special property report

     NevaNews has presented bullish commentary on property investment in this city of St-Petersburg for nearly 5 consecutive years now. Any readers who have acted on this bullish outlook, by buying property in this city, will now have property assets which will have appreciated: perhaps by 100% to 200%, perhaps 300% or more!
     Present property price levels and the foundation of such prices now reverses the earlier bullish view on property investment in St-Petersburg. Property prices in late 2007 have been spiked recently by speculation, greed, and a sort of monopolistic process, which does not seem to be now supported by fundamental financial nor sociological analysis. Certainly much new Moscow money has flowed into the St-Pete property market, but so have much short to medium term speculative funds. However entry prices in the alternative property markets of Eastern European countries now in 2007/2008 seem more attractive than St-Pete. This may cause the speculative funds to soon flow out of the St-Petersburg market.
     Today, buying an apartment or a room in a communal apartment in St-Pete seems no longer commercially viable. Yet there would still be about 15% to 20% of the central city in a communal style of ownership. How will the city address this? How will renovations continue?The cost of one 16 to 22 sq.m. room in the central district can easily now reach USD 70,000, even more. So to buy a 5 room (say 130 sq. m. in total with common areas include) communal apartment can cost USD 350,000, with at least another USD 100,000 to USD150,000 for renovations. It would also take about one year for the overall process to be completed, so the investors funds are tied up for that time period earning nought. With an interest allocation included the total can quiet easily top USD 550,000 , but in reality if a quick sale is sought it is probable the sale price or renovated market value will be far far less. So with prices as they now are, nearly every developer/renovator in 2008 of a center city communal apartment in St Pete is likely to do all this massive work for an overall loss. Is it therefore now not at all surprising that this sort of private eneterprise development, common for the past 5 years in this city, has now all but dried up. And what would happen if the same 130 sq.m was rented out? A gross return of say USD 25,000 to USD 35,000 per annum would be a good achievement in the present market – which is about 5% to 7% pa on one’s investment, less on a net basis. Not much sense in a marketplace where borrowing USD from large banks here costs 10% per annum! The dilemma the above ‘market’ situation creates is real, as the city adminsitration was seeking to move most communal people to the suburbs, using market forces. The only solution left for the city, if prices do not fall again, is to regualte the movement of city communal room owners out to high rise developments, perhaps built by the city administration. Not a savoury thought for the present room owners, who have in effect been caught in the price hike spiral, making their present rooms largley unsaleable at present prices.
     The “high rise” developments in the suburbs of St-Petersburg/Leningrad Region do not paint a price sustainable picture either.
     What was a USD 500 cost per sq.m 2 years ago is now on the market for USD 2000 per sq.m. Some higher. These are those 10 to 25 story monstrosities, built in ‘living areas’. Common now in many large cities worldwide. So for an 100 sq. m. high rise apartment home, how do 10’s of thousands of Russians afford the USD 200,000 or more? Average earnings are still low, around USD 8000 per annum, yet interest alone on USD 200,000 can be USD 20,000 p.a.? The population of St-Petersburg is still dropping (about 4.8 million now), although combined with the vast neighborhood of the Leningrad Region the total population may be 10 million people. But this combined North West Russian Region is for a land area larger than the country of Austria?
     Some say available bank credit has increased the demand and thereby fueled the price rises. And to some degree it has, as 30 year mortgages are now available for the average home owners, for the first time. But is this not just another sub-prime mortage market in the process of creation?
     Another explanation is that the cost of building has increased (as it has - but not doubled, nor quadrupled!). A further explanation is the greed of property developers and the on-going mentality that every deal needs to make a minimum of 100% a year! So when we review the weekly book showing the property for sale, in the centre and suburbs, it reveals tens of thousands of high rise suburban apartments which are coming up for completion. We are left shaking our head, asking where will all the buyers come from?
     Sure their will remain some niche developments, in the upper market areas, which may be immune to any coming doom or gloom in the property market here. There may even be an argument that high oil prices will create surplus internal dollars which may hold up the property prices of a whole city. But one day fundamentals always bring common sense back to property prices. Fundamentals like: rate of return being of earnings on capital invested, costs versus income, demand versus supply, property prices of nearby alternative markets/countries and more. Speculation and greed are short term phenomena, each being able to financially hurt individuals investors and home owners.
     Boom or bust? Every western country has seen property prices boom and property prices bust. Is St-Pete ready for a bust? Only the future can tell us the answer to this question. But now all short term to medium term central city property owners can consider selling to capitalize on what seems to be a presently overpriced market. All readers are urged to seek their own independent professional advice before taking any decision in the marketplace.