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 
 
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Summary 
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¶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. 
 
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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