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. Last Updated: 07/27/2016

City Hall Set to Join $2Bln Resale Race

The Moscow city government announced last week that it would enter the booming secondary real estate market, estimated to be worth over $2 billion per year.

It is the only segment of city realty where City Hall has been underrepresented, yet most key market players do not believe the city can establish itself as a serious rival to private realtors.

Moscow's administration is expanding its real estate portfolio through Moszhilcomplex, a subsidiary of the city's department for construction investment programs, an arm that invests the city's money in real estate projects. Not only will it sell brand new apartments, it will also serve as a full-fledged realtor involved in property resale.

"What we want is for our customers to have access to all the realty services they can possibly need," Moszhilcomplex executive Robert Kvachadze told reporters last week.

Because of soaring property prices, Moscow real estate is seen as a very profitable and popular form of investment. In addition, brand new apartments sold before the building is completed traditionally cost much less than after the construction is complete.

The city enterprise was formed in 1998 to serve as project supervisor for the city's investment projects, for which it gives the final stamp of approval once a raft of quality standards are met. It also provides registration and legal assistance to anyone who wants to buy an apartment from the city.

Moszhilcomplex will not "take over the market," said Leonid Krasnyansky, head of the construction investment department; instead, it will concentrate on its "old clients."

It has not been uncommon for one of the department's clients to purchase an apartment from them during the "foundation ditch" stage and then turn around and sell it -- through a different agency, since Moszhilcomplex is blocked from resale -- at a 30 percent profit when the building is finished, Kvachadze said.

In instances like this, with the new rules, Moszhilcomplex, too, will be able to compete to serve as the resale agent, reaping a commission on the deal.

The enterprise will charge only 4 percent for its services, a relatively inexpensive fee compared to other Moscow realtors, some of whom charge commissions of up to 10 percent. Fifty percent of Moszhilcomplex's income will go to the city budget, while the remainder will cover the enterprise's maintenance costs.

Krasnyansky said he hoped that Moszhilcomplex's status as a city-owned company affiliated with the city government will help it attract more customers.

"We are absolutely transparent, we pay all taxes and we have good working relations with all the registration authorities and other city bodies," he said.

Kvachadze was similarly optimistic, describing Moszhilcomplex's ability to offer realty services "all in one" as its competitive advantage. "We can offer the very same services as all the other realtors in the market, but we also have notaries and bank deposit boxes all in the same office," he said. "Not to mention real estate registration."

Yet some market participants were rather skeptical about City Hall's plans to enter the secondary market.

"In order to become a serious player on this market, one would need a brand, excellent personnel, especially lawyers, at least 15 branches in Moscow and a few million dollars to launch it all," said Sergei Yeliseyev, marketing director for realtor Inkom-Nedvizhimost. "I would say they currently lack most of these."

Yevgeny Redkin, spokesman for realtor MIEL, said that becoming "too dispersed" may work against Moszhilcomplex and it should concentrate on improving the services it already offers. "It is not like they are overwhelmed by new orders and customers," he said.

Nevertheless, Redkin noted, "a state-owned organization is perceived differently than a private company and some people still tend to trust the state rather than a commercial organization."

But Yeliseyev disagreed. "The so-called administrative resource no longer works in this business. People choose a realtor based on quality and better selection, not state affiliation." In any case, he said, "I don't see them as competitors."

Andrei Zhingan, the head of public relations at Moscow Investment Agency of Real Estate, or MIAN, said that while City Hall affiliation comes with certain advantages for firms, it "cuts both ways" since it drives some customers away.

"Sooner rather than later, large-scale construction will cease in Moscow and already being acquainted with the secondary market will be of prime importance," Zhingan said, noting that the city is running out of empty space.