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. Last Updated: 07/27/2016

Dollar Reigns Supreme in Moscow Real Estate

MTA Don-Stroi billboard in Moscow promising a switchover to prices in euros, a move that may bring price increases for consumers.
Despite predictions late last year that Moscow real estate prices would soon stabilize, they have done anything but.

So far this year, property price tags have shot up 17.2 percent and experts say that by the end of the year they are likely to break the 2001 record of 30.6 percent annual growth, in dollar prices.

Analysts blame the unrelenting growth on a variety of factors, ranging from strong economic growth to high oil prices, the dollar's instability and the upcoming parliamentary and presidential elections.

Unusually high demand for Moscow real estate this year also helped to push prices upward.

Last month, the average price per square meter hit $1,283, up from $1,096 last December, said Gennady Sternik, a real estate analyst for the Russian Guild of Realtors.

"In July, prices grew 3.4 percent. By the end of the year, the increase is going to be between 33 percent and 36 percent," he said. "This is much more than last year, when prices grew only 16.6 percent," he added.

No Russian bank offers such interest rates, making real estate extremely popular among investors.

The instability of the dollar-to-euro exchange rate is seen by most analysts as the primary factor driving Moscow's real estate market ever higher.

Early last November, the dollar roughly equaled the euro, but since then the European currency has strengthened, peaking just over $1.19 in May before dropping to around $1.09, its rate Monday.

The dollar, traditionally Russians' favorite hard currency, has been used to denote apartment prices for years. But as it began losing value, Muscovites started converting their savings into something more reliable -- namely, real estate, said Yelena Novomlinskaya, who heads the analysis and appraisal department at the Center for Real Estate Market Analysis.

Playing on many Muscovites' fears that the dollar may sink even lower, Don-Stroi, one of the leaders of the elite real estate market in Moscow, has announced that it will state its prices in euros starting Sept. 1.

Such a move in a dollar-dominated economy was met with skepticism and bewilderment among many market participants.

However, it remains unclear if the company is simply going to replace a dollar sign with a euro sign (thus effectively raising prices by some 10%) or will recalculate its prices using the currency exchange rate.

In other words, under the first method, something that cost $100 would suddenly cost 100 euros, or about $110.

Under the second, Don-Stroi would calculate the euro value of $100 and state its prices as such, meaning the $100 property would be listed at 92 euros, leaving its real cost unchanged.

Don-Stroi would not release an official explanation for the switchover to euros, but a company source, who requested that his name be withheld, said that the change, despite the hundreds of billboards blanketing Moscow that already advertise it, "has not been finalized yet."

"We are going to see what the exchange rates are," the source said, adding that the key reason behind the switchover is that "up to 40 percent to 50 percent" of the company's construction equipment is purchased from euro zone countries.

Don-Stroi's competitors and market analysts found this explanation unlikely.

"This is nothing but an advertising campaign. This is just another way of saying that Don-Stroi is raising its prices. They have such campaigns on a regular basis," Novomlinskaya said.

Yevgeny Redkin, spokesman for MIEL, one of Moscow's top realtors, called it "a marketing ploy to create an artificial boom," as buyers rush to make their purchases before the price hikes take effect.

"This is just their way of promoting themselves: Now everyone talks about them," Redkin said.

Regardless of how effective this strategy may be, other companies say they are not going to follow Don-Stroi's example and switch their prices to euros.

Most analysts attributed this to the market's conservatism.

"Our clients are used to our prices per square meter being denoted in dollars," said Yury Sinyaev, the head of sales department at Don-Stroi competitor, the Konti company group.

"The stability of our prices is indicative of our company's high corporate standards," he said. "Following currency fluctuations is not reasonable from the point of view of our long-range goals as a business."

"There is no massive conversion to the euro going on and it is not going to happen in the foreseeable future," said Oksana Basova, a spokesman for the S-Holding construction and investment company, another key market player.

"It makes more sense to work with a fixed [dollar] rate, like many companies in Moscow are already doing, than to alternate between currencies," she said.

Soaring oil prices, too, have an impact.

Many expected they would fall after the quick outcome to the war in Iraq, as Iraqi oil began to flow, raising world supplies, said Sternik.

"High oil prices mean higher incomes for Russians and especially for Muscovites, since a huge percentage of Russia's riches is concentrated in Moscow," he said.

Novomlinskaya agreed. "According to some estimates, up to 30 percent of effective demand in the Moscow market is assured by capital flows from the gas and oil sectors," she said.

Non-Muscovites are taking advantage of growing real estate prices as well.

"For many, this [owning a Moscow apartment] is a sign of prestige. Others see an apartment in Moscow as an excellent investment," Sternik said.

Roughly 30 percent of people buying real estate in Moscow are non-Muscovites, he added.

Parliamentary elections set for December 2003 add a sense of relative instability, as people await the political outcome.

In addition, they flood Moscow with "election cash" that, like oil money, can be spent on real estate.

For this reason, Sternik said, "Real estate prices are not going to stabilize until after the presidential elections or late in 2004."