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. Last Updated: 07/27/2016

No Western Loans Left For Russian Real Estate

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Since the arrival of the first dedicated Western real estate lenders in Russia in 2003, an increasing number of property owners, investors and developers -- both local and foreign -- had been relaying on the availability of cheap Western bank finance for their real estate activities in Russia.

In particular, the growing activities of foreign investors were spurred by the availability of debt that provided leverage for their return and reduced their equity requirements.

At the same time, Western real estate lenders perceived Russia as a very promising emerging country, given the potential size of the market coupled with the low level of debt. In addition, they saw a booming real estate market across asset classes and regions and significantly higher margins achievable compared to their highly competitive home or core markets.

But this promising development has come to an abrupt end with the beginning of the global financial crises. Starting in fall 2007, Western banks that issued credit to Russian companies were affected by the liquidity crunch and started reviewing their lending policies. Though most banks are still in the process of formulating their new business strategy, it is already obvious that the majority of them will be forced to scale down their lending volumes and will have to focus on low-risk, core business activities.

Real estate lending in Russia does not fit into this business model. The recent economic downturn in Russia, which has already negatively affected the real estate market, significantly increases the general country and market risks and raises concerns about defaults of existing loans. Moreover, the war in Georgia and the gas conflict with Ukraine have had an additional negative impact on Russia's reputation in the West.

It is therefore highly unlikely that Western real estate financing will be available over the next two years. This bleak forecast will be in particular applicable for developers who will be required to fully finance with equity, thus forcing the vast majority of them to postpone or abandon their development projects.

On the positive side, the drastic reduction of development activities today should stimulate the real estate market in the future. With little new supply coming to the market and an expected recovery of demand from occupiers over the medium term, the market equilibrium could return quicker than many experts predict today.

Heiko Davids is a partner at Knight Frank Russia and CIS.