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The Russian economy is looking bullish - a positive sign for property investors wondering where to turn next The Russian property boom is showing no signs of slowing, as the explosion in global energy prices boosts Russia's economy and the sub-prime problems elsewhere push investors to look for new opportunities. 

Property returns over the last few years have been nothing short of overwhelming – some investors who bought property in Moscow ten years ago have made up to £1 million.  Average prices in Moscow grew by 10 per cent in 2007, with Knight Frank forecasting growth of 18-25 per cent in 2008 – but is Moscow still the best Russian property investment bet? 

Not according to the Global Property Guide, which recently downgraded its Residential Investment Rating on Moscow residential real estate from 'negative' to 'strongly avoid'. The company pointed out that Moscow property prices are now among the highest in Europe and that demand for residential property is still strong. However, rentals rates have not kept pace with rising Russian property prices – and this is making Moscow a less attractive investment proposition.

St Petersburg, on the other hand, has seen both rising apartment prices and an increase in gross rental returns over the past year – the city was named in the Knight Frank Annual Wealth Report as having one of the highest price growths achieved by prime residential areas (38 per cent). The 'oil towns' of Tyumen and Novabrsk also offer good investment potential, while Russian property on the Black Sea coast is tipped for major price rises. 

Russia's near neighbour, the Ukraine, is also being named by experts as a good investment prospect for 2008. Again, property along the Ukranian Black Sea coast is performing particularly well. According to property investment specialist David Stanley Redfern, investors should buy in this area before prices rise beyond their reach.

"One of the keys to making a sound investment is to strike while the iron's hot and to buy into a developing region before its prices and calibre rise beyond reach," said a company representative. "We've seen it before in emerging markets and we'll see it again I'm sure, but coastal Ukraine on the Northern Coast of the Black Sea has attracted an astounding amount of attention, managing to maintain its low profile and to be an unrealised hot spot of potential."

Russian and Ukranian property investors should ensure that they do their research before buying – both markets have a good deal of potential, but can present legal difficulties for inexperienced buyers.

Russia’s economy expanded an annual 8.5 percent in the first quarter, higher than economists expected, as consumer demand fueled an investment boom.

The expansion followed 9.5 percent growth in the previous three months, the Federal Statistics Service said on Monday. Growth in Brazil, Russia, India and China is outpacing the economies of the United States, Japan and the euro region, driven by wage growth, investment and consumer spending. The rapid expansion is also fueling inflation, which accelerated to 15.1 percent in May, and may be a signal that the economy is overheating, analysts said.

“I don’t expect any serious slowing in growth this year,” Alexander Morozov, chief economist at HSBC Bank in Moscow, said. “The risks are from rising inflation. The government doesn’t have a consensus that the economy is overheating — this implies that their first priority is sustaining fast growth, while the problem of inflation will be secondary.”

Russian industrial output grew an annual rate of 9.2 percent in April, the most in nine months, as output of trucks, cars and construction materials surged. Real wage growth has advanced more than 12 percent every month this year, increasing demand for housing and consumer goods. The government expects the economy, the world’s 10th biggest, to expand 7.6 percent this year after growing 8.1 percent in 2007.

Rosstat, the Russian state statistics service, issued a preliminary financial report on January 2008 yesterday. Economists say that the report indicates that the investment and consumption boom in Russia continues, in spite of the worsening world economic situation. A slight slowdown in retail cam be attributed to the ling holidays that month.

The volume of investment in January 2007 was up 19 percent, to 354.9 billion rubles, in comparison with January 2007. That month last year saw record growth of 26.9 percent over January 2006. January's industrial production was up 4.8 percent over the previous January.

Disposal income in January of this year rose 12.9 percent (nominally 28.5 percent) over last January, to 10,641 rubles. Real salaries rose 15.8 percent. These increases are fueling the consumption boom that has seized Russia. Retail turnover in January rose 14.1 percent to 911.6 billion rubles. Foodstuffs made up 45.1 percent of retail trade turnover in January 2008, down from 45.4 percent a year ago. Deputy Minister of Economic development and Trade Andrey Belousov reported yesterday that GDP growth in January was 7.4 percent.

While as reported yesterday The index of Russia’s manufacturers’ prices soared 25.2 percent on year in January, RIA Novosti reported the data of Federal Statistics Service. The growth in manufacturers’ prices was twice as much as the increase in consumer prices (12.6 percent). The prices of manufacturers gained 3.7 percent in January vs. December of 2007.

In the fuel and energy sector, coal and peat prices jumped 13.4 percent and the prices for crude oil and accompanying gas gained 4.3 percent. At the same time, the decline of 13.2 percent was noted in extraction of non-ferrous metal ores and the prices for certain oil products went down as well. The prices for residual oil, for instance, shed 5.6 percent, petrol prices lost 4.5 percent.

When it comes to processing industries, the prices of chemical production were fueled by the 15.5-percent increase in prices for other basic inorganic chemicals, the 12.8-percent growth in prices for fertilizers and nitrogen compounds, the 8.0-percent growth in prices for plant protection chemicals (pesticides) and other agrochemical products and the 6.5-percnet growth in prices for basic chemicals.


Meantime the prices of flats in Moscow continue to manifest skyrocketing growth. They surged nearly 10 percent between January to February, Vedomosti reported Thursday, pointing out that the analysts haven’t arrived at some common conclusion yet.

The figures are different. Some say the average price for a square meter in Moscow grew by roughly 7.8 percent from January 1, having climbed from $4,438 to $4,783 (the ruble growth was 7.9 percent, from 108,936 rubles to 117,595 rubles). But others speak of the 8,500-ruble increase from January 1, pointing out that, for some flats, the prices stepped up 15 percent in three weeks of February.

The increase covered all segments. Economy flats cost 7 percent more now, business class gained 6.7 percent and elite real estate increased 6 percent. The growth was above 15 percent in some parts of Moscow (one-/two-room flats in Zelenograd, South-East and North-West Districts).

The one-roomed flats are the obvious leaders with the prices soaring up to 20 percent. An ordinary flat with a room of 35,000 square meters cost $160,000 before the New Year, but the current price is $190,000.

Realtors give different reasons for this increase, ranging from the surge in demand and reduction in supply of secondary flats and tougher conditions for mortgage crediting to the general shift of investors from stock markets to the market of real estate.

Also the number of economically active Russians reached 75.3 million last year. The employment growth drove the unemployment level down to an unusually low level, and the increase in employment accounted for a roughly a third of economic growth. Russia had 9.4 million unemployed in 1999, 6.2 million in 2003, 5.6 million in 2005 and reached the record low of 4.6 million in 2007

Within the first half of 2008, an average price in the premium real estate market of new buildings in Moscow grew by 15.6%. This information is released by MIEL Holding's analytical consulting center.

According to analysts, within the second quarter of 2008, an average price of supply in the primary market of premium housing of Moscow increased by 3.5% and totaled 484,500 rubles per sq. m. In the secondary market, an average price grew by 6.1% and totaled 359,900 rubles per sq. m.

In June 2008, three-room apartments dominated (41.7%) in the secondary market of premium housing. The share of two- and four-room apartments was 20-24%. Multi-room apartments (5 rooms and more) made 13.3% of the supply volume. Traditionally, the least volume of supply among premium housing is on one-room apartments — 0.7%.

“Thus, for the first half of 2008, an average price in the premium real-estate market of new buildings grew by 15.6%,  in the secondary market of elite housing -by 12.5%,” said Vladislav Lutskov, the director general of MIEL. “Within the second quarter of 2008, prices in the secondary market of premium housing grew more rapidly, than in the market of premium new buildings. One could expect substantial changes in the market by autumn”.