Moscow Home Buyers Need No IMF Help

As Russia's economy worsens, the capital's real estate prices defy market gravity. Elite do very well.

Russia's in financial crisis, the government can't pay workers, and the stock market's heading south. Even a $22.6 billion loan from the International Monetary Fund hasn't bolstered the ailing economy.

But one corner of this vast market has defied the downtrend: Moscow real estate prices.

Take the experience of television producer Slava Zeleniner. He recently bought a small apartment in Moscow for $120,000. And he had to pay in cash, an example of the unfinished capitalist revolution in a land only seven years from communism. Mr. Zeleniner couldn't get credit from a bank. He had to scrape together money from the sale of another apartment and a country cottage, as well as borrow from family and friends.

"It was pretty traumatic, hauling bags of cash across Moscow," he says. "But what can you do?"

Zeleniner's experience is not unusual. Realtors report that deluxe apartments in the center of Moscow sell for as much as $16,600 a square foot. A deluxe one-bedroom rental: $2,000 a month.

On poverty's doorstep, Russia nonetheless has within it a small elite economy with world-class prices - and not just real estate - driven by both wealthy Russians and Western investors.

Strong demand and a limited supply of elite property is buoying the market through what is ordinarily a summer slump, some real estate brokers say. And Westerners and wealthy Russians seem to have lots of money to spend on offices and apartments.

"Business is going on as usual," says Andrew Shepherd, a real estate agent at the international property company DTZ-Debenham Zadelhoff. "That means very well."

And good business translates into high real estate prices in Moscow, which generates 60 percent of the country's gross domestic product. It has been rated one of the most costly cities for expatriates to live in, following Hong Kong and Tokyo.

After the collapse of the Soviet Union, a new class of Russian capitalists and foreign investors has emerged who are willing to pay high prices and who together comprise perhaps 5 percent of the real estate market.

They are the ones, in theory, who would be hardest hit if the government enacts as threatened a new law requiring transactions of $20,000 or above to be reported to tax authorities. They are also the ones working for banks and brokerage firms in Moscow that have, according to some financial sources, collectively eliminated 1,000 jobs since the financial crisis began in May.

Ordinary Russians unaffected

Moscow is not the only Russian city where the luxury real estate market is strong. The market in St. Petersburg is also thriving, although the prices are 2.5 to 3 times lower, reports Ludmila Chechotkina, branch manager of the real estate firm VMB.

She thinks prices will go even higher in the fall, as people go on a buying spree before new tax rules are imposed. "The slump in financial markets won't affect the real estate market. But there could be a rush on buying in anticipation of a new tax code."

On the lower end of the real estate market, brokers say that ordinary Russians are also unaffected by the financial system because they survive largely outside it.

Much business is conducted via barter. There is no effective mortgage market, and houses are generally paid for in cash. Furthermore, average Russians do not keep their money in the bank, are not affected by 60 percent interest rates, and do not know what equities are.

"The stock market situation is not at all vital for most Russians," says Oleg Zhemerdeyev, manager of the foreign department at the real estate agency Novy Gorod. "It's like empty sound for them."

Most Russians avoid the formal financial system completely when they buy houses or apartments, which is one reason why they are so unaffected by the economic crisis.

Mixed forecasts

There is no consensus as to what the future brings, but most analysts do not expect any dramatic plunges in the short term.

Among the rare Cassandras is Alexei Vedev, an analyst with DialogBank. He forecasts that Moscow will follow the pattern in other Eastern European capitals, where inflated rents fell dramatically and then leveled off into an equilibrium. "Real estate prices are crazy. I think some kind of sharp decrease is due," he says.

But this is not a typical view.

Mr. Shepherd forecasts that prices will stay the same for the next two or three years and that the financial crisis will have no impact on construction plans. If prices fell it would be five years from now, when there would be more buildings to meet demand.

"The rewards and returns are more than commensurate with the risks," he says. "The returns achieved in Moscow are among the highest in Europe. That's partly because it's seen as more of a risk than it actually is."

Any fallout from the new tax regime and financial crisis will be much further down the line, says Anna Ivanova of HIB Ltd, which deals mainly with upmarket commercial rentals. But for now the market is thriving.

Andrei Avanesov of Delight Real Estate says only two clients from big companies have canceled office contracts. He expects that office rental prices will decline in the autumn as more firms are hit by taxation - but not by very much.

"We expect prices to come down. For the last year and a half there have been no significant changes in prices. Now, as a result of tax collection, we may see some small changes," he says, stressing the word "small."