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Russian House Price Boom Sparks Fear ........

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  • Russian House Price Boom Sparks Fear ........

    Russian House Price Boom Sparks Fear of Banks Crisis if Real Estate Bubble Bursts


    The Business, London RISMEDIA

    A Chinese contractor has signed a deal to build the Federation Tower in Moscow which will become, if it is finished, Europe's tallest building. But it has led to fears the Russian capital's property bubble is unsustainable and may be about to burst.

    Developers are getting nervous after the China State Construction Engineering Corporation agreed to construct the 87-storey tower that will be the centrepiece of the Moscow City project.

    Some say the economies of developing countries have a nasty habit of collapsing just as a newly minted company flush with cash attempts to build a landmark building. The taller the building, the closer the country is to a crash.

    Russia's real estate market is booming. The cost of an apartment on Ostozhenka, Moscow's answer to London's Knightsbridge, has hit $10,000 (£5,700, E8,300) a square metre -- putting the Russian capital among the most expensive property markets in the world.

    Moscow has the highest concentration of billionaires in the world after New York. So there are still plenty of buyers for the swanky apartment blocks going up across the river from Gorky Park.

    This is not the first time a tower has been attempted. SBS Agro, once Russia's biggest commercial bank, commissioned a similar building in the mid-1990s but collapsed shortly after work began during the 1998 financial crisis.

    Real estate officials are also concerned about the safety of the 340m tall tower. The Moscow river's embankment is notoriously boggy. Stalin demolished the Christ the Saviour cathedral on the embankment to make way for the Palace of the Soviets, a skyscraper topped by a statue of Lenin. But work was abandoned when engineers decided the wet ground would not support a heavy building. Stalin made do with the world's biggest outdoor swimming pool.

    The head of one Moscow property company said: "One international engineering company has already walked out because they said the site won't support the tower. They should be sinking 100m deep piles, but instead all they have done is pour concrete into a hole."

    Despite the worries, Moscow is pushing ahead with the 15-year old Moscow City near Russia's White House and construction has started in earnest. Ground on the Federation Tower will be broken on November 1 and state-owned bank Vneshtorgbank has agreed to provide the first round of financing for the $530m project, making the tower the largest Russia-China joint venture.

    Moscow's leading developer, the Mirax Group, is organising the work which is expected to take two years. Mirax is owned by flamboyant businessman Sergei Polonsky, who had hoped to become Russia's first domestic space tourist last year. As a Russian, he insisted on a 50 percent discount and was turned down by the Federal Space Agency.

    The tower will be a symbol of the booming property market. Nearly every Russian was given their own apartment during mass privatisations after the collapse of the Soviet Union. But they have been unable to tap the billions of dollars tied up in bricks and mortar because there is no working mortgage market.

    The Kremlin has moved mortgages to the top of the political agenda and Russian banks issued $1bn worth of mortgages last year, up from nothing in 2000.

    Nataliya Orlova, chief economist at Alfa Bank, said: "There is strong political will in the Putin circle to develop mortgages and have a working system in place by 1/8the time of presidential elections in3/8 2008. Putin wants to promote mortgages as a panacea that will relieve the state of its social housing obligations."

    Mortgage lending is spreading into regions where prices are following Moscow upwards. The volume of mortgages is expected to reach $40bn by 2008 and some believe it could hit $100bn in a decade. About 70 percent of Russians own their home, but 70 percent say they want to move, according to research.

    But many bankers worry the property market is built on wobbly ground. The deputy director of leading mortgage lender DeltaCredit Kirill Dmitriev said he believed more than half the bank's credits have been taken out by speculators.

    Apartment prices have been growing at double-digit rates for two years, but the cost of one metre on Ostozhenka is more than double the average Russian's yearly income. In the hunt for hard-to-find returns, medium-sized banks have piled into real estate. Two have already hit problems after a large developer collapsed earlier this year. Analysts worry a property downturn could spark another banking crisis.

    News Source:

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  • #2
    Thanks Muppet for publishing this article

    Very interesting. It made me think whether I should hurry to sell my apartment in Moscow or not (it triplled in price since I bought it in 1999). By the way it is not far from that rising tower (it is further than 87 stories falling down though ;-)

    Hey, guys any ideas on this?