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. Last Updated: 07/27/2016

Market Pressures Hitting Demand for Property

MTNew housing being built in Krasnogorsk, outside Moscow. The construction industry, which had 16 percent growth last year, accounts for 5 percent of GDP.
Now that the global liquidity squeeze has hit home for domestic banks, Russian real estate developers are bracing for a slowdown that could curtail investment in new projects and push down prices in an already overheated market.

Interest rates for builders have risen to a record 25 percent per year, and rapidly rising rates for mortgages are making it harder for developers to sell the properties they do manage to complete, driving down prices.

"Developers are facing significant problems because of lack of capital," said Alexei Yazykov, a real estate analyst at Renaissance Capital. "The meltdown may push many developers to the brink and force them to speed up the sales of their assets if they have anything to sell."

Real estate developers presently cannot attract loans at interest rates of less than 20 percent except in cases where they have good connections with their bankers, Yazykov said.

The construction industry, which accounts for more than 5 percent of Russia's gross domestic product, registered 16 percent growth in 2007, but liquidity problems this year — even before the current crisis — have given cause for concern.

In the first quarter of 2008, construction accounted for 6.8 percent of the rate of GDP growth, down from 7.5 in the same period last year, while the real estate sector comprised 7.4 percent of growth, down from 9.7 percent in the first quarter of 2007, according to figures from UralSib.

A number of big developers have already announced measures to help deal with the crunch, including Sistema-Hals, which last week started fishing for investors to help it raise $500 million for projects and Mirax Group, which said it would not seek any new projects until markets stabilize.

Fitch Ratings warned in a note Thursday that the country's builders and developers "are at particular risk" under the tighter lending market.

"Every market player is nervous about events unfolding, and everyone is apprehensive of swings in morale in the [real estate] market," said Maxim Gasiyev, regional director of investment services at Colliers International in Moscow.

"Most [developers] are adopting a wait-and-see attitude, but some will change strategy as soon as it becomes clearer how seriously the global financial crisis is affecting the local market."

Rising funding costs could also spur a rethinking of strategy by many domestic banks, which had been willing to bail out construction firms before the crisis, industry experts said.

State-controlled VTB announced in July that it would increase its loans to the construction industry by a whopping 46 percent this year, adding that it would also help large construction firms acquire their smaller, distressed rivals.

"Overall, the financial malaise spreading through the economy would impact consumption — it is already impacting the purchase of high-value items — and that would clearly spill over into the residential sector," said Sergei Riabokobylko, senior executive director at Cushman & Wakefield Stiles & Riabokobylko.

Faced with plummeting stock prices and capital flight, banks also are taking a tougher look at customers before extending loans. Mortgages are being scaled back by rising interest rates and stricter conditions on borrowers, while banks are increasingly demanding collateral for extending funds to developers.

"In many cases, banks are now requiring additional securities, which were never demanded before, such as a stake in the business or participation in future projects with developers," he said.

But as the credit problems result in fewer projects being completed over the next couple of years, the drop in supply is expected to serve as a counterbalance to falling prices for commercial and residential properties.

"There is a lull in the market at present, and this means that only projects put under construction since last year will be completed and sold successfully," Colliers' Gasiyev said.

"But in two years' time, the difficulties with borrowing will eventually hold back some projects from being completed and put up for sale."

An unexpected upside for buyers is that the crisis has pushed rare properties into the market, enabling investors to buy real estate on the cheap, said Alexei Mogilov, director of regional real estate development at Penny Lane Realty.

"Banks are selling off estates left in their charge as collateral securities, and this is prompting some realtors to consider selling such assets too," Mogilov said. "As a result, the market is full of assets that were difficult to purchase before now."

Ultimately, though, it may be memories of the upheaval a decade earlier that lead developers and lenders to push through with new projects.

"During the 1998 financial crisis, the developers that continued to build while others stopped were the only ones to have products when the market picked up," Riabokobylko said.

"Those that do not rely heavily on bank finance would be in good stead to continue with their development plans, albeit calibrating them to meet dwindling demand."