02-06-2004 / Business: Wealthy Muscovites move into new palatial apartments
The surge in the residential estate industry in general, and in the elite segment in particular, stems from a new economic reality that calls for improved living conditions among well-to-do Muscovites who are finally moving from their Soviet-era congested apartments upgraded several times in the past decade as residents' social status changed into upscale, cozy, guarded and exclusive estates within and outside the capital.
The opulence displayed by owners of these apartments the cheapest of which carries a price tag of more than $500,000 is a further crystallization of the ever-increasing gap between the haves and have-nots in the country. Indeed, the current phenomenon marks a complete social stratification in a society where over 30 percent live at or below the official subsistence level of 2,143 to 3,374 rubles (about $75-115) a month, depending on the region, and where about 42.5 out of 144 million people live in facilities unfit for human dwelling.
The new trend
Moscow is one of the most attractive investment markets in terms of growth potential, says Patricia Ledeneva, a property consultant at Knight Frank Russia. "Prices for top-end residential space doubled in 2003, when several projects were sold at the ground breaking stage. The growth trend has continued in 2004 at the rate of two percent per month."
"It is really a boom, and there are several reasons behind the increased activity on the Moscow real estate market," said Alexandra Sinilova, a property consultant at Kirsanova Realty, a Moscow-based exclusive affiliate of Sotheby's International Realty. "Previously, there were very few good apartments in the city's mostly Soviet-era buildings with standardized parameters standard rooms and sizes that could not be changed or redesigned according to one's taste," she said.
"Besides, even these residential buildings usually have over 100 apartments inhabited by people from different social classes, and consequently, often serve as fertile grounds for conflicts among neighbors," she added.
Sinilova, however, noted that the picture has changed in recent years, as buildings with open-space units and shell-and-core arrangements that allow apartment owners to do what they please with their properties have emerged.
"Also, the elite buildings offer a myriad of modern infrastructure and social amenities, such as underground parking, gym, spa, sauna, and sometimes even a swimming pool, while the limited number of apartments ensures that most of the residents in these buildings are from the same social class," she said.
Another advantage is that residents in the buildings are no longer restricted by Soviet era limitations that allowed for only 19-23 square meters per person in the erstwhile socially allotted apartments an index that pales significantly compared with at least 40 square meters per person in most Western countries.
The current trend in elite apartments where average living space amounts to about 200 square meters per family, compared with 40 to 50 square meters per family in most Soviet apartments is also seen as a shift toward the European average.
This trend has also driven up prices. As an example, Ledeneva cited the Golden Mile, or the Ostozhenka-Prechistenka area, where prices have risen sharply, from $6,000-8,000 per square meter to $12,000-15,000 with 80 percent of the properties sold before completion. "Even in less prestigious locations, prices are still high between $2,000-6,000 per square meter."
Confusion over classifications
However, the volume of renovated apartments or the secondary market segment, in contrast to the primary segment, which offers only newly built apartments has increased significantly. The ratio of these segments stands at 80:20, compared with 95:5 in 2003. On the whole, sales in the elite residential segment were estimated at about $1 billion in 2003, with year-end 2004 forecasts equally optimistic at about $2.5 billion, excluding suburban properties. "It is rather difficult to get exact turnover figures in the elite market segment, but the dynamism of activity and growth in the segment are very obvious," Sinilova added. "Sometimes, developers put high prices on their apartments even when they are not high-class apartments. This often misleads clients, making them believe that the properties offered are actually of higher grades."
Realtors say "true elite residential properties" should satisfy at least three main criteria: be located in a prime location within the Garden Ring Road, have a limited number of apartments in a building at most 40 and have asking prices of no less than $3,000 per square meter.
Who are these elite home seekers?
Typical clients of the Moscow elite residential sector are top Russian company managers, wealthy persons from other parts of the country, and foreigners who have businesses in Russia.
However, the nation's sterling economic performance fueled by sky-high prices on its key export commodities oil, gas and metals, and the availability of loan options for purchasing apartments have led to an increase in the number of Russians who can afford these properties. And, the choice to buy elite properties seems to be a better option for clients in the long run, considering the current high rents on such properties.
Penny Lane says the average selling price for elite Grade A residential properties in the secondary segment has risen to $12,000 per square meter, fueled by the high cost of quality repair, highly developed and modern infrastructure, and uniqueness of location with the highest demand for elite apartments in Ostozhenko, Patriarchy Prudy and Arbat areas. The average price is expected to grow 10-15 percent in 2004.
These are followed by Chisty Prudy and Kitai-Gorod, where asking prices per square meter for Grade A properties stand at $6,000.
Grade B units go for about $5,000 per square meter and are mainly renovated older mansions in the city center that cannot be dismantled by laws. The quality of most of these buildings, even after huge capital intensive reconstruction, does not match the level of Grade A properties.
A purely speculative market
Speculation also plays a big role in the elite market. According to analysts, prices for elite apartments rose by over 40 percent, while the percentage of those bought on speculation rose by 30 percent in Moscow in 2003, and is expected to rise further this year by 40 percent. Consequently, 30-40 percent of new Moscow elite apartments or those under construction are now controlled by speculative investors, about half of which will be resold immediately after completion.
This trend, according to experts, has made residential real estate a lucrative business for those looking to cash in in the housing boom in the capital. For instance, an apartment bought at the construction stage could be resold after completion for a profit of $20,000-30,000, depending on the class of the apartment and its location.
Meanwhile, the purely speculative approach has prompted several sector regulators to express concerns. Igor Artemyev, director of the Federal Anti-Monopoly Agency, has questioned the pricing policy in the real estate sector, noting that prices are artificially ballooned out of the reach of most potential buyers. "The real cost of building one square meter of space in Moscow is about $300-500, but it is being sold at a price several times higher than most potential buyers can afford."
Vladimir Averchenko, director of the Federal Agency for Construction and Housing Policy, has noted that such high prices prevent average Russians living in dilapidated houses improve their living conditions. "Currently, about 70 percent of Russians live in conditions that are unfit for civilized life, while about 42.5 million Russians live in ill-equipped or dangerous apartments without such basic amenities as toilets and bathrooms," he said.
Expressing obvious discontent over housing problems, and specifically, over the sky-high prices on apartments at a May 13 cabinet meeting, Prime Minister Mikhail Fradkov said the obvious desire of everyone to own an apartment is currently being jeopardized by very high prices on residential assets which have made them unaffordable. "To remedy the situation, the government is bent on creating favorable conditions in the industry that will make housing affordable to the majority of those in need." Consequently, Energy and Industries Minister Viktor Khristenko has proposed a battery of 27 bills, which upon adoption later this year will help make housing more affordable to average Russians, effective January 2005. "These changes will create mechanisms for regulating prices on the real estate market with the aim of making them fairer
for the buyers."
Also, experts are worried that market speculation could spark a crisis in Moscow in the next couple of years, when prices for moderate apartments are expected to hit about $2,000 plus per square meter, and those for elite apartments soaring over the roof. The fear is a market collapse after prices peak just like financial pyramid schemes and the Internet stock bubble burst.
There are also fears that the local economy, which is bolstered mainly by sky-high oil prices, could cool down. If this happens, some new owners of elite apartments might find it difficult to foot the additionally expensive monthly payments necessary to maintain the best engineering systems and modern, comfort-enhancing gadgets in their apartments, prompting a sell-off.
Kirsanova Realty's Sinilova conceded that the Moscow residential market is unstable. "Comparatively, other European capitals' real estate markets are more stable than Moscow's a feature evident in their growth dynamics. For instance, the average price growth in most of Europe is about 10-15 percent per year, compared with Moscow's index of 20-30 percent, and at times, even 45 percent per annum," she said.
"This is why some experts, especially foreigners, feel prices are too high in Moscow, a phenomenon they say might precipitate a crisis in the industry," she noted. "But according to [our] statistical data, we do not expect the market to collapse. However, we think that by 2006, the soaring prices should be stable on Moscow residential properties."
The rent options
For those not privileged enough to be born in Moscow to parents with several apartments - or rich enough to buy an apartment upon arrival in the Russian capital - the most logical option is to rent.
According to realtors, the rental segment of the elite market was equally abuzz in 2003 and the first quarter of 2004 offering different classes of estates and leasing options.
Penny Lane noted that January 2004 saw a 25 percent increase of clients, compared to the end of 2003, and attributed the surge to a change of employment policies in foreign companies that that saw a huge influx of expats in Moscow-based offices or regional headquarters of trans- and multinational companies. The increase in the number of foreigners looking for upscale apartments was palpable and led to significant increases in rents.
According to realties' data, asking rents for one- and two-bedroom unfurnished apartments within the Garden Road were $1,300-1,500 per month, while furnished apartments were up to $1,700. Rents for apartments of the same quality category but outside the Garden Road were cheaper at $1,200 unfurnished and $1,500 furnished. For bigger apartments, asking rents varied between $2,000 and $4,000 per month. At the top market level, where rents varied between $4,000 and $8,000 per month, demand increased by just two percent. Among the so-called elite apartments, where minimal monthly rents started from $8,000 plus, demand rose by six percent.
Territorially, about 49 percent of elite home seekers prefer the city center about ten percent of which prefer Arbat and six percent anywhere within the Garden Road. About ten percent and five percent, respectively, prefer southwestern and northern Moscow and four percent prefer Krylatsky, while 16 percent prefer other parts of the city or are cautious of criteria aside from the geographical location of their future apartments, according to Penny Lane .
Outside the city, the trendiest location is the Rublyovo-Uspenskoye Shosse, where monthly rents for moderate cottages stand at $6,000-10,000, rising to $25,000-35,000 for mansions, and in some cases, over $50,000. Monthly rents of $12,000-15,000 and $4,000-7,000 are available, respectively, for the top and moderate-range houses along the Kaluzhskoye, Kievskoye, Novorizhskoye and Skolkovskoye routes.
Yevgeny Shevchencko, an analyst with Penny Lane , said Dmitrovskoye and Ostashkovskoye routes are also of interest, especially for those with a weak spot for water-related recreation due to the on-going development of hotels, restaurants and ski facilities. There, monthly rents stand at $3,000-5,000 the same for Pyatnitskoye and Yaroslavskoye routes, while the least popular destinations on the Volokolamskoye, Gorkovskoye and Kashirskoye routes attract only about $3,000 per month, he added.
