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Home economics

Mortgage deals are pushing demand for mid-priced residential property through the roof. By Ben Aris.
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The irony of the Russia financial crisis in 1998 was that from the

outside the country looked like a basket case, but from the inside all

the local businessmen could see was Russians with cash to spend. And

the first thing they bought was somewhere decent to live.

The rouble may have been cut to one-quarter of its value in dollar

terms, but that rouble was in Russian citizens’ pockets rather than on

company debt sheets. Devaluation re-monetarised the economy and by the

end of 1998 wage arrears had fallen to nothing. It was the start of an

extended shopping spree that still shows no signs of abating, and

fuelled a boom in the residential property market.

Stroy Metrosurs is a leading developer of affordable housing for the

emerging middle class. A pre-crisis supplier of construction materials,

the company refocused on developing residential apartments two years

ago and has been struggling to keep up with demand ever since.

“We have already sold 200,000 square metres in the Moscow region and

have another 1.3 million sqm in various stages of development. Between

one-third and half of these buildings are already sold,” says Andrei

Veselov, commercial director of Stroy Metrosurs.

Cash in hand

One of the quirks of the residential property market is that Russians

normally always buy their apartments outright and in cash (literally).

As everyone was given the apartment where they lived as part of the

mass privatisation of the early 1990s, the amount that a successfully

middle class family needs to raise to move to a better apartment is

within reach without having to borrow.

As mortgages make their first appearance, the circle of those who can

afford to move is widening quickly. Real estate experts are confidently

predicting a boom in the residential market over the next two years and

prices are rising by 30% a year and even faster in the most desirable

parts of the capital.

Mid market clients

While the real estate funds and private investors are targeting the

more lucrative office and elitni dom (high-class apartments for the new

rich), Stroy Metrosurs is selling apartments in the suburbs of Moscow

for between $500 and $600 a sqm, against the $2000 to $10,000 a sqm top

quality housing in the centre. Mr Veselov says that demand is so high

their only constriction is the ability to raise affordable money.

“We have invested $25m of our own equity, we issued Russia’s first

small rouble-denominated bond of $10m in 2002 and we have had total

bank credits of $100m, but all this money is short-term and relatively

expensive,” he says.

As all the apartments have already been sold by the time a building is

completed, the company can always finance more construction. But Stroy

Metrosurs has bigger ambitions and wants to begin projects in Russia’s

untouched European regions next spring.

Hoping to tap the international capital markets, the company is in the

process of preparing its books for a possible IPO by the end of the

year. If this goes well then it is looking further down the road to a

Eurobond issue in the next two years.

“The market has a tremendous demand for housing,” says Mr Veselov. “The

economy has stabilised and the first thing people want to improve is

the standard of their housing.

“Gosstroy [the state committee for construction] estimates there are

three million families who want to move to a new home in the next three

years. That’s $60bn worth of housing just there.”

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Read more about:  Central & Eastern Europe , Russia