All Those Clever Bankers
¢ by the Mysterious Flying Miser ¢
I found this on Global Property Guides:
“For much of 2008, Russia’s housing market seemed insulated from the global financial meltdown. However, the situation turned nasty during the last quarter of 2008. Property prices fell, transactions and sales plummeted, projects were cancelled or shelved, and what limited mortgage lending there was available dried up. Although the price increases in H1 2008 were significantly less than during the past three years or so, they caused satisfaction in Russia, given the house price falls in most Western European and other developed countries.
“However, all hell broke loose after the Russian stock market crash of September 2008, caused by contagion from the global financial crisis, and the realization that Russia’s breakneck economic growth cannot be sustained due to falling energy and commodity prices. The same realization hit property investors and speculators. The property bubble finally burst, with the varying estimates of the price fall.
“While countries around the world were up in arms as fuel and commodity rose, Russia benefited from them. Russia has the world’s largest natural gas reserves, the 2nd largest coal reserves, and the 8th largest oil reserves. It is the world’s leading natural gas exporter and the second leading oil exporter. In 2007, it was the world’s top oil producer, overtaking Saudi Arabia.
“However, global commodity and energy prices softened greatly in the second half of 2008 due to the global economic slowdown and the financial turmoil. For instance, the average price of Europe Brent oil fell from US$132 per barrel in July 2008 to US$39.95 in December 2008, before rising slightly to US$43.32 in February 2009. The last time the price of oil was that low was in 2004.
“… several major developers have now put new projects on hold. The Mirax Group, Russia’s largest property developer, announced in September 2008 that it was halting work on 10 projects, for a minimum of one year. The 10 projects make up 83% of the company’s total portfolio, and amount to 10 million sq. m. of real estate. Mirax cited the cost of credit as its main reason for freezing the projects. Other developers such as Sistema-Hals, Inteko, and the PIK Group have also announced cancellation or suspension of real estate projects.
“Russia’s real estate companies are mostly owned by Russia’s oligarchs. The credit, real estate, and stock market crises have severely affected their fortunes. Many Russian billionaires have been dropped from Forbes annual list of the world’s billionaires, with the total number of Russian Forbes list billionaires falling from 101 in 2008, to 49 in 2009. Those dropped are mostly into real estate, including Sergei Polonsky, chairman of Mirax Group. He lost around US$900 million of his 2008 US$1.2 billion net worth.
“The tightening credit market has made it more difficult for homebuyers to get a mortgage. Previously, banks only required a 20% down payment for home purchases. Now this has been raised to 30%. The minimum monthly income requirement for loans has been raised to RUB25,000 (US$720), from RUB15,000 (US$432). Homebuyers must also prove that their income is taxable and comes from legitimate sources, a process that involves certification from several government officials.
“Now rents have started to fall, along with property prices. Rents for economy-class, one room apartments fell by 8% from November to December 2008. Rents for other units fell from 4% to 6% over the same period. In January 2009, Vedomosti, a business newspaper, reported that rents in Moscow have fallen by 10% since the beginning of the year. They predict rents will drop by another 10% by summer. Another factor contributing to the weakness of the rental market has been the privatization of state-owned housing units. Owner-occupancy rose from 41% in 1995 to 70% in 2004. About 94% of households received their units free of charge.
“Russia is a highly corruption-prone country, and the environment makes no one’s life easy. Getting permits for renovation and everything else almost always involves bribes. Buying land is not easy. One problem is the system of land registration - changes in law and transfer of ownership are not well documented. A title search must be conducted to ensure that there is no lien on the property. This creates a fundamental insecurity for owners. Predatory mafia-like groups make a business of launching attacks on private owners, liaising with corrupt municipality officials and corrupt land registry officials to dispossess the rightful owners.
“Real estate transactions, purchases or leases, in Russia are quoted and paid in US dollars. This creates another concern, because property prices and rents may move. Not because the value of the property has changed, but because the ruble has appreciated or depreciated. Since June 2008, the ruble has depreciated sharply against the US dollar; from RUB 23.357 in June 2008, to RUB 35.816 per US dollar in February 2009. So those who committed to buy or rent properties in June last year must raise around 50% more money to continue the transaction. This cost-increase has added to pressure on the housing market, leading to its crash.
“With the multitude of problems confronting Russia’s housing market, recovery will likely take some time. The prices commodity-based house price boom was clearly unsustainable. Now, Russians are desperately clamoring for real reform.”
From Russia Today:
“The slump in Moscow real estate prices has potential buyers waiting on the sidelines for a developer to be pushed to the brink. Market watchers say this is a serious possibility. The risk of major bankruptcies hand over the real estate sector (sic), with a further downturn in prices likely should any major property developer be forced to unload developments on the cheap.
“With big property developers such as Mirax, and DomStroy all facing possible bankruptcy, market watchers, such as Denis Sokolov, Head of the Research Department Cushman & Wakefield at say this is quite possible. ‘The likelihood is pretty high and I think we’ll see several bankruptcies. Bankruptcy is a correction for the market. Those players that had a wrong business policy will fail.’”
From the Telegraph — Russia and Brazil crumble as commodity prices crash (Oct 2008):
“Oil, grains, and industrial metals all crumbled as the week began despite the passage of the Paulson bail-out plan in Washington and dramatic moves by European governments to shore up their banking systems, compounding the steepest commodity crash in over half a century.
“The sudden shift in commodity sentiment has led to a massive withdrawal of funds from frontier markets, triggering stock market routs across Latin America, Asia, and Eastern Europe. The MSCI index of emerging markets fell 11pc yesterday in its worst day ever.
“Russia suspended trading after Moscow’s Micex index crashed 19pc in its biggest one-day drop since the 1998 default. The state-controlled VTB bank fell 25pc.
“Brazil shut the Sao Paulo exchange after the Bovespa index crashed 15pc in panic trading, led by flight from the resource giants Vale and Petroleo Brasileiro. Mexico’s Bolsa was off 7pc; India’s Sensex was off 6pc.
“‘The boom was fuelled by massive speculation,’ said Charles Dumas, chief strategist at Lombard Street Research. ‘Commodity derivatives in the spring had a face of $10 trillion, so it doesn’t take many bulls to sell and send prices crashing. Remember all those clever bankers saying this was the new investment medium, ‘uncorrelated’ with either assets? Well, it’s correlated now – downwards,’ he said.
“Stephen Jen, currency chief at Morgan Stanley, said the ‘glowing reputation’ enjoyed by emerging markets during the global boom was a deception caused by the easy-money largesse of the credit bubble. Strip that away, and the picture looks very different.
“Moscow has become addicted to the oil bonanza, ratcheting up spending so quickly that it may now need prices to stay above $90 to fund spending plans. Veteran analysts say they have seen this movie before.”
From RTT News:
Crude oil dropped below $70 per barrel on Friday as traders showed concern over energy demand. With the drop, oil gave back a good portion of its weekly gains.
