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Real Estate

Interview with Irina Yulmetieva
Irina Yulmetieva, Head of Residential Real Estate at Four Squares, spoke with PASSPORT about recent trends and prospects in Moscow’s residential rental market
Vladimir Kozlev

What is the biggest difference between Moscow’s residential rental market before the crisis and now?

The Moscow residential market changed significantly due to the 2008 crisis. The immediate effect was that the rental bubble that had been growing since 2003 popped and a small bit of sanity returned to the market. The main reason for this, and the main long term driver for change, was the large exodus of ex-pats renters in Q4, 2008/Q1, 2009 and the reduced financial ability of Russian renters to fill the vacuum left. We estimate that demand in total is still 20% lower than at the peak of the market.

What is the current situation in different segments—economy, business, elite—as opposed to the pre-crisis situation? In what segments is the current situation closer to what it was before 2009?

To give the reader an understanding of what each segment stands for, we will assume that “economy” implies rental prices up to $3000 per month, “business” $3000-$7000 per month and “elite” anything above $7000 per month (this can stretch up to $40,000 per month).

The market is most active in the economy sector. As the economy stabilised and new recruitment started again, demand, especially from Russian renters, improved relatively quickly in 2010. Current rental prices are close to their pre-crisis level. Interestingly, many of the expatriates, who moved to Moscow since the crisis, are young and without families, and they are more active in economy and business segments. This is clearly part of a general cost-cutting trend for Russian companies.

Demand in the business sector has also improved, but at a less impressive rate. We estimate that demand is currently 10- 15% below the pre-crisis level. The elite sector has been the slowest to recover; we estimate that demand is still 20-25% below the market peak. We recently placed a client into an apartment on Ostozhenka with a monthly rental of $25,500, however these types of lettings are rarer, and the pre-crisis rental price for such a property would have been higher.

What is the main lesson learnt from the crisis by landlords and end users? Is there something the crisis could have taught people but didn’t?

The crisis was a breath of fresh air for renters. The market had become pretty crazy, ridiculous prices, inflexible landlords and a take-it-or-leave-it attitude. Let’s not forget that the Russian rental market is still relatively immature, a lot of landlords simply didn’t know any better. The crisis has improved client service standards and partly redefined the relationship between the tenant and the landlord. The Moscow rental market has now moved to the next stage of development and maturity.

The biggest visible change is the improved attitude of landlords. They are more likely to listen to tenant requests, for example agreeing to include internet, satellite-tv and the electricity bills in the cost of the rent. Landlords are also more likely to agree to longer lease periods, with some contract rates fixed for 2-3 years. Previously this was very difficult to achieve. There will always be exceptions, some landlords still have long vacancy periods as they refuse to negotiate on price, but they are the minority. I think the biggest learning for everyone is that prices in Moscow don’t always have to go up!

At the same time, this doesn’t translate into a flood of available properties at the right price. There is still a deficit of well renovated properties, especially in the elite segment, and tenants may find choice is restricted. Apartments which are well renovated with the right price/quality ratio will be rented quickly. Some tenants still don’t understand this and are disappointed to find out that their preferred choice was rented by someone else whilst they were looking at more properties.

Is it possible to single out any current trends in the Moscow residential rental market?

The market is clearly less stable than previously, for agencies, landlords and the renters. The Russian economy is improving against a backdrop of global economic uncertainty, and this is clearly affecting company’s abilities to plan investment decisions and longer-term HR recruitment. This means that a pricing bubble is unlikely in the near future.

One gradual trend is the increasing use of relocation companies. A relocation company, as opposed to an agency, provides a wider range of destination services and works just on behalf of the client. Four Squares works as a relocation company in Moscow, we are in contact with all the main real estate agencies to ensure that our clients get the widest choice of residential properties. Often HR decisions about ex-pat residential packages are taken at head office, and in the more mature western markets relocation companies are the preferred choice. I am sure that this trend will continue in Moscow.

What are the prospects of the rental sector? What is your prediction regarding the prices in it different segments?

Ah, I wondered when you would ask that question. Some clients have told me that they have heard that rental rates will increase across the board by 20% in the next 12 months, but I think that to be excessive.

Prices within the sub-sectors will increase, but at different rates. Prices in the most active “economy” sector may indeed increase 10%-15%, but in the “business” and “elite” sectors I don’t see prices rising as much.

Pricing is also affected by choice of currency in which the contract is signed. For example, over the last six months the dollar has fallen 8% against the rouble, allowing tenants whose contracts are fixed in dollars to pay less for the property (assuming they receive a rouble salary). All currencies fluctuate though, this forex gain may change in the future.

In the longer term, the housing stock is still restricted in central Moscow, and as the Russian economy grows on the back of a recovering world economy we will again see rising rental prices. Moscow is set to remain a very expensive city for renters for many years to come.

In what way did the replacement of Moscow’s mayor have an impact on the rental market? Are there any longer-term ramifications to be expected?

There were no short-term effects due to a change in the Moscow mayor, regulations didn’t change and neither did supply and demand. What will have an impact further down the line though is the knock-on effect of the partial freeze in real estate development that is taking place as the new team settles into city hall. Any reduction in commercial activity dampens rental demand.

The new mayor is implementing a number of plans to restrict more commercial development in central Moscow, this should mean more emphasis on residential stock and social infrastructure for Moscow residents. This can only be seen as positive for renters and landlords alike. The mayor has also announced plans to push office development outside the centre of Moscow and improve traffic flows in the city. If this happens we will see less need to rent within the crowded garden ring and more emphasis on developing a suburban rental market. These are long term projects though and we can only judge their success when we see the results. On behalf of all our rental clients I do certainly hope that the rental market does continue to grow in quality and service. Our clients deserve it.

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