Rents Heading Lower, But Not for Everyone

MTWhile rents for higher-end apartments are already dropping, other segments of the market may see increases.
Hard on the heels of a falling ruble, house and apartment rents in some segments of Moscow's real estate sector are trending lower as troubles mount in the country's financial markets and the dollar reasserts itself as the world's reserve currency.

"Some landlords of elite-class apartments have lowered rent by as much as 30 percent," said Andrei Sado, director of apartment rental at Penny Lane Realty.

"Demand is low, and telephones are not ringing."

Sado said owners of elite-class apartments in the $6000 to $16000 range have proved particularly vulnerable, with most reducing rent by between 20 percent and 30 percent in the past few weeks.

"This is a reflection of the depreciating ruble magnified by the financial crisis and the customary panicky reaction of market players," Sado said.

The ruble has lost around 8 percent against the dollar this year as Russia's war with Georgia in August and tightening credit markets spurred investors to take money out of the country.

Some tenants may be able to take advantage of the falling ruble to renegotiate lease agreements, as they can now find cheaper rents or better space for the same price in dollars, said Konstantin Kovalyov, a managing partner at Blackwood Real Estate.

"Traditionally, the rental market is very sensitive to changes in the currency exchange rate," Kovalyov said. "The ruble is falling, and from all indications we are in this for the long haul."

Tenants can confidently ask for about a 20 percent reduction in rent if the ruble continues its slide, Kovalyov said.

But a falling ruble may not benefit everyone.

A steady influx of foreigners from the CIS, as well as Russia's burgeoning middle class, will ensure a steady demand for apartments in the economy segment and will keep rent prices from falling too drastically, Sado said.

"Landlords of such apartments would not even think of lowering rents at all because of the astronomical demand for them," he said.

Steady demand and growing inflation could mean that many expatriates, especially mid-level managers who can only dream of apartments in the $2000 to $6000 range, are likely to see rent hikes rather than cuts, he added.

Rustam Gamid, a self-employed real estate agent who specializes in low-cost apartments, agreed.

"Nothing so far indicates that low-income or even middle-class tenants can benefit from affordable rents in the near future," he said. "So far, I've only noticed an upward trend in rent."

Gamid said he himself pays $1,300 for a dimly lit, two-room apartment in southwest Moscow's Tyoply Stan neighborhood.

His landlord has increased rent three times this year and with the dollar gaining strength has been hinting that inflation would make another hike inevitable.

Although rental fees can be fixed in lease contracts to prevent landlords from raising rent, taking a landlord to court could ultimately prove more trouble than it's worth, said Vitaly Mozharowsky, a partner with law firm Pepeliaev, Goltsblat & Partners.

"Legal redress is costly both in time and money," he said. "It is usually easier to abandon one apartment and seek out cheaper alternatives."

Mozharowsky described the current fluctuations in the currency market as a "slight adjustment," adding that so far the ruble has not fallen enough to make landlords raise rents or demand payments in dollars or euros.

Other experts agreed that it was still too early for a falling ruble to put a dent in the entire apartment rental market.

"The rent rate is static and can hardly respond to short-term volatility in the exchange rate," said Maria Zhukova, deputy director of MIEL-Arenda. "Tenants might need to wait for at least six months to benefit from reduced rent."

As a result of the dip in the dollar exchange rate over the past two years, about half of landlords showed a preference for rubles when drawing up rental agreements, Zhukova said.

That way, she said, they have been able to cushion any effect a volatile market could have on rent.

Nevertheless, the departure of Western top executives in the wake of the financial crisis could eventually put downward pressure on rents in all segments of the market, Blackwood's Kovalyov said.

"When the head offices of many Western companies plan their strategy for the next year, one element would be a revision of salaries and steep cuts in rental allowances for expatriate and Russian managers," he said.

"We expect rent to fall by about 20 percent to 30 percent within the next one year."