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Sochi is going to host Olympics in 2014. Will this have a positive impact on real estate prices? The following article written by one of Sochi's elite developers draws a picture of Russian residential market prospectives.
Sergey Usachev, First Vice-president of “Sunzha Group”
At present Russian real estate market is in the same indefinite position as the world economy in whole. The usual schemes and tactics which worked perfectly for the past 10-20 years nowadays do not seem to be as effective and viable as before.
For the past 10 years the amount of mortgage loans increased almost 6 times, more than 46 billion euros were injected into real estate market through mortgage lending. In the same period the income of Russian Federation state budget grew 8 times, nominal citizen income increased 6 times, and real income grew 8 times by experts’ estimation. This general statistics gives understanding of the original cause to price growth in Russian real estate market. The average price in Moscow residential market during the past decade grew 5-8 times, depending on the segment.
World financial crisis had a great impact on Russian residential market. Reduction of quantity of workplaces and the decrease in citizen income were the most significant consequences as well as financial institutions’ deficit of “long” money. Thus the two basic components of estate market sustainability and growth were seriously injured.
Effective demand immensely reduced regarding both current solvency and long-term credibility. What is more, banks have become much less capable of crediting new development projects and writing down of debts under operating credits. It is remarkable that they failed to make mortgage lending a mass instrument, available to all levels of the population. In fact the market turned out to be several years behind. Now again, it is necessary to stabilize the macroeconomic situation on the whole and not only at the corporate and market level but also at the level of family budgets of end consumers. Unless end consumers become ready to purchase housing it would be immensely difficult to “relaunch” the market resuming its support through mortgage lending.
The longer it takes to “relaunch” the market the bigger grows the risk to lose the pool of private investors which has formed in the past few years. Potential future customers might also spend their savings not on purchasing (or mortgage payments for) real estate but on current expenditures. It is estimated that depending on the region, 10-30% of apartments in new buildings put to commission during the past decade are in possession of private investors. In case of worsening of expectations on the residential market, there might appear investment apartments from private investors, which would be consequently followed by additional supply growth. Considering the limited effective demand this might lead to another market correction “downwards”. Especially obvious the probability of such scenario is traced on dynamics of the Moscow market where rates of building of new housing accommodation in the last years essentially surpassed effective demand, and the share of investment apartments by experts’ estimations was maximum for Russia.
Concerning Sochi, where active building of new housing accommodation began in the last 2-3 years, mortgage lending at purchase of apartments is involved quite seldom (there are no apartments purchased with mortgage lending in “Millenium Tower” housing complex). There are very few investment apartments and the probability of price reduction is quite low. On the contrary, with Olympic Games approaching it is possible to expect an essential rise in prices. A weighty point is that high quality housing supply is rather limited and the risks of purchasing unbuilt housing are very high.
So at present we can expect significant changes in the structure of Russian residential market. The terms of the changes will depend on efficiency of actions both federal and regional government bodies, and the international organizations.
In the world economy, actions of international organizations would to a high extent determine availability of “long” money, directed on financing hypothecary programs, size of effective demand on goods (including raw materials) and services, containing “Russian added value” and other factors of growth vital for the market. During the past months, there were much more positive signals in international financial markets news, which gives us certain optimism that banks would soon resume their hypothecary programs and development projects crediting. Especially, I would like to note share market statistics reflecting future investment expectations – Dow Jones index surpassed 10000 point level, Russian MICEX index exceeded 1350 point level and RTS grew over 1400 points almost reaching the level of year 2006.
Russian government takes significant steps on economy support however it is not yet clear how quickly it will be possible to restore effective demand and not to admit slumping of end consumers’ family budgets. The Federal Budget accepted for 2010 can be quite positively evaluated as it guarantees essential financial injections into Russian economy. To add to it, oil prices that have stabilized in the past months give all grounds to predict sufficient resources availability for budget financing.
Summing up, at present we can expect almost any scenario of Russian residential market development starting from reduction of prices and volumes of residential building to stabilization and following growth. However it is most likely that till the end of the year-next spring the market will be in slight stagnation. Further, in process of economic stabilization as financial injections into economy are resumed and restructuring of developers’ debts is finished, we will see a growth in demand for real estate causing a rise in prices for real estate and active resumption of new buildings construction.
Sergey Usachev, First Vice-president of “Sunzha Group”
At present Russian real estate market is in the same indefinite position as the world economy in whole. The usual schemes and tactics which worked perfectly for the past 10-20 years nowadays do not seem to be as effective and viable as before.
For the past 10 years the amount of mortgage loans increased almost 6 times, more than 46 billion euros were injected into real estate market through mortgage lending. In the same period the income of Russian Federation state budget grew 8 times, nominal citizen income increased 6 times, and real income grew 8 times by experts’ estimation. This general statistics gives understanding of the original cause to price growth in Russian real estate market. The average price in Moscow residential market during the past decade grew 5-8 times, depending on the segment.
World financial crisis had a great impact on Russian residential market. Reduction of quantity of workplaces and the decrease in citizen income were the most significant consequences as well as financial institutions’ deficit of “long” money. Thus the two basic components of estate market sustainability and growth were seriously injured.
Effective demand immensely reduced regarding both current solvency and long-term credibility. What is more, banks have become much less capable of crediting new development projects and writing down of debts under operating credits. It is remarkable that they failed to make mortgage lending a mass instrument, available to all levels of the population. In fact the market turned out to be several years behind. Now again, it is necessary to stabilize the macroeconomic situation on the whole and not only at the corporate and market level but also at the level of family budgets of end consumers. Unless end consumers become ready to purchase housing it would be immensely difficult to “relaunch” the market resuming its support through mortgage lending.
The longer it takes to “relaunch” the market the bigger grows the risk to lose the pool of private investors which has formed in the past few years. Potential future customers might also spend their savings not on purchasing (or mortgage payments for) real estate but on current expenditures. It is estimated that depending on the region, 10-30% of apartments in new buildings put to commission during the past decade are in possession of private investors. In case of worsening of expectations on the residential market, there might appear investment apartments from private investors, which would be consequently followed by additional supply growth. Considering the limited effective demand this might lead to another market correction “downwards”. Especially obvious the probability of such scenario is traced on dynamics of the Moscow market where rates of building of new housing accommodation in the last years essentially surpassed effective demand, and the share of investment apartments by experts’ estimations was maximum for Russia.
Concerning Sochi, where active building of new housing accommodation began in the last 2-3 years, mortgage lending at purchase of apartments is involved quite seldom (there are no apartments purchased with mortgage lending in “Millenium Tower” housing complex). There are very few investment apartments and the probability of price reduction is quite low. On the contrary, with Olympic Games approaching it is possible to expect an essential rise in prices. A weighty point is that high quality housing supply is rather limited and the risks of purchasing unbuilt housing are very high.
So at present we can expect significant changes in the structure of Russian residential market. The terms of the changes will depend on efficiency of actions both federal and regional government bodies, and the international organizations.
In the world economy, actions of international organizations would to a high extent determine availability of “long” money, directed on financing hypothecary programs, size of effective demand on goods (including raw materials) and services, containing “Russian added value” and other factors of growth vital for the market. During the past months, there were much more positive signals in international financial markets news, which gives us certain optimism that banks would soon resume their hypothecary programs and development projects crediting. Especially, I would like to note share market statistics reflecting future investment expectations – Dow Jones index surpassed 10000 point level, Russian MICEX index exceeded 1350 point level and RTS grew over 1400 points almost reaching the level of year 2006.
Russian government takes significant steps on economy support however it is not yet clear how quickly it will be possible to restore effective demand and not to admit slumping of end consumers’ family budgets. The Federal Budget accepted for 2010 can be quite positively evaluated as it guarantees essential financial injections into Russian economy. To add to it, oil prices that have stabilized in the past months give all grounds to predict sufficient resources availability for budget financing.
Summing up, at present we can expect almost any scenario of Russian residential market development starting from reduction of prices and volumes of residential building to stabilization and following growth. However it is most likely that till the end of the year-next spring the market will be in slight stagnation. Further, in process of economic stabilization as financial injections into economy are resumed and restructuring of developers’ debts is finished, we will see a growth in demand for real estate causing a rise in prices for real estate and active resumption of new buildings construction.
