Victoria Park Apartments Moscow[Photo credits to Miraluz06 on Flickr]
Moscow News has published an interesting snapshot of Moscow’s residential property market, both the for sale and for rent. The key observation seems to be that letting agencies are assuming an increasingly important role in the rental market and that the higher end of the market is becoming proportionately more important. The vital ingredient that agencies bring to the process is ensuring that all the properties on their books are available with legally binding rental agreements. Going down this route has the obvious advantages of protecting the unwary foreigner from abrupt evictions or rent rises.
There’s no disputing that Moscow is an expensive place to live. The Mercer cost of living survey in this spring placed the city in top place with a cost of living that was over a third higher than New York City’s. Naturally, costs of accommodation are an important feature of this and at the beginning of the year Moscow was sixth most expensive European capital in terms of purchase costs and fifth highest in terms of rental and rental yield. Renaissance Capital estimate that Moscow’s residential property prices have averaged a 90% rise in the 12 months to 2nd Quarter 2007 and forecasts that the rises will continue, all-be-it at the more sedate level of 16 to 11% a year through 2007 and the succeeding three years (read report here (pdf)).
However, the latest statistics taken from Global Property Guide: suggest that by May this year rental yields were on the way down, from above 8% to between 4.5 and 6%. Rentals have been failing to keep up with purchase prices, particularly at the higher end of the market. One reason for this is the competitiveness of mortgage rates. Low interest rates should fuel the rise in residential prices.*
Moscow News’s interpretation of trends seems to be throw further into question by the same journalist, Bojan Soc, saying in April that it was the lower end of the rental market where activity was hottest. Anyone considering a stint of residence in Moscow needs to consider that even small apartments in Moscow can hardly be considered economical; Evans the Moscow agency says rentals for two room apartments can be anything from $3,000 to $15,000 a month. The rental sector tends to be dominated by foreigners, who tend to be favoured with better deals as more reliable tenants. However, this attitude does not extend to people from India or Russia’s neighbours in the Caucasus.
Foreign workers based in Moscow seem to live in partial isolation from Muscovites, not in any particular locality (like Baghdad’s Green Zone) but a ‘virtual zone’ created through employers paying their accommodation costs and their own lifestyle preferences. The market would be safer for investors if there were fewer differences between the two.
Bojan Soc has remained consistent in identifying ‘deferred demand’ as the main characteristic of the for sale market. It looks as if the Moscow market is pausing after rapid rises in 2006. The fact that the rental market has been unable to keep up in terms of yields suggests that the property market may have reached a peak. According to another important Moscow agency, Blackwoods, demand for property can be subject to volatility (confirming Bojan Soc’s take on the situation) but demand is likely to outstrip supply for some time to come.
Factors contributing to the shortage of new build are Russia’s planning laws (Federal Law #214) and the time it takes to develop brown field sites freed up by industry relocating away from the inner districts of the city. For flat-hunters from the UK, the market will seem surprisingly influenced by the amount of new building in the pipeline.
In the longer term, a development like Moskva City should provide a satisfactory solution to the accommodation problems of foreign businesses requiring a presence in Moscow. The residential elements of this massive investment should begin to become available from 2009 onwards, offering luxury serviced accommodation for business people.
However, opportunities to invest in other large developments such as Ostozhenka Park Palace or Italiyansky Kvartal can be intermittent as developers negotiate their way through the planning regime. There is also a large amount of residential development going on in Moscow’s hinterland particularly along the trunk routes leading out of Moscow westwards. Blackwoods’ market commentary refers to these as ‘cottage’ developments but the most popular size is 300 to 500 sq metres.
(*Please note that both inflation and interest rates are relatively high in Russia with the cost of living increase easily exceeding 10% in 2006 – excluding accommodation costs – and mortgage interest rates in the range of 12 to 13.5%. The trend for both inflation and interest rates is expected to be downwards in the near term. The rouble /euro exchange rate is fairly stable at present.)