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Cablegate: Unlocking Russia's Housing Market Potential: Views

VZCZCXRO1518
RR RUEHLN RUEHVK RUEHYG
DE RUEHMO #1450/01 1440622
ZNR UUUUU ZZH
R 230622Z MAY 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 8218
INFO RUEHLN/AMCONSUL ST PETERSBURG 4952
RUEHVK/AMCONSUL VLADIVOSTOK 2826
RUEHYG/AMCONSUL YEKATERINBURG 3174
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 MOSCOW 001450

SENSITIVE
SIPDIS

STATE FOR EUR/RUS

E.O. 12958: N/A
TAGS: ECON EFIN EIND PGOV RS SOCI
SUBJECT: UNLOCKING RUSSIA'S HOUSING MARKET POTENTIAL: VIEWS
FROM AN INTERNATIONAL FIRM

-------
Summary
-------

1. (SBU) Improving Russia's housing sector is often mentioned
as one of the new government's highest economic priorities.
To better understand the issues at play, we met with a series
of experts in April and May. Sergey Riabokobylko, Senior
Executive Director, and Denis Sokolov, Head of Research at
Cushman and Wakefield ) an international real estate
services company active in Russia ) told us the sector has
great growth potential, but that this potential is blocked by
both structural and psychological factors and that unlocking
it will require government action. End Summary.

--------------------------------
Russia's Stagnant Housing Sector
--------------------------------

2. (SBU) Sokolov and Riabokobylko said their company focuses
on commercial real estate in Russia, where they directly
manage properties. However, they said Cushman and Wakefield
is also involved in residential projects in Russia as well,
where prices have been rising rapidly. The company usually
serves as a "catalyst" for projects by linking up developers
with financing and then advising on marketing strategies.
According to the two executives, the sector has great growth
potential but realizing that potential will be a long process
given the relatively undeveloped state of Russia's
residential real estate market.

3. (SBU) Riabokobylko said five years ago Russia's mortgage
market was non-existent. Last year it grew from 1.3 to 2.3
percent of GDP. Although a significant increase, mortgage
penetration remains low compared to Poland, Hungary and the
Czech Republic where mortgages have already reached 10-15
percent of GDP. Sokolov said another telling statistic is
the level of indebtedness to equity. In Western countries
this approaches and in some cases even exceeds 100 percent.
In Russia, the corresponding statistic is 5 percent. Sokolov
stressed that these statistics were evidence of the sector's
lack of maturity but also of its enormous potential as a
source of long term financing in Russia. If the economy
discovers a way to unlock the enormous wealth tied up in
Russia's housing, it could have global financial
implications.

4. (SBU) Sokolov said there are serious structural obstacles
to growing the residential housing sector. 85 percent of
Russians live in housing that they and their families
received free from the government at the time of the Soviet
Union's break up. This housing is extremely difficult to
price. A 1,000 square foot apartment in central Moscow, for
instance, on paper might be worth over a million dollars, but
there are relatively few potential buyers. Since it is
difficult to sell, it is difficult to move into newer, better
housing.

5. (SBU) Moreover, Sokolov said, much of this housing is of
poor quality and since Russians lack a sophisticated
understanding of housing as a financial asset, they generally
spend little time or money maintaining or renovating their
homes. The government has reported that two-thirds of all
housing is in need of repair and 3.2 percent is officially
uninhabitable. Finally, he noted that although long-term
mortgages are readily available, they are prime mortgages
with prevailing interest rates that average 12.5 percent, too
expensive for most Russians.

6. (SBU) Sokolov said the obstacles are also psychological.
Russians have yet to overcome their lack of confidence in the
future and in saving. As a result, Muscovites spend on
average 130 percent of their income, relying on rising real
incomes to finance growing consumer debt but making little
provision for the future, especially with respect to
upgrading their housing, which is simply unaffordable for the
average Russian.

--------------------
Unlocking the Sector
--------------------

7. (SBU) Sokolov said unlocking the housing sector should be

MOSCOW 00001450 002 OF 002


a priority of the new government. He argued that the
psychological impediments would dissipate over time,
especially since younger Russians were much more
sophisticated when it came to taking on long-term debt, but
structural obstacles needed to be addressed head-on.
Although market solutions were preferable, the State was
responsible for a number of these obstacles, and as such, had
an essential role in speeding Russia's development of a
modern, market driven housing sector. The great deal of pent
up demand among Russians of all economic classes for better
housing would only increase as the economy continued to grow
and expand and as income levels continued to rise.

8. (SBU) Sokolov said the key for the government would be
encouraging a supply response to meet this rising demand, and
in particular, taking steps to address the structural
obstacles. For instance, the lack of land near city centers
zoned for residential use was a major cause of inadequate
supply. Much of this land is still zoned for agricultural
use and the shortage is driving up the remaining urban land
prices, contributing to the explosive growth in real estate
prices. Moreover, given the high cost of the land,
developers are more likely to build luxury apartment
buildings, which are easier to market and provide higher
returns than housing that would appeal to the middle classes.


9. (SBU) Sokolov said the National Priority Project (NPP) in
housing forced the GOR to allocate some land for residential
development. However, this was done through an auction
process that Sokolov described as "not exactly transparent."
The prime, scarce plots that the GOR decided to auction off
were acquired by developers with insider connections, who
then built expensive homes for Russia's elite. Sokolov said
the government should make still more land available to
developers, but through a much improved auction process.

10. (SBU) Sokolov said the GOR also needed to aid the
sector's development by improving the social services and
transportation networks in suburban and exurban areas. This
would lower development costs and create incentives for
building more affordable housing. Finally, Russia was still
over centralized and the government could provide incentives
to people to relocate from Moscow, reducing housing pressure
in the capital and spurring economic development, including
the construction of better housing, in the regions.
RUSSELL

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