We could see something quite similar in the last weeks of September, with the shocking financial news influencing the inactive real estate market. The news looked like reports from a battlefront. The USA of course played the main part; both positive and negative news from the States always provoke a significant kickback on European and Asian markets. At first the U.S. Treasury Department claimed that it was willing to spend $200 billion to support failing mortgage giants — Freddie Mac and Fannie May. Actually they were taken under the government’s control. Then the White House didn’t listen to Lehman Brothers’ cry for help, and neither did anyone else, stopping all attempts to save the 4th largest investment bank. Lehman Brothers’ owners announced the beginning of bankruptcy procedures. Another investment leader, Merrill Lynch, in attempts to avoid total failure was sold to the Bank of America. U.S. Secretary of the Treasury Henry M. Paulson announced that the Treasury will not support Wall Street. But the next day the U.S. Treasury tried to find $85 billion to prevent the world’s biggest insurance company, AIG, from bankruptcy. It was nationalized as well - promises are promises, but there are 74 million AIG stakeholders in the U.S alone. It is unwise to treat them badly right before the elections. Judging by the September Department of Commerce report, new building volume on the housing market went down by 6.2% and reached a level of 895 thousand. It is the lowest level for the last 17 years. Over 4 million mortgage credits were not paid on time, 9% of the households are at risk of credit default — a record level for the last 30 years. Unemployment rates are increasing, consumption is failing — the overall picture is, to put it very mildly, a mess. Under the pressure of these events, shocked indexes dropped not only in New York but in Tokyo, London and Singapore as well. Russian finance minister Aleksey Kudrin promised that Russia will remain an “island of stability” in an international financial storm, but Russian financial failure turned out to be both deeper and faster.
Get down and do some push-ups!
By September 17th Russian companies value had fallen dramatically on the RTS and MICEX markets. Gazprom lost 71.6%, Sberbank — 78.5%; Lukoil’s 64% fall seemed almost a success. In attempts to avoid bankruptcy Kit-finance bank was sold to a new owner. The Russian government stopped all stock trading. On September 17th and 18th a powerful package of crisis-proof measures was launched. Market-defining banks — Sberbank, VTB and Gazprombank – were given 1.5 billion rubles from the budget. The Central Bank of Russia gave orders to lower banks reservation norms for the obtaining funds — it helped and put an extra 300 million rubles into circulation. Loan requirements were lowered. 60 million rubles were pumped into mortgage support programs. On Friday 19th trading was resumed and the RTS market won back 20% on the first day. Igor Jigounov, vice-president of City Mortgage bank says the following: “The bankruptcy of the 4th largest investment bank had a negative influence on international markets. Major European stock indexes dropped. Analysts think that it’s not the end point and bankruptcy of some of its partners will follow. A chain reaction can spring up in the international financial system which is going through hard times now, as this crisis is the largest since the World War II.” With all this going on Mr. Jigounov thinks that the consequences of the crisis “won’t be highly influential on the Russian market”: there are funds, obtained in the gas and oil trade, and there are sufficient official reserves, so there are no reasons for dramatic fluctuation of the ruble exchange rate. The head of the mortgage credit department of Saint-Petersburg Alfa bank branch Vyacheslav Mikhailov admits: “The problems turned out to be much tougher than we had expected a month ago. We depend greatly on foreign investors, who are taking their money away from all the risky markets… just to remain stable.” Mr. Mikhailov thinks that Russian financial markets will be dependant on government action. But Alfa bank is continuing to increase the amount of mortgage credits and credits to construction firms, despite the difficult market situation: “These credits will be definitely be paid off,” claims Mikhailov. But he can’t ignore the possibility of a negative scenario: “Today no one knows where the risks are”. The crisis consequences are already obvious now: project funding and mortgage credit amount will be reduced, client requirements will be toughened and interest rates will rise.
Crossroads
The real estate market has had a typically scandalous, albeit delayed response. Sergey Polonsky, head of the Mirax group, and Stroymontazj president Arthur Kirilenko made statements that made a racket. Polonsky claimed that Mirax Group was postponing for at least a year the implementation of projects that are in early stages. Construction of 10 million square meters of housing will be frozen. Now the company credit portfolio is about $850 million, 20% of the commitments must be repaid before April 1, 2009. Mirax is ready to sell up to 4 million square meters of housing in Moscow — but will anyone buy it? This spring, when sorting through guests at his party in Nice, Mr. Polonsky suggested: “Anyone who don’t have a billion — get the f ... out!” Some day he might need to say the same thing to himself. Arthur Kirilenko, commenting on the statement of his partner, was a bit more restrained: “Since the beginning of the mortgage crisis in the U.S. we haven’t acquired new projects. All funds are accumulated for the realization of the program that was created up to 2011.” An auction held in the Property Fund showed opposite expectations, precisely against the backdrop of the index level collapse and paused RTS trade. Five plots for housing in the 58th block of the Northern Seaside Area were being sold. They were more or less equal in size — 1.5 hectares (about 30,000 square meters of housing) each. The initial price of about 320 million rubles was more than doubled during the auction. All plots were sold and the final land price was more than $700/sq.m. Four “spots” out of the five were bought by “LenSpetsSMU,” the last one — by IPS Concern. LEK Company was bidding as well, but finally had to withdraw from the race. Houses on these plots are to be constructed in 40 months. President of the the Etalon-LenSpetsSMU holding Vyacheslav Zarenkov is sure that there will be no crisis in the market and he predicts a 40% prices increase by 2010.
Estimates
The mass housing market is being influenced by objective (credit difficulties, shortage of land, etc.) and subjective factors (rumors, inflationary expectations and official statements). Sergey Drozdov, the head of Petersburg Real Estate, believes that the situation can be precisely judged by the dynamics of late September — early October sales: “If demand will grow at about 30% — then the market will be in its normal state.” So far, compared to the April maximum, the secondary market has experienced a 25-27 fall. “The rental market yield beats all records,” Sergey Drozdov noted. “Mainly because of mortgage inaccessibility. This gap between the dynamics of rental rates and other indicators appeared ... because of mortgage transactions being reduced – from 25-27% to 12-15%.” This fall had the least influence on cheap and small housing. Suburbs that were not valued much previously are getting popular: Shushary, Gorelovo, Shlisselburg. “There is no reserve for price increases,” says Drozdov. “The drop in demand is being partly compensated by the infusion of budget money into various city programs.”CEO of the Bekar estate agency Sergei Kozlov notes that sales have fallen by half (from their maximum). “The situation will become clearer in October,” he explained. “Limited but steady demand still remains in the typical segment. ... People still need to solve their housing problems – because of family circumstances or for other reasons. The number of mortgage clients will be reduced. “Head of Adveks company Vladimir Gavrilchuk is confident: “The problem is in the efficiency of payment system. Bonds and the IPO have run out, but they were not very important for developers. Banks’ liquidity problems and their ability (or inability) to give credits to construction companies are much more serious. Not overcoming a liquidity crisis will result in an inevitable failure of some developers’ deadlines and their not fulfilling commitments to shareholders. Perhaps some will reduce prices. No one knows what will happen next as there are no precedents. The current instability is happening in a situation of large reserves and a relatively flexible economy that looks quite good.” The S.E.R. company notes a revival in sales in the Zenit complex on Koroleva Street: some small studios, modest two-room apartments and five variants of one-room apartments. Prices are lower than average: from 81 to 93 thousand per sq. m. “We aren’t going to start any new projects — says the head of the S.E.R. construction company Pavel Belousov. “We are waiting for the crisis to try buying cheap plots from those developers who have a lot of land, but little money.” In the mean time the prices of building materials — brick, mortar, reinforcement — went down.