Elite Real Estate Prices Outrun Credit Crisis

ST. PETERSBURG -- Although the U.S. and European credit crunch and ensuing fund market crisis have slowed the growth of global real estate prices, a sharp increase in prices has been registered in developing countries, according to a Knight Frank survey.

Russia came in near the top of the list, in third place, with prices for elite properties growing 30 percent on the year, Knight Frank said. Larger price increases were experienced only in Bulgaria, with 33.7 percent, and Singapore, which ranked second with 31.3 percent. The top five were rounded out by Montenegro (26 percent) and Poland (22.4 percent).

"In developed countries, the typical price growth is 3 to 6 percent a year. In 2007, average real estate prices grew by 5.2 percent in Great Britain, by 4.8 percent in Spain and by 2.5 percent in France. These figures prove that the crisis has resulted in a correction in real estate prices on mature markets," said Yekaterina Tein, managing partner of Knight Frank.

"Quite different trends were seen in Russia, Singapore and Hong Kong. Singapore, Hong Kong, Moscow and St. Petersburg are large, developing cities that attract real estate buyers from many regions. They provide stability and offset the negative influences of mortgages and the financial crisis," Tein said.

In 2006, real estate prices in Russia grew by 40 percent -- the highest growth in any country during that period. Moscow saw 92 percent price growth.

According to Knight Frank, price growth for mass-market property slowed down last year and even decreased in some areas, while prices for elite premises in Moscow continued to grow.

More than 20 new elite projects were announced in the capital last year, while in 2006 there were just seven. Tein concluded that this trend demonstrated the high confidence of investors in the further growth of real estate prices in Russia. Most of the new projects will be realized in 2008 and 2009.

In 2007, the price of elite property in Moscow grew by more than 20 percent. Based on the price dynamics for the first quarter this year, Knight Frank forecasts that by the end of 2008 the price of elite property will increase 15 to 20 percent.

Another expert forecast that the negative effects of the crisis on the real estate market could intensify this year.

"The growth of real estate prices in Russia is based mainly on the growing demand for property, fueled by soaring profits from oil and gas export," said Maxim Mikhailov, executive director of Maris Properties in association with CB Richard Ellis. "The bank crisis is putting pressure on prices to decrease, but with no effect so far. Speculative investors are quitting the market while institutional investors remain. So far, prices in Russia have not decreased, but over the next few months the situation in the financial markets is likely to get worse and then the effect of the crisis on real estate will be more evident," Mikhailov said.

Despite the financial crisis, Knight Frank says prices for elite property in the capitals of other developing countries are also growing at a high rate. Bulgaria is attractive to investors, especially as an EU member. Montenegro is similarly attractive for its relatively low real estate prices and prospects of entering the EU.