Russia with a GDP size of around USD 2 trillion, is the 5th largest economy in the world, followed by Germany, Brazil & France. Nevertheless, after an impressive growth in the recent times, Russian economy has entered into a phase of acute recession- with the GDP contracting by nearly 4% in 2015. The slowdown has been attributed to factors such as reduction of oil prices & international embargo on the country after its alleged interference in the Ukraine crisis. International Policy analysts believe that its combat mission in Syria is further adding to its economic woes.
Rise in Poverty & Poor Spending Sentiments
The impact on the contracting economy has been severe on the general public. Nearly 3 million more Russians have fallen below the poverty line, thereby making the total population living below poverty line as 19 million. There have been more job cuts & poorer pay hikes leading to weaker spending sentiments. According to Association of European Business, in 2015, total number of passenger cars sold have been almost cut down by half, indicating troubles in the middle income households as well.
Slump in Real Estate
Shrinking economy & poor buying sentiments have also been very detrimental to the Real Estate Industry of the country. It is in stark contrast with the prolific & attractive nature of the industry over the last couple of decades. After the fall of the USSR in 1991 & transfer of property rights to individuals from the state, Kremlin has been playing its cards smartly to exercise soft diplomacy on world stage through its real estate industry. The market was made open for foreign buyers, making it a hot platter for international investor fraternity. In the subsequent time, institutional investors such as private Wealth Fund Managers & Real Estate Investment Trusts along with global HNIs started heavily investing in the Moscow, St. Pittsburgh & other major Russian realty markets- Eventually leading to significant price appreciation.
However, things have reversed now with most of the major real estate markets in Russia facing a tough time. Property prices have been slashed & slowdown in transaction volume could be observed. Even among, wealthy investors there is an apparent tendency to hold to their funds & let the market further depreciate. The realty market is also suffering due to the surge in home loan rates, that is above 12% at the moment.
Silver Lining- Devalued Ruble Stimulating International Investment
All is not negative about the Russian real estate markets. The dip in prices is enticing a large number of foreign buyers to look into the Russian Real Estates. A devalued Ruble that has lost over 40% of its value when compared to the beginning of the year 2015, is enticing international investors to invest in Russia. Both across the commercial & residential classes, there have been an ample amount of investment emanating from foreign individual & institutional investors- leveraging a devalued ruble.
Another positive news comes from the industrial segment which in spite of economic contingencies, is showcasing significant growth. For instance in Moscow, in the industrial segment, the total take up has been in tune of 14,822 million Sq. Ft. in 2015, demonstrating a 35% rise compared to 2014.
The Future of Economy & Russian Real Estate Industry
Due to lower oil prices, the future of Russian economy looks bleak in the coming time as well. Incidentally the factors affecting the economy are mostly external in nature with Kremlin having almost no control on them.
According to Barclays, the economy is expected to shrink by 1% in 2016 & showcase a very modest 1.5% growth in 2017. According to Capital Economics, a global Macro-Economy Research House there might be some improvement in oil prices in the latter half of 2016, but till then the prices are expected to plunge, thereby indicative of harsher times for the economy.
Due to poor economy the overall real estate market sentiments are expected to remain slow in the near future. Declining real income will continue to effect customer spending. This will eventually affect the overall market sentiments along with real estate industry. Due to the ongoing crisis many of the Russian Oligarchs are also wary of investing in the Russian real estate. In order to park their capital safely they are looking into other alternative markets such as Dubai, Western Europe & even Greece, which is offering greater capital appreciation prospects.
Among individual cities, Moscow would ideally be hit hard more due to its higher cost of living that is at par with Western Europe. In comparison, St. Pittsburgh is expected to have a better outlook due to lower unemployment rate & moderate cost of living & upcoming industrial sectors.
However, a devalued ruble & cut in current price should attract more international investors to look into Russia. Similarly sectors such as industrial deals should keep the activity going on in the sector. The government is also trying hard to bolster the crisis stuck sector. In 2015, Russian government has subsidized USD 13 billion in housing loans. Such proactive steps are expected to make some positive impact on the sector.
(The article was originally published in “The Address”, Square Yards, monthly magazine)
