Prices on Russian Real Estate market almost tripled in 2006. If you want to buy a condo or apartment in Moscow, you would have to pay $400-500 per sq. f. for “an average” property and up to $2000-3000 per foot for an “elite” one. I see 3 major reasons why it happened:
1) During 2000s, Russian ruble was constantly getting stronger against Dollar (5-9 % every year), even Euro/RUR ratio got up a little, nobody considers European currency as a full replacement to $ yet. So, Russians chose a real estate as their new investment. A number of people who own 2-3 and more apartments increased significantly. It was similar to the “2000 correction on US stock market” when low interest rates and too much money from stocks were chasing limited amount of real estate. Low taxes on Russian RE also make it an attractive investment, for instance, you would have to pay only $200-300 per year for a condo worth of half mil dollars. There is no school tax in Russia.
2) Land development in Russia is a very tricky process. Most of the population live or desire to live in cities. Ordinances put additional pressure on zoning, permit processing and licensing. Luck of infrastructure and corrupt practices increase a burden on developers. “If you can get a permit in Moscow – you can get it anywhere” (Frank Sinatra). The price increase of residential properties in big cities stands for 90% of increase in all sectors of RE.
3) Unavailability of RE for most of Russian population. There were only 20,000 mortgages taken in 2006 in the country of 140 mil people. Most of the RE transactions are cash transactions and it means “in cash”. Most of working class can’t afford it or don’t have a chance for a number of reasons (undeveloped banking sector, luck of liquidity in some areas, high interest rates (20-50%). So, is Russian RE is a highly speculative market of Russian Neauvoux Riches? Not quite right. It’s market for 10-15% of people.
Observation: Unlike in US RE market that tanked in 2006, Russian RE market probably would not go down in 2007. If oil and commodity prices remain on the same level, it would support higher demand for a tangible asset and there is no indication of fast increasing in supply. We can predict another 20-25 increase in Russian RE market in 2007. Russian Fixed Income Portal and GR Investments offer Russian Real Estate Mutual Funds where NAV is linked to a price of SQ.F. In addition, some funds pay dividends in a semi-annual or annual basis.
Subscribe to:
Post Comments (Atom)
5 comments:
How close (or far) is Russia from developing a mortgage industry that would enable more of the middle class to buy into the dream of apartment ownership? In Moscow, according to the article it seems there is a big difference between first class apartment rates, and "Class B" rates, if you consider construction costs, are there opportunities to tear down old construction and put up new, or perhaps rehab old construction,-I know it might not be an easy question to answer....
Like the last guy said, I know it's never just this easy, but with such a big difference between Class A, and B, even with expenses, can someone make some money by buying a small to medium sized B property, rehabbing or tearing down, and then flipping it like so many did in the U.S. in the past 10 years? Also, what about investments in class B property as a landlord, in other words if I bought a small property for 1 million, how much would the rents return to me in a given year?
In Response to both last anonymous comments: It seems to be a great idea to invest in renovating from Class C or B to A. Profit margins could be high, however, 2 obstacles: corrupt practices of local ordinances and dealing with existing tenants/owners might "eat up" all profits. There are many cases of fire ( read "arson") in older neighborhoods, usually downtowns of big cities just to create a spot for new construction.. Class A is always good location but space is limited.
How much of R/E appreciation would you say is inflation driven, lack of supply driven, or as Mr. Greenspan says, just "irrational exhuberance"?
my guess 50/50
Post a Comment