Russian Real Estate Market Devastated By Falling Commodity Prices

Russia was riding high on the commodity boom, but now with commodity prices down considerably from their highs, Russia’s real estate market is struggling. Not only is the …

Russia was riding high on the commodity boom, but now with commodity prices down considerably from their highs, Russia’s real estate market is struggling. Not only is the real estate market on the decline, but so too is the country. Some analysts even think that Russia no longer deserves to be considered an emerging power. For more on recent developments in the Russian real estate market, read the following article from Global Property Guide.

For much of 2008, Russia’s housing market has seemed insulated from the global financial meltdown. However, the situation turned nasty during the last quarter of 2008. Property prices fell, transactions and sales plummeted, projects were canceled or shelved, and what limited mortgage lending there was available dried up.

At the end of H1-2008, the average price of re-sale flats in Moscow was US$24,840, up almost 30 percent from a year earlier, according to Knight Frank. On the other hand, the average price of newly-built flats was US$21,862, up 23.7 percent from a year earlier.

In St. Petersburg, the average price of re-sale flats rose 15 percent y-o-y to US$8,867 per sq. m. in H1-2008. The average price of newly built flats increased by 14.4 percent, over the same period.

H1 2008
H1 2008
New build
New build
Source: Knight Frank


Although the price increases in H1 2008 were significantly less than during the past three years or so, they caused satisfaction in Russia, given the house price falls in most Western European and other developed countries.

However, all hell broke loose after the Russian stock market crash of September 2008, caused by contagion from the global financial crisis, and the realization that Russia’s breakneck economic growth cannot be sustained due to falling energy and commodity prices.

The same realization hit property investors and speculators. The property bubble finally burst, with the varying estimates of the price fall.

Statistics from Blackwood Real Estate indicate an 8 percent – 10 percent price drop to Q4 2008 from the previous quarter. Some real estate agents note that many sellers are accepting offers 15 percent to 30 percent lower than their initial asking prices.

Property prices are expected to slide further in 2009, by 20 percent – 25 percent for newly built- economy class housing and by 30 percent for business-class housing, says Maria Litinetskaya, acting director of Blackwood. Prices in the secondary market are expected to fall by 20 percent to 35 percent.

Enormous price increases since 1998

There has been enormous house price increases across Russia since 1998, according to figures from Rosstat, the national statistical agency. However, the price increases that peaked in 2006 started to weaken in 2007.

In 2006, residential prices in Russia’s secondary market (re-sale properties) rose 54.4 percent, while prices in the primary market (new build properties) rose 48 percent. In 2007, price increases were more moderate at 20.6 percent for the secondary market, and 23.4 percent for the primary market.

From 2000 to 2007, prices in the secondary market have risen 436 percent, while primary market prices have risen 362 percent:

  • The Central Federal District (FD), which includes Moscow, registered the highest secondary market house price increases from 2000 to 2007, at 589 percent. Primary market prices rose 345 percent over the same period.
  • House prices in the Northwestern FD, which includes St. Petersburg, rose the least from 2000 to 2007, 338 percent for the secondary market and 293 percent for the primary market.
  • In the primary market, Urals FD (593 percent), Siberian FD (507 percent), and Far Eastern FD (400 percent) experienced the fastest house price increases from 2000 to 2007. The increased amount of mineral and fuel extraction from these districts partly explains the huge price increases.

With commodity and fuel prices now plunging, these price increases are expected to moderate or even reverse during 2008 and 2009.

Prices in the provinces pushed against affordability limits, experts believe. The ratio between per square meter prices and GDP per capita in Russia is one of the highest in the world — always a danger signal.

Change in house prices (%)
Change in house prices (%)
2000 – 2007
2000 – 2007
Central FD
Southern FD
Northwestern FD
Far Eastern FD
Siberian FD
Urals FD
Volga FD
Source: Rosstat


Commodities bubble has burst

While countries around the world were up in arms as fuel and commodity rose, Russia benefited from them. Russia has the world’s largest natural gas reserves, the 2nd largest coal reserves, and the 8th largest oil reserves. It is the world’s leading natural gas exporter and the second leading oil exporter. In 2007, it was the world’s top oil producer, overtaking Saudi Arabia.

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Russia also has huge amounts of mineral reserves including platinum, nickel, aluminum, iron ore, copper gold and diamond. Oil, natural gas, metals, and timber account for more than 80 percent of Russian exports abroad. Revenues from oil and gas account for 50 percent of Russia’s budget.

However, global commodity and energy prices softened greatly in the second half of 2008 due to the global economic slowdown and the financial turmoil. For instance, the average price of Europe Brent oil fell from US$132 per barrel in July 2008 to US$39.95 in December 2008, before rising slightly to US$43.32 in February 2009. The last time the price of oil was that low was in 2004.

The huge impact of the commodity price falls is visible on Russia’s economy which grew by a mere 1.1 percent y-o-y to Q4 2008, down from 6.2 percent y-o-y growth in Q3. Full year economic growth for 2008 was around 6.2 percent, down from 8.1 percent in 2007 and 7.4 percent in 2006. Average annual GDP growth from 1999 to 2006 was 6.8 percent.

The economy is expected to contract by around 1 percent in 2009 before recovering slightly in 2010 with 1 percent GDP growth.

Housing supply hit by credit crisis

Similar to other transition economies, the number of new dwellings built in Russia fell sharply during the late-1990s. In 1990 more than one million apartments were completed, but from 1996 to 2004, less than 500,000 apartments were constructed yearly. Supply did not match demand, which led to higher property prices.

The majority of Russians live in aging Soviet-era housing stock, particularly outside the main cities. More than half these units badly need repair. Most have not been repaired for 40 to 50 years.

The lack of supply is particularly evident in major cities such as Moscow and St Petersburg. There are even accusations that developers are concealing new supply in anticipation of higher prices.

It was only in 2006 that new apartments constructed exceeded 600,000. In 2007, the number reached 721,000, according to Rostat. In 2008, completions of new apartments reached new highs — Rostat estimates that a total of 72.5 million sq. m. of new apartments will be constructed in 2008, which translates to more than 850,000 new units, assuming an average size of 85 sq. m. per apartment.

Projects on hold

However, several major developers have now put new projects on hold. The Mirax Group, Russia’s largest property developer, announced in September 2008 that it was halting work on 10 projects, for a minimum of one year. The 10 projects make up 83 percent of the company’s total portfolio, and amount to 10 million sq. m. of real estate.

Mirax cited the cost of credit as its main reason for freezing the projects.

Other developers such as Sistema-Hals, Inteko, and the PIK Group have also announced cancellation or suspension of real estate projects.

Biggest losers: oligarchs

Russia’s real estate companies are mostly owned by Russia’s oligarchs. The credit, real estate, and stock market crises have severely affected their fortunes. Many Russian billionaires have been dropped from Forbes annual list of the world’s billionaires, with the total number of Russian Forbes list billionaires falling from 101 in 2008, to 49 in 2009. Those dropped are mostly into real estate, including Sergei Polonsky, chairman of Mirax Group. He lost around US$900 million of his 2008 US$1.2 billion net worth.

Even after losing nearly US$1 billion in value, the Mirax Group still hopes to finish the 506-metre skyscraper in the new business district, Moscow City.

Elen Baturina, wife of the Moscow’s mayor and founder of Inteko, lost about US$3.3 billion of her US$4.2 billion net worth in 2008. She also dropped out of the list. At the peak of the house price boom a year ago, Inteko announced a grand plan called Project Orange, an avant-garde complex shaped like slices of fruit that would have cast on orange glow over the Moscow River. Inteko has also frozen its projects in Ukraine and Morocco.

Two of Russia’s biggest losers are Kirill Pisarev and his partner Yuri Zhukov. They lost about 90 percent of their wealth, when their real estate firm PIK lost 98 percent of its stock value. Pisarev dropped off the Forbes list, after losing US$5.5billion. PIK was set to develop 173,000 sq. m. of housing for the government of Moscow, when the crisis struck.

Mortgages tighter

Russia’s mortgage market is still very small compared to Russia’s economy, at a mere 2.5 percent of GDP in 2008. Yet the mortgage market expanded by 120 percent in the year to H1-2008.

Its recent rapid growth was not due to widespread adoption of mortgage-financing for house purchases. It was mainly driven by a few houses bought by the relatively wealthy. Average monthly mortgage payments are around US$700, which less than 20 percent of Russians can afford. Interest rates remain high, at more than 12.5 percent per annum in 2008.

Most real estate transactions are done in cash and paid in full with US dollars. Only 14 percent of homes were bought using mortgages in 2007, while only 26 percent of purchases of newly-constructed apartments were aided by credit. Buyers and sellers use banks simply to avoid being mugged while exchanging wads of dollar bills. Buyers also have to reserve dollars days in advance.

The development of the mortgage market has been hindered by inadequate legislation, immature financial markets, and lack of unified market standards.

In 2006, laws underpinning mortgage-backed securities were introduced, allowing banks to refinance housing loans for the first time. Two state banks held more than 50 percent of the mortgage market in H1 2008, Sberbank with a 38.7 percent share, and VTB Bank with 12.7 percent.

Mortgage growth will probably be stunted in 2009, due to higher interest rates, falling real estate prices and the credit crisis. The Agency for Home Mortgage Lending (AlZhK), a secondary mortgage loan provider, received no additional funding for mortgage under the revised 2009 budget. In January this year, it bought 1,980 mortgages worth US$56 million from banks.

The tightening credit market has made it more difficult for homebuyers to get a mortgage. Previously, banks only required a 20 percent down payment for home purchases. Now this has been raised to 30 percent. The minimum monthly income requirement for loans has been raised to RUB25,000 (US$720), from RUB15,000 (US$432). Homebuyers must also prove that their income is taxable and comes from legitimate sources, a process that involves certification from several government officials.

Rental market weakens

Rents have moved up at a slower pace than house prices in recent years. From 2006 to H1 2008, the average price of Moscow new build flats rose 66 percent, and resale flats rose 50 percent — but average rents rose only 36.5 percent, from US$5,073 per month in 2006 to US$6,925 per month in H1 2008, according to Knight Frank.

This led to lower rental yields. In June 2008, rental yields in Moscow ranged from 4.6 percent to 5.7 percent, with smaller units earning higher returns, according to Global Property Guide research.

Now rents have started to fall, along with property prices. Rents for economy-class, one room apartments fell by 8 percent from November to December 2008. Rents for other units fell from 4 percent to 6 percent over the same period.

In January 2009, Vedomosti, a business newspaper, reported that rents in Moscow have fallen by 10 percent since the beginning of the year. They predict rents will drop by another 10 percent by summer.

Another factor contributing to the weakness of the rental market has been the privatization of state-owned housing units. Owner-occupancy rose from 41 percent in 1995 to 70 percent in 2004. About 94 percent of households received their units free of charge.

Bribery, risks

Russia is a highly corruption prone country, and the environment makes no-one’s life easy. Getting permits for renovation and everything else almost always involves bribes.

Buying land is not easy. One problem is the system of land registration — changes in law and transfer of ownership are not well documented. A title search must be conducted to ensure that there is no lien on the property.

This creates a fundamental insecurity for owners. Predatory mafia-like groups make a business of launching attacks on private owners, liaising with corrupt municipality officials and corrupt land registry officials to dispossess the rightful owners.

Ruble depreciation hits home

Real estate transactions, purchases or leases, in Russia are quoted and paid in US dollars. This creates another concern, because property prices and rents may move. Not because the value of the property has changed, but because the ruble has appreciated or depreciated.

Since June 2008, the ruble has depreciated sharply against the US dollar; from RUB 23.357 in June 2008, to RUB 35.816 per US dollar in February 2009. So those who committed to buy or rent properties in June last year must raise around 50 percent more money to continue the transaction. This cost-increase has added to pressure on the housing market, leading to its crash.


With the multitude of problems confronting Russia’s housing market, recovery will likely take some time. The prices commodity-based house price boom was clearly unsustainable. Now, Russians are desperately clamouring for real reform.

This article has been reposted from Global Property Guide. You can view the article on Global Property Guide’s international residential real estate website.


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