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. Last Updated: 07/27/2016

Property Market Regains Momentum in 1999

Going into 1999 on the skids after the financial crisis of the year before, the Moscow property market defied expectations to stabilize and even post moderate growth in some sectors.

The retail sector was the most dynamic as dozens of firms expanded operations and - after a months-long plummet - lofty office rents finally bottomed out at levels much closer to their actual value, real estate experts said Monday.

"In the fourth quarter of 1998 everyone was quite worried about 1999," said Michael Lange, partner at the Moscow offices of real estate giant Jones Lang LaSalle. "However, things turned out much better than many of us expected."

Retail Space

As with all sectors in the property market, retail kicked off the year quietly. Companies were still assessing their prospects for the market while keeping a wary eye on the economy, which had been in free fall through most of the last half of 1998.

Only one shopping center opened for the entire year, and it was a project planned and mostly completed before the August crisis. The complex, which threw open its doors in January, was the upscale Nautilus shopping center on Lubyanskaya Ploshchad. The six-level, three-sided complex had signed leases for most of its 4,500 square meters of retail space in the previous July, but the center's opening was put off after tenants demanded that those contracts be renegotiated, according to its leasing agent Jones Lang LaSalle.

The real action in the retail sector took off in the second half of 1999 when companies saw that the ruble, which sank from about 6 to the U.S. dollar in August 1998 to 23 to the dollar by February 1999, had started to stabilize. With consumers' buying power therefore starting to recover, retailers began to move more assertively.

Established food retailers such as Ramstore owner Ramenka, Sedmoi Kontinent and Perekryostok aggressively expanded their supermarket chains and non-food retailers - including Sportmaster, Office Club and a partnership between shoe sellers TJ Collection and Carnaby - followed suit.

In late November, Ramenka opened two 1,000-square-meter free-standing Ramstore supermarkets in Moscow suburbs, building on its existing stable of two Ramstore hypermarkets. The number of Sedmoi Kontinent supermarkets grew to 12 and Perekryostok to 14.

In the non-food sector, the more aggressive player, arguably, was TJ Collection and Carnaby, whose number of footwear boutiques in Moscow increased to 14 with the opening of a joint 220-square-meter salon on Prospekt Mira in December. TJ Collection and Carnaby also opened shops in St. Petersburg and in several regions, a company spokeswoman said.

Office Space

The office market saw a surprising amount of activity last year as companies took advantage of rock-bottom prices to upgrade their facilities, real estate experts said.

Rental prices on top-quality A class space were still sliding from the pre-crisis average of $750 to $1,000 per square meter going into the year, but they appeared to have bottomed out at $500 to $550 per square meter by mid-1999, market experts said.

"We saw a surprising amount of uptake, triggered by the crisis, when clients upgraded their facilities," said Lange of Jones Lang LaSalle. "We're talking about a market absorption of well over 150,000 square meters - which is quite substantial."

While the market was less dynamic than in 1997, it beat the dead third and fourth quarters of 1998 hands down, he said.

A lot of the movement in the market was for existing office space, but a handful of new buildings did open their doors.

Capital Group opened its 8,270-square-meter Northstone Olympia on 42 Schepkina Ulitsa, and Raiffeisen Property Invest, part owned by Raiffeisenbank Austria, unveiled the 3,000-square-meter Ambassador Building on Prechistensky Pereulok.

Private Russian company Vash Finansovy Popechitel renovated and opened an 11,000-square-meter complex on Spartakovskaya Ulitsa, but was forced to indefinitely put off the development of a 150,000-square-meter office building on Bolshaya Dekabrskaya Ulitsa due to a lack of funding.

Turkish-Moscow city joint-venture Mosalarko completed the 10,000-square-meter Mosalarko Plaza One in the Taganskaya district and developer Golutvinsky Dvor closed out the year with the opening of its 13,600-square-meter office building about a kilometer from the Kremlin.

Residential Space

The biggest news on the residential scene was the launching last summer of the first Russia-wide mortgage program by the U.S Russia Investment Fund.

Until last year, a number of mortgage schemes had been attempted but none of them had panned out.

With the multimillion-dollar backing of the U.S. Russia Investment Fund, set up by the U.S. government to promote direct investment in Russia, the first successful programs were implemented in Moscow, St. Petersburg and on the far eastern island of Sakhalin.

Fund senior vice president James Cook said that from the launch in July to the end of the year some 150 loans to the tune of $5 million had been handed out. About $3 million was loaned in the last month of 1999 alone, a sign that the program was picking up, he added.

The $440 million U.S. Russia Investment Fund has earmarked $100 million for mortgage loans this year, but is ready to increase the amount to meet demand, Cook said.

The fund, which lends the money through Russian partner banks, is preparing to expand the program throughout other regions of Russia in 2000.

Several regional governments last year also kicked off small-scale mortgage programs.

Meanwhile, prices in the residential market stayed fairly stable after the 1998 crisis and even jumped 20 percent to 40 percent over the first nine months of 1999, according to the State Statistics Committee. Apartment prices never fell since such property is seen by most Russians as having steady value no matter what might be going on in the wider economy.

In September, average prices per square meter for new and resold apartments in Moscow were 16,300 rubles (about $650 at then-prevailing rates) and 15,000 rubles, respectively, the agency said.

Over the last month of 1999, sales jumped by about 20 percent as homebuyers fought to beat a Jan. 1 law that orders spenders to declare big purchases with the tax authorities, the Izvestia newspaper reported.

Rental prices on all but the most expensive apartments took a battering after the 1998 crisis and continued to fall over the first half of 1999. As the year drew to a close they appeared to have leveled out. Downtown two-room apartments that once commanded monthly rental fees of $700 to $2,500 are now widely advertised for prices ranging from $250 to $1,000.

According to real estate experts, demand for elite housing ended the year exceeding supply, a comforting sign to developers like Hines, which last year completed the first phase of its Americana suburb northwest of the city center.

The $100 million Pokrovsky Hills project now boasts 103 two- to four-bedroom townhouses that are mostly all leased out, according to Hines. Last summer, the developer held the grand opening to the 15.7 hectare site, which will this year grow by 45 more houses under phase two.

The kickoff of the second phase had been slated for Dec. 1 but was moved to spring, partly over investors' concerns about the outcome of last month's parliamentary elections, Hines' real estate consultant Pavel Barbashev said.

Real estate insiders said Russia's political situation appears to be the main hurdle blocking continued growth in the real estate sector in the first quarter this year.

With presidential elections set for March 26, real estate agents are predicting that many companies would rather wait out the results before making any property decisions.

"It's a bit foggy to forecast at this point what will happen [this] year. Obviously we do not expect a massive amount of absorption over the first quarter," Lange said.

But after the resilient showing of the property market last year, he and other real estate experts are looking forward to a good year.

"Over the entire year we expect similar absorption numbers as to 1999," Lange said. "We are quite optimistic."