Russian Real Estate Market Softens

The global credit crisis causes investors to flee both commercial and residential sectors.

The global financial crisis is taking a toll on many formerly lucrative sectors, and the Russian real estate market is no exception. Although the pace of investment was strong in the first three quarters of this year, the situation is changing rapidly.

Rapid downshift. While overall volumes were up for the first nine months of the year, tight credit conditions are rapidly changing the dynamics of the marketplace:

--Developers note that the cost of financing has doubled or tripled and, for some, there is no credit available at all.

--Thanks to these conditions, larger players with access to foreign institutional capital are faring better, but many smaller domestic investors may drop off the scene, possibly selling out to their stronger competitors.

--Tightening of credit has also allowed investors to become quite selective and choose either existing high-quality assets or projects at the final stages of development.

--New development concepts are becoming increasingly difficult to finance. Mirax Group, a Moscow-based developer, underscored this point by recently canceling $4 billion worth of new projects. The developer cited spiraling debt financing costs, up from 8.5% to 25%.

Commercial real estate. The commercial real estate market has positive long-term prospects, as Russian regions are likely to pick up the market slack left by slowdowns in Moscow and St. Petersburg. However, the credit crisis is exerting pressure on commercial real estate prices and yields. Several developers have announced that they expect a 25-30% decrease in commercial real estate prices in the short term. This will strain new commercial developments as pressure will increase on both companies' profitability and the economic returns of existing projects.