Russian Roulette

Russian RouletteOne of Europe’s great cities is perpetually in flux

Moscow has seen its share of drama in its history. Perched on either side of the Moskva River, the city sprawls out from its banks, with the remnants of a rich history visible at every turn. Moscow was sacked or besieged on countless occasions, The Kremlin the stalwart iconic and symbolic core of city for most of that time. With the dismantling of the old Soviet Union, the city has transformed itself into a modern megalopolis that rivals Tokyo, London and Paris, and the local government has vowed to make it one of Russia’s most vibrant tourist destinations in the years to come.

One of the largest (over 11 million people) cities in Europe and the world, and the beating heart of Russian trade, industry, finance, education, culture and politics, Moscow is also the country’s wealthiest: according to Forbes, there are now more billionaires in Moscow than in New York. Sure it can be cold, but it also boasts some of the most fantastic architecture in the world and many of the globe’s great historical sties and a good portion of its great art: this is the home of the Bolshoi after all. Moscow’s nightlife is renowned and its shopping and dining are beginning to rival the continent’s best.

With Moscow’s economy accountable for one-fifth of Russia’s GDP, and industries as diverse as food, software development, heavy machinery, textiles, energy and financial services concentrated in the city, it’s no wonder investors and business interest have steadily flooded in. With that rush to the capital, real estate prices have skyrocketed to the point that Moscow has one of the highest costs of living and property in the world. There is a downside: the Economist Intelligence Unit placed Moscow 70 of 140 cities in the world for liveability in 2011, with stability scoring poorly for Europe, while infrastructure was moderate at best. To top it all off, Russia ranked 154 out of 178 on Transparency International’s corruption list in 2010 — far below China. Wading into Moscow’s property market could be fraught to say the least.

As of the third quarter 2011, Moscow housing prices hovered at levels that rate right alongside Hong Kong. Since the beginning of 2011, newly constructed premium housing sales volume has exceeded US$1 billion, with average prices almost US$18,000 per square metre — HK$13,000 per square foot. But research by IntermarkSavills in Moscow reported 50 transactions on overall elite properties concluded in October, an increase of 10 percent over September, not including a handful of ultrahigh end purchases. To Hongkongers, $13,000 sounds reasonable. So does Moscow make a wise investment?

Certainly if you’re a HNWI looking for another base of operations. Further research by Savills in London announced in September stated that among the “billionaire property” cities, ten worldclass locations, Hong Kong had the priciest executive real estate and offered the smallest spaces. Moscow was in the middle of the pack, at approximately HK$30,000 per square foot. If you can get your hands on it, it could be good value: prices grew just over 2 percent between December 2010 and June 2011 in the ultra highend sector, stabilising after a massive jump (110 percent) over the five years prior to that.

The greatest demand for high-end flats is coming from foreign nationals in the city for work. As IntermarkSavills sees it, supply has dropped but demand — particularly for mid-size (three rooms around 800 square feet) units — remains stable. It’s possible that in investor friendly supplydemand imbalance is on the way.

“As of the end of the third quarter, 2011, the elite residential rental market of Moscow remained quite stable. However, there is evidence to show a considerable disparity between rental rates and the average budgets of tenants,” explained Galina Tkach, IntermarkSavills leasing director. “Thus, during the last 9 months rental rates and supply budgets have increased … and have already exceeded pre-crisis levels. At the same time, the average budgets of potential tenants have steadily decreased since the second quarter of 2011. No doubt, such a disparity will result in a further increase in the deficit of realizable projects and the creation of an ‘owner’s market’.”

By the end of September, over 30 new executive class residential developments representing 2,500 units were completed, in which many units were sold to part-time residents. New developments are the preferred properties, with demand for units priced at US$3 million or more increasing by 6 percent. Moscow is tricky to figure out — luxury real estate is broken down into premium, elite and business class in Moscow — but the basics of supply and demand, a burgeoning economy (one of the strongest in Europe) and rental yields second only to New York according to Savills world class city analysis (5.6 percent) could mean its time to see what the great bear has to offer.