Moscow’s iconic State University has already become a landmark, but the last five floors of the building have remained exposed to the elements since its developer Don-Stroi ran out of money and suspended work in 2008. However, in the last month, Russia’s economy has started to pick up momentum again.
Like in most western countries, Russia’s real estate sector was booming before the start of the global debt crisis. Prices soared and Russian developers and banks were investing billions of dollars.
“The crisis arrived at absolutely the worst possible time for the Russian real estate market,” said Darrell Stanaford, Managing Director, CB Richard Ellis Russia. “In the spring of 2008 over a million square meters of new office space arrived on the market – the biggest ever addition to the city, so when prices began to fall they collapsed completely.”
Today, the new supply of office space in Moscow is being steadily eaten up since despite the slower-than-expected growth, Russia’s economy will still grow by at least 3.5 percent this year. Moreover Moscow Mayor Sergei Sobyanin has frozen all construction permits until a new strategy for the capital’s development can be worked out; Stanaford says there will probably be no new office space coming onto the market until at least 2013. That is meant to push prices back up again.
Prices for prime locations have already passed their pre-bubble peaks. Office vacancy rates in Moscow have fallen to 12.5 percent from 25 percent at the end of 2009, according to Renaissance Capital. A similar story is playing out in the residential market. The volume of new construction accelerated unexpectedly in July, rising by 17.6 percent year-on-year, according to analysts with Alfa Bank. Dozens of projects were frozen in 2008-2009 as heavily indebted developers struggled to survive after their credits were cut off completely in the worst of the meltdown.
The prospects for more growth are good. Banks have reported an increase in mortgages all year as Russians are once again investing their spare cash.
At the same time Russia’s Mortgage Agency (AIZhK) said earlier this year that the number of mortgage and housing loans will nearly triple to 741,000 loans by 2015 from the current 300,000 and continue climbing to 868,000 by 2020.
While many American and European mortgage holders are still under water, prices for residential property in Moscow have held up well; as the market is so small the owners of the better apartments simply took them off the market during the crisis, prepared to wait until the crisis passed.
Is another bubble forming? The big difference between Russia and the U.S. is that unlike the U.S., there is a huge shortfall of supply in Russia. In order to meet the pent up demand the size of Moscow would have to double.
Moscow’s State University