Fitch Sees Decline in Real Estate This Year

MTFitch is forecasting a significant decrease in construction volumes.
The Russian real estate market is likely to see a decline that began late last year quicken in 2009, with prices falling by 20 percent to 40 percent for the year, Fitch Ratings said.

The primary causes for the drop, according to the agency's analysts, were slowing GDP growth, limited access to consumer credit and a drop-off in investment.

Fitch is also forecasting a significant decrease in construction volumes and prices. In 2009, real estate prices will fall 20 percent to 40 percent, depending on the region and segment, Fitch analyst Artyom Frolov writes in the report.

Roman Gromov, an analyst at UniCredit, agreed, saying both residential and commercial real estate could see drops. "Generally, we're talking about metropolises such as Moscow and St. Petersburg. In small cities, there won't be such a decline," he said.

Renaissance Capital real estate analyst Alexei Yazykov forecast that residential real estate may weaken on average by 30 percent and commercial property by 40 percent, adding that it would ultimately depend on how far the ruble falls.

PIK Group spokesman Dmitry Ivliyev said there would "absolutely" be a small correction in prices this year, although he said it wouldn't be a collapse.

"The ruble is weakening, and in order to protect their savings, people need to invest somewhere. Real estate is an option," he said.

The biggest fall is possible in the overheated secondary market, particularly in nine- and 10-story panel buildings, said Alexei Belousov, commercial director of developer Capital Group. He said didn't expect a serious correction in any of the other segments.

Deputy Regional Development Minister Sergei Kruglik said late last year that the pace of construction was falling, estimating that in 2009 only 85 percent of last year's volume, or 52 million square meters, will be completed. Mortgage lending will drop 20 percent to 25 percent, Kruglik forecast, to 500 billion rubles ($15.2 billion).

Fitch also forecast a drop in supply on the primary market since many developers will not be able to finance projects because of the lack of their own funds and dried-up access to foreign capital.

Finding cash under the current conditions really has become difficult, said Galaxy Group commercial director Artyom Tsogoyev. On the other hand, he said, it's not profitable for banks to take unfinished projects that had been offered as collateral because they don't know what to do with them.

"It's easier to provide a developer with more money to finish construction so that you can later sell it profitably. Then again, they'll have to be sold at a considerable discount," he added.