The scene is the same in New York, LA & on the San Francisco Peninsula: Russian buyers are gobbling up the cream of the cream when it comes to US real estate. You put a residential property on the market with a price tag of $10M, or $50M, or $100M…. And you kind of know (and hope) that a Russian buyer is at the corner, ready and able to make a cash offer.
No complaints here. It is comforting to know that someone appreciates the beauty & value of our priciest homes and… can afford them. If it were not the case, the high end could not sustain today’s price levels. Besides, I might be out of work, along with thousands of hard working people whose livelihood is dependent upon the free flow of our trickle down system.
Understand that our trophy homes are not the only ones being coveted by the Russians. The picture is a duplicate copy of what’s happening in Paris, or London, or whatever big international metropolis where big money wants to sleep and wake up bigger. Of course this frenzy is not exclusive to any one group of foreign buyers. In recent years, we have seen a lot of Chinese and Indian buyers investing colossal amounts of cash in US real estate, but the seemingly insatiable appetite that Russian buyers have for the best real estate anywhere is unique in the sense that top prices don’t scare them a bit. They don’t want to over negotiate and risk losing the deal.
Curious by nature, I wanted to try to know more about the Russian phenomenon. I thought I knew quite a bit about Russia for having covered, in a previous life, Eastern Europe questions for magazines. Well, the Russia I knew is no more. The Russia I knew was John Le Carre’s cold war version. Today, we are talking about a much different country, a country where the power is in the money. I had to plunge into docs from the Rossiyskaya Gazeta (the official government daily) and an excellent article from Alison Gregor for the NY Times to better understand what’s going on.
The Russians believe in real estate. Just like in the US, real estate represents the lion’s share of everyone’s worth. It may be interesting for many to learn that Russia has a level of home ownership (about 77%) exceeding ours (67%), and contrary to the norm in the US, almost no one over there has a mortgage! No, it does not mean that all buyers are loaded, far from it; the simple reason is that the State gave people the homes they occupied after the collapse of the Soviet Union in 1991. Nice. That sure did not happen in my neighborhood!
The Russian real estate market, not unlike ours, has peaked and crashed many times since its privatization. 2000 to 2007 was boom time, as prices multiplied 6 times. The following year and in 09, due in part to the global economic crisis, prices went the other way, down as much as 50%. Of course the weakness of the currency had something to do with this, as real estate transactions in Russia are quoted and paid in US dollars. Even though the dollar was hardly strong in those days, the ruble depreciated deeply against the dollar, causing purchasing costs to skyrocket out of reach.
The crisis hit mostly the low end, constituted mainly of aging Soviet era housing stock. Nearly 80% of the country’s population lives in apartments. Interestingly enough, the high-end came out of the crisis looking good, propelled by the huge bonanza that benefited the wealthy elite: those new business tycoons closely associated with natural gas (Russia is the leading exporter), oil (Russia is the 2d largest exporter), and precious mineral reserves like platinum, gold & diamond.
As we Americans know well, when money flows, real estate thrives. Prices in Moscow and, to a lesser degree, in St. Petersburg (the two cities hosting the quasi totality of government, financial sector & large private businesses), have nothing to envy to other world capitals.
In Moscow, you pay about $850 per square foot for housing these days, but the bill can easily quadruple to $3500 (or more) if you do your home shopping in the “Golden Mile”, the high-end district flanked by the Moscow River. At that rate, a 6,000 square foot mansion will fetch over $20M. We are not far from Manhattan prices.
By the way, even though Moscow is not exactly (yet) an international hub for tourism or business, Americans and Europeans buy real estate there. They usually are looking for postcards locations near the Kremlin, up to a couple of millions. The buying process is very similar to ours and the ownership rights are similar as well. Want to buy a flat in Moscow?