Builders, developers, property managers, bankers and consultants discuss impact of the world credit crunch on the Russian real estate market. The discussion is held within the 6th Christmas summit of the Guild of Property Managers and Developers (GMD). General opinion of the professional community: “the crisis bottom” is likely to be reached in 2009, but the upward trend will not follow soon.

Over 140 professionals from Moscow, St. Petersburg, Saratov, Ekaterinburg and Novosibirsk attended the summit, organized by the GMD together with the “Real estate and construction of St. Petersburg”.

Panel discussion was started by the unavoidable “When is the bottom reached?” voiced by moderator Alexander Olkhovsky, the GMD President, Vice-President of VTB.

In the opinion of Boris Yushenkov, General Director of Colliers International St. Petersburg, the “bottom” has arrived. In Russia its dynamics will follow oil prices. The oil will go up after enlivening of the US market.

Oleg Barkov, General Director of Knight Frank St. Petersburg, on the contrary, believes that the downturn of Russian real estate market is still underway. The drop in production, ruble devaluation, etc. became obvious only in December. “In February-March we’ll be able to understand the speed of downward market dynamics. Only at the 2009 Summit we will say ‘the bottom has been reached’”.

Mikhail Zeldin, the Avers Group President, said that published prices on the good-liquidity property of federal and regional authorities (both sites and uncompleted projects) show a drop of approx. 30-1074362400n comparison to the level of a few months ago. Projects at early stage and sites requiring large-scale investment – by 50-70%.0 But this has not been confirmed by new deals at ‘lower price’. Institutional developers take a conservative/waiting position, they do not have a pressing need to sell.

Alexander Olkhovsky continued on the subject: “Even if sales of facilities and land are excluded from governmental budgets, the property still can be offered at realistic prices. Can an imbalance between justified market value, at which companies are ready to buy, and conservative position of the state lead to the absence of deals?”

The question was commented by Alexander Chuprakov, General Director of St. Petersburg Directorate for property inventory and valuation. “The problem not in high prices. We do not have information enabling us to say which price is justified. Our information exchange with St. Petersburg property Fund is not enough, and it is not enough for giving a discount - 10, 15 or 50%? I am requesting the Guild of Property Managers as market professionals to provide information about new (not forced) deals, which can be used as a reference”.

Mikhail Vozijanov, Vice-President of RBI Holding spoke about the relation of prices on housing and land. The land price bottom is likely to be reached in the summer of 2009, the prices reached their peak in the middle of 2008. To make new development efficient the land price has to fall not twice, but 4-5 times. So far prices on flats (in rubles) have dropped by 10%, expected to fall by 5-10%».

Vyacheslav Semenenko, GMD Vice-President, SETL Group Member of the Board, expects that the new reality will shape out in the summer of 2009. We’ll see by then how many viable tenants will stay on the market, how much housing and commercial property is offered. 2009 will see a 30% reduction of offered new housing, much of good-liquidity proposals will be bought by the state.

Matvey Zakashanskiy, General Director of M-Industria Allied Construction Company: since August the prices have dropped by 10-12%.0 In December we sold 3 times more flats than in November. Soon prices will “hit the prime cost level”. Price of construction materials has dropped by 30% (about 1227775524262f a development project). Main stumbling block is the reticence of banks to give credits to development projects. M-Industria is planning to finish projects with 85-95% readiness, the rest to be frozen.

This position was shared by Igor Vodopianov, managing Partner of UK “Theorema” and Igor Onokov, General Director of the Leontievsky Cape Company.

Alexander Olkhovsky, noted that under the circumstances banks tend to finance economic segments with more predictable revenues than the real estate, development projects in particular. For example, bonds and securities of large foreign banks bring the creditor-banks more money than project funding. Not a single large bank operating in Russia, be it Sberbank, VTB or Raiffeisen, are not going to offer services to the downgoing market.

Andrei Rozov, Director of Jones Lang La Salle St. Petersburg, mentioned the two scenarios of situation development, his estimate of optimistic development – first indications of recovery in the 3rd quarter of 2009, pessimistic – growth only in 2011. This opinion was shared by Alexander Sharapov, Vice-President of GMD, President of Becar Realty Group..

Mark Lerner, General Director of “Petropol” Company proposed not to speculate on “where we are” – we are nowhere”! The enlivened oil market will turn the dynamics in the direction of growth as early as in spring 2009, so in the middle of 2010 we can expect the climbing demand, first on housing, later – on the commercial property”.

The second part of the 6th Christmas summit reviewed the dynamics of market segments.

Boris Moschensky, General Director of Maris Properties in association with CBRE told about the peak prices and rent rates of office property. In summer the rent rates Class A offices reached 1700 RUR/1 m2/month; 1200-1400 RUR – B Class. But as early as in 2007 it was predicted that by 2008-2009 the office market would be saturated. Two development scenarios are possible: if the crisis is over in 2009, all currently available 1,5 mln m2 of high-quality office space will be in use, and growing demand will boost the office property development. If the recession lingers on, the rent rates will drop twice (in the dollar equivalent).  

Andrei Stepanenko, General Director of St. Petersburg Property Fund expects a dramatic drop in prices on the property sold by the Fund. In the period of 2004-2008 the city has sold property to the amount of 66 bln. rubles. In his opinion the real estate prices in Russia are mostly influenced by the oil price dynamics, they will go up together with the price of oil.

Elena Ignatiy, Praktis, told about the basically positive dynamics of hotel development during last years, with a 2008 shift to suburban hotels and stronger presence of new players on the market: international hotel networks (Rezidor, Accor, Marriott, Kempinski, Orient-Express and others).

Yuri Borisov, GMD Vice-President, IB Group Managing Partner, summarized the 2008 history of retail property in St. Petersburg. During the year the retail added 438 th. m2 (2007 - 472 th. m2, 2006 – 1290 th. m2). Not a single ‘breakthrough’ project was added to St. Petersburg retail scene in 2008, noticeable though were a new Zara in the Mertens House (Nevsky prospect) and Finnish Prisma shopping center. In 2008 the city attracted the record-breaking number of global networks - 27 brands. The retail property crisis manifested itself in September by the closure of 7 Bananamama shops, “Bookbery” network and some others.

Commenting on the situation Mr. Borisov quoted the lecture of Prof. McKellar, Schulich School of Business “… the position is serious when enterprise becomes the bubble on a whirlpool of speculation – J. M. Keynes” (The Guild had a seminar in Schulich in October). In accordance with Mr. Borisov severe problems will be faced by retail networks, which have a large development component in their structure (e.g. Х5 Retail).

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