House prices falling in Moscow and St Petersburg

Russian house prices are rising - but only just, after inflation has been taken into account, and not in Moscow or St. Petersburg. The price index for all resale apartments in Russia rose by 10.39% during the year to Q1 2013, according to the Federal State Statistics Service(Rosstat).  Adjusted for inflation this represents only a 3.05% real price rise.
In Moscow, Russia’s capital, the price index for resale apartments rose by only 6.17% y-o-y to Q1 2013. When adjusted for inflation, house prices actually fell by 0.89%.

In St. Petersburg, the country’s second largest city, the price index for resale apartments rose 5.31% during the year to Q1 2013.  When adjusted for inflation, house prices fell by 1.68%.

Russia had a massive housing boom from 2000 to 2007, with secondary market prices skyrocketing by 436% while primary market prices rose 362%.  Property prices started to weaken in late-2008, and began falling in the second quarter of 2009.

At RUB 48,795 (US$ 1,485) per sq. m. the average price of new apartments is still 7.6% down in the first quarter on the 2008 peak price, which was RUB 52,799 (US$ 1,607) per sq. m.

According to the Land Code of 2001, private ownership of land properties is allowed for both locals and foreigners. The legislation was extended to Moscow in January 2006.

Small but expanding mortgage market

Total outstanding housing loans increased 31.5% during the year-to-end Q1 2013. Around 94% of the loans were in rubles, while the remaining 6% were in foreign currency.  This reflects less an expanding property market, than an expanding mortgage market.

In the first 9 months of 2012, every fifth property (20.5%) registered in housing deals was purchased with a mortgage loan, according to the Federal Registration Service, especially on the primary market.

In 2006, laws underpinning mortgage-backed securities were introduced, allowing banks to refinance housing loans for the first time.

Key interest rate on hold

In Q1 2013, the average interest rate for ruble-denominated loans increased to 12.9%, up marginally from 12% in Q1 2012. In contrast, the average interest rate for foreign currency-denominated loans was slightly down at 9.7%, from 9.8% last year.

Russia’s key interest rate has been kept at 8.25% for ten consecutive months, after being raised from 8% in September 2012. Some longer-term rates, however, were cut, such as the one-year repo, which fell from 7.5% to 7.25%.

Rental yields are low

Moscow is the world’s 4th most expensive city to live in for expatriates, according to the 2012 Mercer Cost of Living Survey. Rent payments are commonly in US dollars or euros, payable on a monthly or quarterly basis.

In December 2012, the average rent for elite apartments with a total area of 80 sq. m. to 150 sq. m. was US$6,365 (RUB 208,225) per month, up by 0.5% from the same period last year, according to Knight Frank. Although the supply of luxury properties grew in 2012, the total primary market stock fell from 950 flats in June 2012, to 745 units by end of 2012.

Despite these very high rents, the average gross rental yield in Moscow’s upper-end areas was a meagre 3.9%, down by 0.3% on the previous year, according toGlobal Property Guide research (June 2012).

St. Petersburg apartments generate higher yields than Moscow, with an average yield of around 5.7%. The yield for 120 sq. m. apartments was lower, at 4.74%.

New laws affecting property market

In 2013, new laws expected to affect the real estate market have generated significant protests.  The proposed legislation requires foreigners and Russians to register their permanent address after 90 days of changing address. Those who fail to register will be fined from RUB 2,000 (US$ 60) to RUB 3,000 (US$ 90), which could go up to RUB 5,000 (US$ 150) in Moscow and St. Petersburg. Landlords will also pay up to RUB 7,000 (US$ 210) for every unregistered occupant residing in their properties. Fake registrations or registration of a person who doesn’t reside at a property could lead to a fine of up to 500,000 (US$ 15,000) and a 3-year imprisonment.

The Russian Supreme Commercial Court issued a legal opinion concerning landlord-tenant relations on March 21, 2013:

• A lease agreement may be entered into for future properties, it also applies to buildings whose ownership titles have yet to be registered but are already operational. If the landlord fails to hand over the premises because the building has not been constructed, the tenant may recover damages.
• If it is proven that the building or the premises are an unauthorized construction, no lease agreement may be entered into for future properties. This also includes a situation where a lease agreement is subject to a condition that the landlord will go to court to have title to the unauthorized construction facility legally recognized.

The basis for taxation of a property tax from book value (current basis) to market value of the property was supposed to be introduced last January, but the process was delayed due to continuous discussions on exemptions for various categories of property owners.

The parliament also plans to implement a RUB 1.5 million cap on tax deductions from interest paid on mortgage loans. Currently, all interest payments on mortgage loans are tax deductible.

Economic slowdown in 2013

Russian economic growth slowed in early-2013. The continued recession in the Euro area affected investments in Russia, as well as demand for its commodity exports, causing GDP to grow by only 1.6% y-o-y in Q1 2013, its weakest growth since 2009, according to the Federal State Statistics Agency (Rosstat).  GDP is expected to grow by only 2.3% in 2013, and the World Bank has cut its projection from 3.3% due to weaker than anticipated investment demand and delayed recovery in export demand. Russia’s economic growth was 3.4% in 2012.

The country fell deep into recession in 2009, with GDP contracting 7.8%, after global energy prices dropped. It was Russia’s deepest recession in 15 years, after robust economic growth from 1999 to 2008 thanks to booming energy and commodities revenues. The recession was followed by a recovery, with Russia’s GDP growing by 4.5% in 2010 and 4.3% in 2011.

Russia’s unemployment rate has fallen from over 9% in January 2010, to around 5.2% in May 2013. However unemployment ranges from 13.3% in North Caucasus Federal District, to very low rates in St. Petersburg (1.2%) and Moscow (1.6%) (Rosstat, May 2013).

Inflation was around 7.4% in May 2013, the highest rate in 21 months, driven by regulated prices and food costs, and significantly higher than the Russian central bank’s target of 5% to 6%. IMF expects inflation to slightly fall in 2013, to 6%.

Russian depositors big losers in Cyprus

Cyprus was recently granted a €10 billion bailout by the European Commission, ECB and IMF, making it the 5th country to receive a bailout. Cyprus is a tax haven for investors – mostly Russians, who own around 40% of Cyprus bank deposits.

The downfall of Cyprus’ two largest banks affected wealthy Russians, who invested their money in the country.  They are now facing write-downs of around 30% to 40% for accounts with more than € 100,000. Moody’s Investors Service (MCO) estimates that Russian individuals and companies have at least $ 30 billion in Cypriot banks. The Russian government has stated that it will not compensate Russians who have lost their money in the Cypriot financial crisis.

Cyprus received aid from Russia during the crisis, with a € 2.5 billion emergency loan to cover its 2012 budget deficit. Russia also agreed to restructure that loan in April 2013. According to Russian Finance Minister Anton Siluanov, the restructuring terms sought by Cyprus would amount to a 10% writedown of the loan. The terms of Russia’s new credit agreement with Cyprus weren’t disclosed by President Vladimir Putin.