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Moscow's decade-long building boom is falling victim to the global credit crunch as record high interest rates squeeze developers in the world's third most expensive property market.
"Loan rates have climbed to ridiculous heights and the terms are very short," said Dmitry Lutsenko, a board member at Mirax
Group, the Moscow-based company building the Federation Tower, which will be Europe's tallest skyscraper when completed.
Mirax cancelled plans to develop 10 million sq m of commercial and residential space after interest rates on some loans rose to as high as 25 per cent.
Higher borrowing costs already are crimping demand for apartments, said Oleg Repchenko, head of Real Estate Market Indicators. Prices may fall in the fourth quarter and in 2009 post the first decline in 11 years, says the Moscow-based research group. The drop may reach as much as 30 per cent for some types of apartments by the end of next year, Repchenko said.
Prices for homes in Moscow have risen more than sixfold since 2003. In the first six months of this year, they increased 25 per cent to an average of 136,404 rubles ($5318) per sq m.
Since then, prices have climbed a further 13 per cent. Moscow is now the world's third most expensive location for residential properties after Monaco and London, according to Global Property Guide.
Investors should "steer clear" of Russian real-estate stocks including PIK Group and Sistema-Hals because the industry will be the country's "hardest hit" in a global recession, JPMorgan Chase says.
"The current situation in Moscow partly resembles Japan's real-estate crisis of the 1990s," UniCredit SpA analysts said yesterday.
"Liquidity risks associated with Russian property developers have never been higher," said analyst Julian Crush. He said developers will have to slow expansion or offer stakes in projects to raise cash for financing them.
Sistema-Hals, the property company of billionaire Vladimir Yevtushenkov, dropped 25 per cent to 75 cents yesterday in London trading, heading for the lowest since the shares began trading in November 2006.
PIK, the Russian developer with the biggest market value, has lost 78 per cent of its market value since an initial public offering in June 2007. OAO Open Investment, the country's second-largest publicly traded property company, has declined 52 per cent this year. LSR Group, the Russian developer and building-materials maker controlled by billionaire Andrei Molchanov, has fallen 64 per cent.
Mirax will decide by the end of the year whether to sell shares to the public to help finance projects, Polonsky said. The Federation Tower, due to be completed in 2010, will be 506m tall and will replace Commerzbank AG's headquarters in Frankfurt as Europe's tallest building.
The collapse of the US subprime mortgage market and subsequent global credit crunch has forced smaller Russian developers onto the sidelines, said Avni Akvardar, vice-president of St Petersburg-based Renaissance Development, whose projects include a 6 billion-ruble ($239 million) shopping mall in Novosibirsk, Siberia's biggest city.
Renaissance Development's clients include Oleg Deripaska, Russia's richest man. Deripaska's holding company, Basic Element, hired Renaissance to build an airport in Sochi, host city for the 2014 Winter Olympics, together with Strabag SE.
Strabag, an Austrian construction company in which Deripaska has a stake, said that it would delay a plan to create a cement unit in Russia because of the global financial turmoil.
Malls, Hotels London & Regional won't halt any projects in Russia because it already has financing from banks including state-run OAO Sberbank, Russia's biggest, Geovanis said. The company's projects include shopping malls in Penza and Kaluga in central Russia and hotels in Novosibirsk, Omsk and Rostov.
"It will be tougher for new entrants and smaller developers," Geovanis said. "But banks will continue to back large companies with good credit histories."
Russia's MosPrime overnight lending rate, a gauge of liquidity for banks, soared to a record 11.1 per cent on September 17, two days after Russia's Residential Mortgage Loans Agency raised its benchmark rate to a minimum of 12.65 per cent from 10.75 per cent, the highest rate in a year.
The agency won't work with banks that charge less than its benchmark.
- BLOOMBERG