Greg Thain of IMS -

At the end of last year and in the early months of this year, Moscow's property market was moribund. But as autumn arrives in Russia's capital, the market is picking up.

The big developers - Capital group, Mirex, DON-Stroy and others - all moved into the office or retail segments in addition to residential under pressure from bankers, who saw residential as a high-risk portfolio. But hindsight, of course, is a wonderful thing - residential has the real advantage of continuing to sell even at a lower level through any crisis, because people need houses and there will always be people changing jobs, changing location or having babies.

The first signs of the upturn in residential appeared in March and April when the average discount on pre-crisis prices stabilized at about 10%. There are many examples of deeper discounts of 30% to 50% in deals cut by companies desperate for cash, but the number of deals with such depressed prices was small. By autumn, the appearance of a steady flow of deals has brought some transparency to pricing.

The banks are also holding up prices, as they have taken over so many assets in lieu of defaulted credit and aren't keen to book losses, so are prepared to sit on these properties until the market recovers. Developers too small to have borrowed heavily aren't feeling the same selling pressure as their larger peers, so are also supporting prices.

Deals are also reappearing on the secondary market. Properties worth less than $1m are normally priced in rubles, so prices have been effectively cut by the devaluation of the ruble. For the more expensive properties of $5m and above, most of that stock was taken off the market during the worst of the crisis, as the owners weren't prepared to sell at discounts in what has been a largely cash-on-delivery business at this level. Amongst distressed deals still happening, there is probably a 20% discount to previous values.

The bankers who financed much of the construction boom in recent years, however, prefer office development with blue-chip clients and the cash flow that they can model. Trouble is, the office market has collapsed, with rents falling from well over $1,000 per square metre to between $300-$400/sqm. The outlook for the office market is dependent on the general health of the economy. As most businesses are still in the downswing phase of the crisis and cutting staff, it will be at least two years before there's any recovery in the office sector.

Retailers have also suffered badly over the last 12 months, though retail sales have held up remarkably well because the current crisis hit corporations harder than the consumer, most of whom still have a job and receive a salary, albeit a smaller one.

Greg Thain is chairman of IMS, a leading Russian-based marketing group

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