Crisis Gives Moscow Renters Room to Bargain

Four months ago, finding a deal in apartment rentals in Moscow — a billionaire-ridden city that took first place in Mercer's 2008 worldwide cost-of-living survey — was nearly unheard of.

But the economic turmoil has propelled a dip in rental prices for Moscow apartments, and tenants and prospective renters have assumed what used to be the landlord’s bargaining advantage.

"Before the crisis, the landlord would dictate the price and someone would rent it right away, no questions asked," said Mike Bartley, director of Four Squares, a leading residential and commercial real estate company in Moscow.

"Now, 'How much will you knock off?' 'What discount will I get?' are the first questions asked," said Bartley, whose company specializes in securing housing contracts for the foreign employees of corporations and governments.

By the end of December, apartment rental prices had fallen between 20 percent and 50 percent since mid-September, depending on the class of apartment, said Vadim Lamin, the head of Penny Lane Realty's elite rental department.

The largest discounts are observed in business and luxury-class apartments, while prices for the economy segment — rents from $1,000 to $2,000 per month — have fallen the least, said Lamin.

"Business premium apartments that used to go for $15,000 a month are now $8,000, and in some cases even $7,000."

According to Lamin, widespread management layoffs, salary and benefit cuts and office closings triggered a steep fall in demand for expensive, business premium apartments among expatriate and corporate renters.
"In all business-class apartment complexes, there are free apartments. International businessmen who used to live in them have left the country, and firms that used to pay for such apartments have revised their budgets.
"The apartments were way overvalued to begin with, and now the prices have come back to reality."

Nick Rees, the founder of Star Search, a Moscow-based executive recruitment agency, said that while companies are still paying their top foreign executives luxury housing and other benefits, they are tightening their belts when it comes to mid- to senior-level managers.

"There is a major trend of cutting out the people who demand housing allowances," said Rees, whose agency is privy to their clients' employee contract, salary and benefit information.

"Russians are now getting these top positions, whereas before it was the expats winning out. Companies are trimming back budgets, and they don't want the expense of renting apartments. Local employees cost them less."

Before the crisis, one Moscow-based IT company that rented 50 apartments for its foreign consultants, mostly from CIS countries, recently reduced its housing stock by 10 apartments to "optimize" housing costs, said Kira, a company representative who declined to give her last name and the name of the company for fear of doing damage to the company's reputation.

"Many of our three-bedroom apartments only had two consultants living in them at a time, so we placed employees from other apartments in the free rooms and vacated their old apartments," Kira said.

When the company notified landlords that they would no longer be renting, many landlords, in an effort to not lose tenants, offered 10 percent to 12 percent discounts on their spaces, or 5,000 to 6,000 rubles less than they rented for previously.

"When there were discounts, we took them. Some landlords, however, had the gall to try to raise the rent, but we told them that was completely out of line with the market, and they quickly retracted their demands."

The move to offer discounts when tenants express their readiness to move out in favor of lower offers is an "advisable move" in today's real estate market, said Bartley of Four Squares.

"It used to be very much a landlords' market, but now the pendulum has swung the other way. It is a very uncertain time, and the landlords have to try and secure any tenants that they've got. Less money is better than no money," he said.

In the midrange segment, apartments that rent for between $2,000 and $5,000 a month can now be found for an average discount of 25 percent, said real estate experts.

Nick Wilsdon, CEO of e3internet, an online marketing company, was one of many recent midrange apartment-seekers who gained from the new discounted rates.

"We got our two-room flat in Kitai Gorod at a 25 percent discount, down to $3,000 a month from $4,000," said Wilsdon, who said his agent, Evans, cited the credit crisis as a reason for the discount.

Natalya Levitova, a senior real estate adviser at Evans, said the company advises landlords seeking new tenants to keep in line with the market.
"The majority [of landlords] understand the trends and realize that a lower price is better than not renting at all," Levitova said.

The demand slump has made it difficult for Olga Tseplitskaya, the landlord of a large apartment near Mayakovskaya metro station, to find a new tenant for her space.

In late December, the expatriate tenants who rented the apartment for $5,000 per month, left the country. After consulting with real estate agents last week, Tseplitskaya decided that it would be "more profitable" to divide the space into two separate apartments for individual rental — each for a 20 percent discount.

"The market is demanding it, so that's what I'm going to do," she said by telephone.

In 1997, when Tseplitskaya first began renting, she merged her two neighboring apartments to create one large apartment.

"In the 1990s, large apartments were high in demand among foreigners and there were very few of them, so it was profitable to rent one large [apartment] instead of two small ones. Now the opposite is true."

The increased difficulty of finding tenants willing to pay pre-crisis prices coupled with a general reluctance to offer new discounts has given many landlords reason to think twice about increasing their current tenants' rents, even those paid in rubles, said Lamin of Penny Lane Realty.

"At the very minimum, landlords are not raising the rent, but if the tenants ask for a decrease most landlords have been meeting them halfway," Lamin said.

Jerome, a Moscow landlord who receives payments in rubles, said he had not asked for an increase in rent from his tenants despite the fact that his income has fallen by about 20 percent with the weakening of ruble against the dollar.

"I understand that my Russian tenants do not generally get inflation raises during hard economic times, so I decided not to ask for an increase," Jerome said by e-mail. He noted, however, that none of his tenants asked for rent decreases.

The Central Bank has devaluated the ruble 18 times since Nov. 11, and the currency is now at a six-year low against the dollar.

Evidence from postings on online expatriate forums such as Redtape.ru, Couchsurfing.com and Expat.ru, suggests that some landlords who are paid in euros and have benefited from the ruble's drop are nevertheless demanding higher rents.

Tenants, however, are not giving in easily to their landlords' demands for rent increases.

After recently telling his landlord that he wanted to renew the apartment contract for another two years, Max Bergmann, an expatriate, was shocked to find that his landlord was ready to raise the rent of his apartment near Kievsky Station by 50 percent, from 2,000 to 3,000 euros per month.

"He started to insult me when I said I would not pay a single kopek more than 2,000 euro," said Bergmann in an e-mail.

"It helped to show him printouts from several Internet pages that show much cheaper and better places to rent in this area," he said.

"Even in October, I couldn't find anything that cheap no matter how hard I tried."

In December, Janna's landlady warned her that she would soon raise their rent by 100 euros and argued that the rent could be raised because during the 1998 financial crisis rents were also increased.

"By getting her rent in euros, [our landlady] is effectively already earning more money now than she was two months ago. But she still insists to raise the price. Especially for my flatmate, who is getting paid in rubles, that's not acceptable," said Janna, who declined to give her last name because she doesn't want her landlady to find out that she and her roommate are busy looking for another apartment.

February will be a very active month for apartment rentals as those who went away on holidays return to the city, said Lamin at Penny Lane, who along with other real estate experts, does not forecast a further fall in rental prices in 2009.

"The bottom is starting to be reached," said Bartley of Four Squares.
"Clients in the market have been putting off their decisions until after the new year in expectation of the market to slide even more, so now there is a pent-up demand to be met."

And if the landlords get a sniff that demand is going up again, then they are going to stop offering discounts."