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. Last Updated: 07/27/2016

For Sale, Cheap: 1 Million Meters of City Flats

In the suburbs on Moscow's edge, bizarre ghost towns have sprung up over the past year. In drab suburbs like Mitino, Butovo and Zhulebino, about an hour from the Kremlin, new tower blocks stand ready but empty.

It is a problem that would have been beyond the wildest dreams of Soviet authorities when housing was in chronically short supply: Tens of thousands of apartments, by some estimates 40,000, lie vacant for lack of takers. Some say demand outweighs supply by 10 to one.

The huge imbalance has arisen because the city is caught between a populist, Soviet-style political imperative to build lots of housing and the reality that most Muscovites simply cannot afford to pay for them.

Last year, the city built 3 million square meters of housing, of which real estate agents say only 60 percent has been sold. This year, the city will build a record 3.5 million square meters of housing. But real estate industry sources say they can only be sold at a huge loss. While the average cost of construction is about $600 per square meter, prices have fallen to as low as $400 to $500.

The result is a financial burden for the city which has huge debts to building companies and investors.

It all started back in 1992 when the city government came up with an ingenious plan that would allow it to combine profitable property development with building more public housing.

The city built apartments which it sold on the open market. With the income from those sales, it built flats that it would supply free to needy Muscovites.

The housing scheme created two separate housing departments. The first was a commercial department that would seek private venture funding to build apartments that it would sell to the public. Part of the proceeds from this organization's housing sales would go into the budget of a municipal housing department, which would build cheaper apartments and give them away to certain categories of Muscovites -- called ocheredniki, or "liners," because they generally wait in line for several years -- who are entitled to free state housing.

At first, the city was able to fill both missions -- sell commercial housing and provide free municipal flats -- said Raymond Struyk, an expert with the USAID-funded Urban Institute, which studies housing reform in Russia.

"In the wonderful years between 1991 and 1995 they were able to sell far above cost of construction -- at that point, they were doing good and doing good business as well."

Andrei Kupriyanov, deputy marketing director for the SAVA real estate agency, said the program was popular with buyers.

"Pent-up demand, coupled with the high profitability rate of businesses, created enormous demand for the flats," he said. "Until about 1994, prices were so high they managed to fund four apartments for ocheredniki from the sale price of one flat."

After booming sales in the initial heady days, demand for the apartments has fallen: Some 40 percent of the apartments built last year have yet to find buyers. Others, according to realtors, are selling for prices that are as much as 30 percent below original asking prices.

"Today the program is throwing about 3 million square meters of living space on the market every year, and understandably such huge volumes are difficult to sell," said Kupriyanov.

At construction rates of approximately $600 per square meter, that means the city is spending about $1.8 billion a year on building apartments.

The first casualty of the bust on the construction market has been public housing programs. With no money coming from the city's commercial sales, Eduard Yakushenko, deputy head of Moscow's municipal housing program, said his department is trying to get its funding direct from the city's budget in 1998.

"If they do well, we can build more," said Yakushenko. "If they don't get enough money, municipal housing construction could come to a halt. ... Under the present system we are unable to plan ahead."

In spite of the oversupply, the city continues to build. By the end of 1997, Moscow will have built 3.5 million square meters of housing, more than in 1996.

Like the dingy five-story complexes nicknamed Khrushchyovki after former Soviet leader and construction catalyst Nikita Khrushchev, the new buildings, located mostly in Moscow's cheerless suburbs, are coming to be known, after Mayor Yury Luzhkov, as Luzhkovki.

Luzhkov himself recently demanded that the pace of construction, and advertising for the projects, be stepped up.

For the most part, the city maintains silence on the housing project. Moscow's non-budgetary planning department -- the department that builds the apartments for sale -- did not respond to repeated questions on the size, plans and financing of the program.

Independent realtors cite a number of reasons on why the program has run into trouble.

Housing officials contend the flats boast improved design, but Natalya Vetlugina, a consultant with the Novy Gorod real estate agency, said the quality of construction leaves much to be desired.

"These flats are of really poor quality," Vetlugina said. "I am not surprised no one wants to move into them." Even flats built during Stalin's time are in better condition than the Luzhkovki, she added.

Vetlugina said location is another reason Muscovites are thumbing their noses at city housing. Most new apartments are in outlying areas such as Butovo, Maryino and Zhulebino, where infrastructure is poor and indirect transport links make commuting time to Moscow's center over an hour each way. Some new districts are perceived as ecologically undesirable, she added.

One official in the city's sales department confirmed that the best-selling apartments are nearer to the center. City-built apartments in the Kakhovskaya neighborhood of southeastern Moscow, which go for about $850 per square meter, are usually snapped up quickly. Further out in Butovo, where apartments go for a rock-bottom price of around $500 per square meter, there is little demand.

The city has apparently begun to address the problem. Yakushenko said that commercial housing will now be built closer to the center, while areas such as Butovo and Maryino would be reserved for free municipal housing.

As cheap as they may be, the main reason city apartments are not selling is that they are still far beyond the means of most Russian buyers. A two-room, 50 square meter apartment, sold at construction cost of $600 per square meter, would run to about $30,000 -- far above the reach of the average Muscovite.

According to Urban Institute's Struyk, a key factor that is killing demand for these apartments is the absence of credit and mortgage lending programs.

"The city is presently talking with a number of banks about mortgage finance and if some programs are actually initiated, that will make an enormous difference to the situation," he said.

A recent federal government initiative to creating structures for mortgage lending would go further toward addressing the problem, but President Boris Yeltsin refused to sign the law this summer and its fate is unclear.

Some banks are organizing their own lending programs. SBS-Agro bank's Universal Financial Company charges 20 percent interest for a 10-year loan which covers up to 70 percent of the cost of the apartment. The flat is registered in the bank's name. An SBS-Agro spokesman refused to disclose how many such loans the bank had provided, but sources said most applicants are unable to meet the bank's requirements.

All of these negatives add up to losses for the city, which is currently selling the apartments at prices not much above or equal to the cost of construction. Although sales prices are falling steadily -- by at least 20 percent over the past year -- the cost of construction remains at about $600 per square meter.

In some areas such as Zelenograd and Butovo flat prices have dipped to $500 or even $400 per square meter.

"It's our job -- the job of the builders -- to lower construction costs," Yury Pritulin, deputy head of the city's department for non-budgetary planning told The Moscow Times earlier this year. "We can't do anything to influence the sales price -- the market does that."

The city has been trying to get rid of its huge real estate stock by using the apartments as barter payments to creditors like construction companies, sanitation and energy companies and telecoms. The city also owes a sizeable amount to investors and last year paid back part of the interest with apartments. But these apartments have flooded the market, often at dumping prices, depressing the market further.

"Dumping is not at all surprising in this case," said Struyk. "A company like say, Mosenergo, has its own cash needs and can't wait three years for the market to turn around."

Struyk also said that though the practice appeared to be bailing out the Moscow government at present, it is probably responsible for aggravating the problem further.

"From the city's point of view [paying in kind] is bailing them out," he said. "But it is back to the barter economy. ... It could well be a process that will cost them more in the long run."

Much to the chagrin of realtors, the city's housing scheme has had repercussions on the entire market. Prices for residential space in Moscow fell for the first time in 1996 -- by nearly 17 percent -- as approximately 40,000 apartments hit the market. Prices are bound to fall further, said Kupriyanov."The situation in the primary market is bound to affect the secondary market as well," he said.

Currently in a last ditch effort to make some money out of the vacant apartments, the Moscow city has started a number of schemes that do not involve actual sale. One involves exchanging flats in the center for larger, city-built flats on the outskirts.

"Muscovites are beginning to realize the advantages of moving to the new apartments," said Boris Basin, deputy director of the MIEL estate agency. "These flats present a good opportunity to move from cramped living quarters to more spacious ones, at little or no extra cost." He said the exodus to the suburbs would continue as metro lines are gradually extended to the new areas.

Another city effort to fill the apartments involves leasing or renting -- rather than selling -- to companies and individuals.

Real estate observers say that the city has little choice. "The apartments don't do the city any good when they are sitting empty," said Kupriyanov.