Russian Property Stocks Slump in ‘Overheated’ Market

By William Mauldin

Dec. 18 (Bloomberg) -- Russian property stocks fell after UniCredit SpA said real-estate prices are so inflated that they may need to drop by half to lure buyers back to the housing market and give the shares a boost.

OAO Sistema Hals, developer of a resort in the Olympic host city of Sochi, and AFI Development Plc, builder of the Mall of Russia in Moscow’s new financial center, led the slide, both sinking to record lows.

Moscow apartment prices have increased sixfold since 2003, making the Russian capital the world’s most expensive residential market after Monaco and London, Global Property Guide said in September. The average price has declined 9.2 percent since reaching a record $6,122 per square meter on Oct. 13, according to Property Market Indicators as of Dec. 15.

“Buyers are unlikely to return until prices fall substantially,” UniCredit analyst Roman Gromov, based in Moscow, wrote in a note to investors dated yesterday. “A few developers are already offering roughly 25 percent discounts, but we see no evidence that they are tempting buyers to return to the market.” Prices of property may need to fall 25 percent to 50 percent before demand recovers, according to UniCredit, which called the market “overheated.”

Only a fall of this scale would “make housing affordable to a meaningful proportion of the population,” the note said.

Funding

Sistema-Hals slid 17 percent to 299.99 rubles on the Micex Stock Exchange. The stock has lost 94 percent this year. AFI Development declined 4.3 percent to 67 cents, a record low.

PIK Group, LSR Group and Sistema-Hals face a “particularly difficult situation given relatively large short-term debt,” UniCredit said, adding that developers don’t have enough money to complete current projects and that banks, the major source of funding, have “almost completely ceased issuing loans and mortgages.”

Russian developer stocks won’t see a “rapid” rebound, Moscow-based Renaissance Capital said yesterday, adding that there is “little hope” they will catch up with global real- estate stocks. Goldman Sachs Group Inc. said Dec. 1 that Russian apartment prices may plunge 32 percent next year in dollar terms.

The Renaissance Capital Property Shares Index of Russian developers has lost 92 percent since its record high in June 2007, more than the 56 percent slide for the GPR 250 Global Index of world property companies since the beginning of June last year. PIK, a Moscow-focused apartment-building developer, has plunged 96 percent in that period.

Russian stocks, bonds and the ruble have tumbled since early August as oil prices declined, Russia fought a war with neighboring Georgia, and investors sold off riskier assets amid the global financial crisis.

OAO Open Investments, a property developer part-owned by billionaire Vladimir Potanin, fell 12 percent to $69 on the RTS Index in Moscow, its first decline this month.

To contact the reporter on this story: William Mauldin at wmauldin1@bloomberg.net;