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14.04.10   Capital Rivalry

By Maria Samsonova / Mayfair Properties in cooperation with Night Sky Realty

Capital RivalryDemand fell by 30 percent to 40 percent on average in St. Petersburg's elite segment in 2009, but as in Moscow levels vary greatly among different developers.

Russia’s two leading cities, both at one time the country’s capital, have always run head to head competing for political, economic, cultural and scientific superiority. While the real estate markets in Moscow and St. Petersburg develop in the same macroeconomic environment, there remains a number of differences between them.

In comparing the two cities’ property markets the consequences of the economic downturn figure highly. Has it affected both cities’ real estate markets equally? On the one hand, yes — both experienced price landslides, reduced demand and fewer transactions, oversupply, frozen projects, developers that went bankrupt and some that triumphed. On the other hand, all these processes occurred in different ways in each city.

21.6 million square meters of residential property entered the Russian market in the first half of 2009, according to data from the State Statistics Service. That is 233,900 apartments. Of this figure 10.4 million square meters, or 114,400 apartments, were completed in the first quarter and about 11.2 million square meters, or 119,500 apartments, in the second.

In St. Petersburg the elite residential real estate market acquired about 4,000 square meters per month in the first half of 2009, while in 2008 the same figure was 12,000 square meters; that is the volume of new builds was reduced by two-thirds. However, if we make the same comparison in Moscow, the conclusion is that, despite the developing crisis, the delivery of residential space remained practically at the same level with a difference of only a few percentage points. In both cases it is necessary to take into account that many residential properties that entered operation in the middle of 2009 had almost been completed by the moment the crisis hit.

By the end of 2009, supply volumes on the primary elite segment of the property market across Russia stood at about 200,000 square meters. During the year several new properties appeared on the market and sales that had previously been suspended were renewed: Rezidentsia Znamenka in Moscow’s Khamovniki district, Barkli Plaza on Prechistenskaya Naberezhnaya, Italian Quarter on Ulitsa Fadeyeva, Prechistenka 13 and Ostozhenka 11 were among those elite properties that returned to the market during the year. After a long period of continual price corrections and complete uncertainty on the market, by the beginning of the final quarter of 2009 the market of elite new developments had become more stable both in terms of properties and of prices.

By early fall 2009 price reductions for new elite properties had stopped. Prices were fixed at a low level, unseen in the last three years: luxury-class properties costing from $16,000 to $20,000 per square meter appeared on the market. These properties, however, are noted for their quality and location, as well as being almost fully complete — an especially important factor while the property market is in such an unstable period. Among such properties are Rezidentsia Znamenka as well as the Barkli Plaza and Ostozhenka Park-Palace residential complexes. As a result, these projects became bestselling properties in the elite real estate market in 2009. Despite a hard beginning of the year, overall the number of properties on offer in 2009 on Moscow’s primary elite market increased by 18 percent.

A large number of properties were completed in St. Petersburg as well: by the beginning of the year several projects had already been accomplished on Krestovsky Island — Stroiinvest delivered two projects, while the developer Grad completed work on its Residence on Krestovsky. Meanwhile, on Vasilyevsky Island properties including Financier and Severny Palazzo entered the market.

Stroiengineering delivered Imatra, a small property on Maly Prospekt on St. Petersburg’s Petrograd Side that is marketed as elite, while Richness Realty Company completed work on Family House, a business-class block of flats on Kostromskoi Prospekt. Renaissance of St. Petersburg, a part of LSR Group, has delivered its Kamennoostrovskaya Collection project, on the Petrograd Side in 2009, as well as its Residence in Suvorovsky and two apartment blocks that are part of the Paradny Kvartal residential complex.

Both cities experienced consequences of the economic downturn, but all these processes occured in different ways in each city.

Price reductions and the appearance of special offers were the main tendencies on the real estate market in the first half of 2009. By summer price drops had stopped, and market players began to talk about prices reaching bottom. In the second half of the year they remained practically unchanged, and a considerable revival in the market became apparent.

By the end of the year Moscow’s market had stabilized with values fixed at a level of 50 percent to 70 percent lower than before the crisis. This fall was not spread across the year, since in the primary market prices fell on average by 25 percent in the first quarter of 2009 alone, while in the secondary market elite property prices went down by only 15 percent. Similarly in St. Petersburg price reductions on the primary market were greater than those on the secondary market: in 2009 elite property prices fell by around 7 percent to 10 percent on the secondary market, and about 10 percent to 20 percent on the primary.

Price stabilization became the general tendency on the real estate market in both capitals by the end of the year. Consequently, sellers, believing that prices have reached their lowest levels and afraid to underestimate them, are offering practically no further considerable discounts. Each month brings less and less dumping supply.

In Moscow the average price for luxury small apartment complexes in the Golden mile area, around Patriarch’s Ponds and Arbat has reached $18,900 per square meter on the primary market and $22,500 per square meter on the secondary. In the business-class segment — with average-size residential complexes in prestigious areas of Moscow’s city center such as Zamoskvorechye and Khamovniki — prices have leveled at $9,200 dollars per square meter on the primary market and $12,100 per square meter in the secondary.

In St. Petersburg in the first half of 2009 the average cost of a square meter in the elite segment of the property market stood at $6,500 on the primary market and $7,700 on the secondary. These prices fell slightly in the second half of the year, to $6,000 and $7,000 respectively. In Moscow the average budget of a luxury-property buyer stood at $4 million at the end of the year, while those looking at business-class real estate in the city were, on average, prepared to spend $1.5 million to $2 million.

In the first half of 2009, 22,800 purchase and sales transactions of residential real estate were registered, according to Moscow’s Federal Registration Service. This is almost 25 percent less than in the first half of 2008. Nevertheless, the slackest months, January and February, differ considerably in the number of transactions concluded from the active period of March to June. On the elite residential property market the average number of transactions fell by 50 percent. However, in the second half of 2009, starting from October, transaction rates in Moscow picked up by an average of 10 percent per month.

Research on the St. Petersburg market has shown that in 2009 the average reduction of demand in the elite segment was 30 percent to 40 percent. It is also important to point out that the level of demand reduction in both cities varies greatly depending on developers as well as on the type of property. In total around 550 apartments were sold in St. Petersburg in 2009 in elite residential complexes, a percentage decrease of approximately 30 in comparison to 2008.

As far as new properties in the real estate market are concerned, the situation remains unclear both in Moscow and in St. Petersburg. The destiny of numerous projects that have been frozen in planning by firms such as PIK, Mirax and Capital Group in Moscow and Peterburgrekonstruktsia, Stroiinvest and Setl Group in St. Petersburg is still uncertain. Development of such long-awaited projects as Red Square House 2, Golden Island, Park City and Gelijmash Union in Moscow and the Lumiere residential complex in St. Petersburg’s Petrograd district, which was originally planned for 2009-2010, has all been postponed indefinitely.

Nevertheless, the situation in both Moscow and St. Petersburg is currently growing more and more stable. But despite the similarities in how the economic downturn has affected the two markets, it has not succeed in equaling them out, and the cost of a square meter in the capital remains record breaking.