While we have seen major changes in the Russian political landscape over the last decade, and a move back towards the old Cold war scenario, there is no doubting the riches which have been created over the last decade. This from a country which has practiced the most brutal form of communism for many years and has seemingly reverted to Western capitalist ideals in certain areas of the economy.
One area which has seen substantial investment demand and indeed substantial investment growth is the property market, both residential and commercial. We are not talking about companies making big money we are talking about individuals in the higher echelons of Russian society becoming billionaires on the back of many astute property transactions over the years. But how are they coping with the credit crunch?
The Russian property market
The Russian property market is not necessarily the first market which would spring to mind as a good, safe, long term investment but over the last decade we have seen an enormous lift in property prices. However, this property bubble has been very much concentrated on the main business areas of the country with many rural areas seeing very little in the way of property wealth coming their way.
To give you an example of how the market has grown over the last few years let us consider Moscow where the average cost of property in the City was around US$700 per square metre in 2000 but had risen to over US$5,000 in 2008, before the real affects of the credit crunch started to hit home. There is also the situation in Ulyanovsk where the cost of property back in 2002 was around US$300 per square metre but then proceeded to reach a high of US$1,100 per square metre in 2007.
This massive increase in asset values drew in the more wealthy of the Russian business community and through a number of very astute deals we saw the emergence of the property billionaires club in Russia. While prior to 2000 it carried great kudos to be a multi-millionaire, now it seems that only billionaires are classed as successes!
It will come as no surprise to learn that the Russian economy went through a very difficult stage prior to the start of the improvement around about 2000. A closer relationship with the West opened up Russian markets to massive cash rich companies and while the relationship between the government and overseas businesses has soured a little of late it was still a good move for all parties. This new found interest in the country also induced a massive boom in property in and around areas such as Moscow which remains central to the economic direction of Russia.
During the dark years prior to the economic recovery, Russian inflation had been touching levels as high as 86% and while the rich got richer the poor were literally starving. However, the boom in demand for property led to a massive increase in activity within the construction industry, saw average incomes rise and unemployment numbers start to fall. Was Russian finally adopting a Western way of economic management?
While there have been a number of well publicised fallouts between Russia and a number its former allies such as the US and the UK the picture on the ground is not as depressing as many would have you believe. However, even the presence of some large western organisations has not seen Russia avoid the perils of the ongoing credit crunch.
The larger banking institutions with have enormous reserves are still trading well, out of range of any serious financial trouble, but some of the smaller groups have hit troubled times. Money market liquidity has dried up, business is proving very difficult to attract and the state has been closely involved with monitoring the situation and offering assistance behind the scenes. However, the real estate market has taken a real battering over the last few months and the signs are not good for the immediate future.
What does the future hold for the Russian property market
The credit crunch has now taken hold of the Russian property market and the situation has not been assisted by the revelation that many of these property companies are geared up to the hilt with short term debt which needs to be refinanced. This has literally seen share price falls of up to 90% over the last few months knocking literally billions of dollars off the value of many property portfolios.
The problem seems to be the deluge of property now on the market at sub-market values because of the prevailing companies need to raise finance as quickly as possible. However, the more groups which need to sell to refinance themselves the lower property prices will fall. Until a short term funding solution can be formulated it looks as though the Russian property market will remain under pressure for some time to come.
While for quite a few years now we have been hearing about the ever increasing number of business and property billionaires in Russia, there is no doubt that many of these billionaires have seen heavy falls in their net value over the last 12 months. We are hearing of multi-billion dollar losses for property companies which are majority owned by a small band of investors, we are seeing many property groups falling to their knees but where is the rescue package, where is the government assistance?
The Russian economy and property markets are in real trouble and entering a serious situation whereby the lack of short term credit could literally see a number of the more prominent property companies go under. The debts which were racked up in the good times to assist with expansion have now returned to haunt many of Russia’s top property magnates and in this environment there is very little that they can do.
Property investment in Russia has always carried more of a risk than the vast majority of markets throughout the world but it has made many people seriously rich. While local contacts and assistance from acquaintances may have helped some property investors there are a number of genuine success stories in Russia. Quite how the markets will manage to turn around the developing crisis remains to be seen but there is no doubt the short term liquidity crunch has been magnified by the massive amount of property speculation which has been going on since the turn of 2000.