitement caused noticeable weakening of the Russian currency,” according to Continent’s CEO Galina Garaeva.

In St. Petersburg resale apartment prices increased in nominal value by around 1.64% y-o-y to Q1 2014 – a 4.6% fall when adjusted for inflation. 

In Russia as a whole, the price index for resale apartments rose by 3.11% y-o-y, according to the Federal State Statistics Service (Rosstat).  But when adjusted for inflation, prices fell by 3.08%.   Nominal price falls were seen in 10 of 46 Russian regions, compared to only one last year.

From 2000 to 2007 Russia experienced a massive housing boom, with secondary market prices skyrocketing by 436% while primary market prices rose 362%.  Prices began falling in the second quarter of 2009, and since then there have been ups and downs – there was a 9.6% increase in average Moscow prices in 2012.

At RUB 49,939 (US$ 1,420) per sq. m. the average price of new apartments in Russia is still 5.4% down on the 2008 peak price.

Both locals and foreigners can own landed properties, according to the Land Code of 2001. The legislation was extended to Moscow in January 2006.

Crisis pushes key interest rate to 7.5%; Russia’s credit rating cut

The central bank has raised Russia’s key interest rate twice since the beginning of 2014, from 5.5% to 7% in March, and to 7.5% in April. The rate increases were related to the country’s financial instability due to inflation, and to the crisis in Ukraine.  As of June 2014, Russia’s inflation was 7.8%, the highest rate since August 2011.

"Keeping the [bank´s key] rate at the current level for the next few months will be enough to achieve medium-term inflation goals," according to Central Bank of Russia governor Elvira Nabiullina. "However we observe the presence of significant inflationary risks at the current time. If these risks are realized, the Bank of Russia will continue to raise the key rate."

Hours before the central bank raised its key rate in April, Standard & Poor´s Ratings Services cut Russia’s credit rating to a level above junk at BBB-, as S&P sees “additional significant outflows” from the Russian economy due to the country’s standoff with Ukraine.

Before the Ukraine crisis, average interest rates for ruble and foreign currency housing loans had actually been falling. Ruble-denominated loans’ interest rates fell to 12.2% in Q1 2014, from 12.9% in Q1 2013, while average foreign currency loan rates fell to 9.4%, from 9.7% in Q1 2013).

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Fast-growing mortgage market fueling housing demandZ

How much will the property market be impacted by interest rate rises?  It could be a significant hit, because every fourth property (24.6%) was bought on a mortgage in 2013, according to the Federal Service for State Registrations.

Total outstanding housing loans rose by 32.4% during the year to Q1 2014. Around 96% of the loans were in rubles, while the remaining 4% were in foreign currency.

Mortgage market expansion has been a key booster of housing construction, according to the Agency for Housing Mortgage Lending (AHML).   Mortgage market growth in 2013 was encouraged by the downward trend in loan rates, with lower rates supported by a lower funding costs and improved liquidity.

In 2006, laws underpinning mortgage-backed securities were introduced, allowing banks to refinance housing loans for the first time. Since then, mortgage lending growth has helped drive growth in the housing market.

Yields are higher in St. Petersburg

Moscow is no longer the 2nd most expensive city in the world for expatriates – its ranking in 2013 – but it is still very expensive, ranking 9th in the 2014 Mercer Cost of Living Survey. St. Petersburg has dropped 12 places to 35th, due to the depreciation of the ruble against the US dollar.

Rents for elite apartments remain scarily high, and were basically static in 2013, according to Knight Frank.  Monthly rents in elite areas of Moscow range from €39 (RUB 1,855) to €41 (RUB 1,950) per sq. m., according to Global Property Guide research in June 2013.

Gross rental yields in Moscow’s upper-end areas are nevertheless quite low, despite the high rents, ranging from 3.03% to 4.52%, again according to Global Property Guide research.

St. Petersburg’s apartments have higher yields.  A 65 sq. m. apartment can yield around 6.13%, while bigger apartments have lower yields ranging from 4.25% to 4.29%. Monthly rents in St. Petersburg’s elite areas range from €20 (RUB 951) to €23 (RUB 1,094) per sq. m.

New property laws have caused anxiety

All change in the tax laws!  From January 1, 2014 the cadastral value of real estate has been used in calculating tax, replacing the inventory value approach. This may mean a higher tax and rent burden for buyers and renters, as cadastral values of many land plots may have exceeded their market values, given that the mass valuation criteria used for revaluation in 2012 did not take into account land characteristics.

A tax rate of 0.1% will be imposed on real estate properties with cadastral value around RUB 300 million (US$ 8.6 million) or less from January 1, 2015, while residential properties with cadastral value worth higher than RUB 300 million will have tax rates ranging from 0.5% to 1%, according to Knight Frank.

Anxiety was also caused in 2013 by proposed new registration laws.  The proposed legislation requires foreigners and Russians to register their permanent address after 90 days of changing address.

Those who fail to register will be fined from RUB 2,000 (US$ 60) to RUB 3,000 (US$ 90) – or RUB 5,000 (US$ 150) in Moscow and St. Petersburg. Landlords will also pay up to RUB 7,000 (US$ 210) for every unregistered occupant residing in their properties.

Fake registrations or registration of a person who doesn’t reside at a property could lead to a fine of up to 500,000 (US$ 15,000) and a 3-year imprisonment.

Slower growth ahead amidst US, EU sanctions

The Russian economy entered the first quarter of 2014 with a slow start. The country posted only 0.9% y-o-y growth, the lowest growth in the last five quarters and a sharp slowdown from the 2% annual increase in the previous quarter, according to the Federal State Statistics Service (Rosstat).

The IMF cut its estimate for 2014 growth to around 0.2% in April, the IMF’s fourth downward adjustment in a row from an earlier forecast of 1.3% growth.

The IMF cited the international sanctions imposed on Russia. The country is predicted to have a total capital outflow of about US$ 100 billion in 2014 as an outcome of the sanctions imposed by the European Union and the United States and the expected capital flight.

"The difficult situation and especially the uncertainty surrounding the geopolitical situation and follow up of sanctions and escalation of sanctions are weighing very negatively on the investment climate," according to IMF´s mission head to Moscow Antonio Spilimbergo.

In contrast, Russian President Vladimir Putin’s economic aide Andrei Belousov predicts 1% GDP growth in 2014. "The sanctions in their current format don´t have a macroeconomic effect," according to Belousov.

The country fell deep into recession in 2009, with GDP contracting 7.8%, after global energy prices dropped. It was Russia’s deepest recession in 15 years, after robust economic growth from 1999 to 2008 thanks to booming energy and commodities revenues. The recession was followed by a recovery, with Russia’s GDP growing by 4.5% in 2010, 4.3% in 2011 and 3.4% in 2012.

The recovery was followed by a 1.3% slowdown in 2013, the lowest economic expansion since 2009. The economy suffered from contractions in the utilities and construction sectors, as well as weaker export demand and falling domestic investment.

The ruble has fallen, inflation is up

The ruble has fallen 6.2% against the dollar since January 2013, and is the worst performing currency among 14 developing markets in Europe.   This is partly because the central bank initiated a policy in late 2013 of allowing the currency to fall further, hoping that a major currency devaluation over the next two years would boost exports.

Nevertheless, the country’s unemployment rate fell to a record low of 4.9% in May from 5.3% in the previous month, according to Rosstat, indicating that there is a worker deficit, according to Renaissance Capital economist Oleg Kouzmin.

With a falling ruble and tight labour markets, inflation has become a major concern. In June 2014, annual inflation rose to 7.8%, its highest level since August 2011, boosted by the ruble’s depreciation.  Based on a poll by the Russian Public Opinion Research Centre in July 2014, 59% of the respondents named inflation as their top concern, an increase of a quarter on the previous year.

According to Finance Ministry’s strategic planning department director Maxim Oreshkin, inflation will start to decelerate in July.

Russia and the conflict in Ukraine

The governments of the two countries have a complex relationship, given that Kyiv and Ukraine have long been considered by Russia as part of their heartland.

Former president Viktor Yanukovych tried to establish closer ties both with the European Union and Russia, in order to attract capital to Ukraine. Ukraine was about to sign an association agreement with the EU which would have provided funds contingent on reforms. However, agreeing to this treaty would also have meant breaking ties with Russia, and required the release of former Ukrainian Prime Minister Yulia Tymoshenko.

In the end, Yanukovych refused to sign the treaty and signed an agreement with Russia instead, which led to civil unrest and eventually the ouster of Yanukovych. He was temporarily succeeded by Oleksandr Turchynov (later replaced by newly-elected President Petro Poroshenko). 

After the Ukrainian revolution, the Russian government did not recognize the new Ukrainian government, and reacted by calling the revolution a coup d’etat and annexing Crimea. The revolution was also followed by protests in Ukraine‘s south-eastern regions by pro-Russian ultranationalists and anti-government groups.

In March 2014, the Russian parliament granted President Putin the authority to use military force in Ukraine. On March 11, the Crimean parliament voted in a referendum and declared their independence, along with the city of Sevastopol as the Republic of Crimea. On March 16, Crimea voted to rejoin Russia, reporting a 96.77% vote with 83.1% turnout. The following day, Crimea declared independence from Ukraine and requested recognition from the United Nations as part of the Russian Federation. The same day, Russia recognized Crimea as a sovereign state.

On March 27, a UN General Assembly resolution voted the Crimean referendum invalid. Meanwhile, The European Union, the United States, joined by other countries, accused Russia of violating Ukrainian sovereignty and breaking international law. This resulted in sanctions against Russia and against Russian companies and individuals, sanctions ratcheted up in the wake of the downing of Malaysia Airlines flight MH17.  

This article was republished with permission from Global Property Guide.


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