Apartment Prices Headed for a Fall

MTA "for sale" sign on the front of a Moscow building. Property prices may fall up to 20 percent, some experts said.
The stock market is plummeting, interest rates are going through the roof and the price of oil is far from its highs, but the city's famously high real estate prices have so far managed to stay afloat. Experts, however, warn that the prices of residential buildings and apartments may be trending downward, succumbing in part to the current liquidity crisis, growing supply and a long-overdue correction in the real estate market.

"A big percentage of second-tier apartment buildings are now on offer, and this suggests that apartments bought earlier as investments are finding their way onto the market," said Alina Andreyeva, a real estate analyst at KomStrin.

"We can expect up to a 20 percent drop in apartment prices if the current trend continues," she said.

In recent years, Russia has enjoyed a real estate boom, fueled by oil money and higher incomes. Apartment prices have surged, helped in part by the influx of people from the provinces to the big cities in search of comfort and prestige. Moscow is now the world's third-most expensive location for residential properties after Monaco and London, according to Global Property Guide.

The latest figures released by the Indicators of the Real Estate Market analytical center showed that prices for most types of residential buildings have remained virtually unchanged since before the start of the crisis — the average price of a square meter in a typical Moscow apartment building is currently $5786, only a few dollars cheaper than what it was in June.

Most realtors said the crisis in the banking sector could be the primary factor for an eventual fall in apartment prices.

Faced with borrowing problems of their own, various banks have tightened conditions for financing residential projects, and some are opting out of agreements inked earlier with developers.

"The financial crisis is a stimulant for decline in apartment values, and this could lead to a 5 percent to 10 percent fall in prices before the end of the year," Boris Derevyagin, deputy head of the IRN analytical center said Friday.

"A fall in prices is long expected because Moscow residential real estate is overpriced when compared to other countries," he added.

Jana Kuzina, Director of Strategic Consulting and Valuation at CB Richard Ellis said the credit squeeze would force developers to drop prices on newly completed projects in order to sell them quicker.

As a result, "within two or three months, we can expect offers on apartments that would be 20 percent to 30 percent lower than what we have today," Kuzina said.

Other industry experts doubted that prices would fall drastically. Konstantin Popov, chairman of the board at INKOM Corporation, Moscow's largest developer, said the current shortage of apartments and many banks cutting back on real estate financing would keep supply at a minimum. In any case, Popov believes that it would be difficult for an individual investor to capitalize on any weakness in the market.

"The few developers presently in stringent financial straits would not sell to individual buyers, but rather on a wholesale basis to other real estate investors," he said.

Denis Sokolov, the Head of Research at Cushman & Wakefield Stiles & Riabokobylko, said prices in major cities such as Moscow would always be kept afloat by a constant influx of people seeking higher living standards.

"Having an apartment in Moscow is a ticket to a salary that is significantly higher than in any other region," he said.

"Because of this, we won't see a major decrease in the sale of residential property, at least in the short term."