The overall situation

As the retail networks stopped their expansion plans the developers froze their projects the demand for land decreased. As a result, owners of land plots have become more flexible when discussing the price of their assets. However, many market participants have noticed an increase in number of buyers interested in acquiring land for investment purposes.

Many experts still believe that investments in land are still very attractive. In an unstable economic situation, investments in land could very well prove a safe place to put one's money. However, given that the market has land plots of various qualities, the investor must use a balanced approach when acquiring these assets, which incidentally, is true when making purchases in any other market as well. "During the period of growing prices, many investors bought land without being aware of what type of business could be placed there in the future, and did not study the requirements of potential users of these sites," said Olga Kuzyakina, Head of Land Relations at Cushman & Wakefield Stiles & Riabokobylko. "As a result of chaotic investment practices, a great deal of land investors have not seen a significant increase in their asset values. Therefore, when planning land purchases as investments, we cannot ignore the knowledge that already exists in the marketplace, and use in-house or external consultants to evaluate the attractiveness of a particular site for future buyers."

After several years of rapid land price growth in the capital city and surrounding areas, the time has come when land values are stabilizing. Market participants noted that the stabilization started even before the crisis: in some areas the market became overheated, and demand for sites started to decline. With the "freezing" of development markets, the supply of land had markedly increased: companies started getting rid of non-core assets, selling land plots which were no longer willing to develop themselves, or were forced to urgently sell land to repay their urgent credit obligations. "It should be noted that the growth of new offers has not led to an increase in the number of transactions on the land market," stated Konstantin Kovalev, a Managing Partner of Blackwood."The reasons for this are: first, the market is in a state of wait-and-see, secondly, in crisis it is very easy to make a bad purchase, and third, one of the main categories of buyers – the land speculators – have severely reduced the volume of purchases, as well as the periods of speculation have increased. Land is still a good investment, but in the current circumstances, you will need to wait a few years before prices increase significantly."

Supply

One of the two Chinese characters which are used to write the word "crisis" is the character which stands for "opportunity". Among the new opportunities we need to mention is the emergence of a variety of highly liquid plots on the land market of Moscow and Moscow Region. "Today you can find attractive plots that would not have been sold under any circumstances before the crisis, and at very interesting prices – said Andrei Vasilyev, the Commercial Director of RDI Group."This is a good time to enter the market with strategic objectives: you are unlikely to get a better opportunity later. In 2-3 years, the value of such sites will increase three-fold, or even more, and will continue to grow in future at a higher pace than the general market thanks to their excellent location."

However, the bulk of the increased land supply is made up of lands that final consumers are not interested in. "First of all, the land owners are offering the least liquid assets which have low development potential, such as lands designated for agricultural purposes," notes Polina Kondratenko, Director of Consulting and Assessment at Colliers International. "In addition, buyers are still waiting for more attractive lands at lower prices to come to the market."

At the same time, the same lands that were designated for agricultural purposes, which have significantly dropped in value since the beginning of the crisis, look favorable today for land development. "If we understand land development to mean the investment business, where a company buys a plot of land in the agricultural category with plans to later transfer it the "industrial lands" category and then sell it as a finished object, such transactions are not declining today, but on the increase," says Olga Kuzyakina. "There exist very good opportunities today for a land developer to buy plots near major highways not far from the Moscow Ring Road at very attractive prices. In a few of years, after changing the land zoning, you will own an attractive product which will enjoy good demand in the market." According to Ekaterina Kashtanova, the Expert Analyst of Marketing in the Consulting Department of GVA Sawyer, if one has good administrative resources and business contacts in the area where one purchases the land, the procedure of making zoning changes is not too much of a challenge. "If you have such connections you can get a zoning change within 2 weeks to 2 months," considers Mrs. Kashtanova.

According to Blackwood data, in the second half of 2008 the supply of plots in the southern areas of the Moscow Region has increased – Simferopolskoye, Warszawskoye, and Kashirskoye. "This is connected to the Government's plans to improve the transportation infrastructure in these directions," says Konstantin Kovalev. "However, the crisis has slowed down the development in these directions. Traditionally, a large part of the land market supply is located in the western direction: Novorizhskoye, Kievskoye, and Minskoye."

Demand

Considering that a land transaction deal can take an average of 4 to 6 months, and that ate year-end the number of transactions traditionally declines, it is difficult to say if there has been an increase or decrease in activity on the land market. "Transactions are happening, but these are few in number, just like in the real estate market as a whole," said Andrei Vasilyev. "Investors are waiting for the time when it will be possible to say, without any doubt, that the market has reached bottom. Everyone has already converted assets into the currency, and is awaiting a more substantial devaluation of the ruble. When this finally happens – the market will start to thaw." Concerning the stagnation in the wholesale land market Konstantin Kovalev noted – "There are very few transactions where companies, possessing the necessary finances, have an opportunity to acquire land on really advantageous conditions."

"Of course, the ability to 'catch the rock bottom' prices – is possessed by only the most economically versed and experienced market investors", says Denis Kozhevnikov, the Marketing Specialist at "Zeleny Kvadrat". "However, the Russian market, once in a while, can present some surprises. Therefore, in order not to miss an opportunity for a good bargain, not to wait for prices to increase rapidly again, one should probably start thinking about buying land right now."

Potential buyers are really thinking about purchasing sites. "This may sound weird, but our volume of the work has increased during this crisis. Though the volume of the plots available for sale has increased, the number of people interested in investing their funds in such a strategic resource as land has also increased," says Olga Kuzyakina. "There is very little good land available, which is the so-called 'lasting value' land, which at this very moment is in the redistribution stage." According to Mrs. Kuzyakina, potential customers can be divided into two categories; the first watches the market, hoping for a total adjustment in prices and even for a collapse, the second category is looking at the portfolios of specific companies, burdened by significant credit commitments, with a view to purchasing their plots at relatively low prices. "In addition, there are those customers who seek to buy a plot as an investment – these buyers tend to purchase distressed assets. But most buyers wish to purchase land plots for the realization of their own projects," said Mrs. Kuzyakina.

With regards to the distribution of demand by directions, according to the data provided by GVA Sawyer, currently popular are the southern (41% of the total volume of demand) and northern (29%) directions. Demand for the eastern and western directions is 10% and 8% respectively.

According to the estimates of "Zeleny Kvadrat", the highest demand is for:

• Land plots with areas up to 1 hectare in all directions, especially along the Novorizhskoe, Simferopol and Novoryazanskoye highways;
  
  
• Land plots with the area of 1 to 10 hectares along Minsk, Novorizhskoe, Dmitrovskoye, Simferopol and Novoryazanskoye highways;
  
  
• Land plots with areas of more than 10 hectares along Minsk, Novorizhskoe, Simferopol and Volokolamskoe highways.
  

There are several criteria for determining the attractiveness of a land plot, which determine its value to the buyer. "Liquidity means the possibility of selling, in this case the site itself, in a relatively short term and at its full value. The degree of liquidity of the plot is determined by the following parameters: whether all communications are already present, or absent (main gas pipelines, power transmission lines, etc.), at the site. The potential buyer, before purchasing, should familiarize himself with the approved general development plan for this area/region", advises Konstantin Kovalev. "This is extremely important, because, for example, a railway line might be constructed in the future through the purchased plot, and this will significantly reduce the liquidity of the plot. And, of course, one of the main parameters is price."

Traditionally the most attractive areas in Moscow are located in the city center close to easy traffic access. "Taking into account that the transportation system of the capital has a ring structure and the main business areas are concentrated in the city center, then the closer the property is to the center, the higher its value and the higher revenues it will bring. This determines the large prices for land located on the approaches to the center and the lower prices in the outskirts of the city," said Polina Kondratenko. "Regarding the Moscow Region, on the whole, we can say that the attractiveness of land plots suitable for development varies depending on the type of commercial real estate. For example, for office construction the areas of interest are mainly in the western and north-western directions. For warehouses – in the northern and southern directions. For retail – sites along roads near their intersections with the Moscow Ring Road, having convenient transport accessibility."

Rates

Over the past 5 years land prices in the Moscow region have been growing, and this trend has been seen in all directions and for all categories of land. For example, according to GVA Sawyer, the price for 100 square meters of land zoned for agricultural purposes along the Novorizhskoe highway, at a distance of 50-70 km from the Moscow Ring Road, was $100 in 2003; by 2008 this same land reached a price of $3,000, i.e. an increase of 3,000%. At the same time, according to the company’s analysts, the greatest growth occurred in the period from 2005 to mid-2007, and since mid-2007 the growth rates of land prices slowed down. Slightly less active has been the growth in prices of agricultural land along the Kiev highway: from $500 for 100 square meters of land in 2003 to $7,000 in 2008. "Within the past 2 years, land prices have grown by 15% on average, lands designated for industrial use, and especially for the construction of production and logistics complexes increased by 20-40%" notes Ekaterina Kashtanova. "We should bear in mind that the dynamics price increases for specific plots varies and depends on many factors: location, quality of the roads, the configuration of the plot, communications equipment status, legal cleanness and readiness of documentation, etc."

The crisis, according to the estimates of RDI Group, led to a 10% reduction in the price of the most liquid plots, and up to 70% reduction for the least liquid areas. "It is very simple – the plots which are further away from major settlements and which have lower zoning, and consequently lower liquidity – the more significant will be the drop in their prices," says Andrei Vasilyev. "This is true for both the wholesale and retail plots."

Olga Kuzyakina has noted that those companies which have found themselves in difficult financial situations have reduced the prices of their liquid plots, while the owners who do not have creditors hard on their heels can afford to wait for buyers, not only without reducing prices, but even in some cases increasing the price of the plot.

"The cost of a plot (be it a tenancy or an ownership right) directly depends on the location as well as on what can be built there," says Polina Kondratenko. "Another important factor is the permitted density of construction: if you can build a small 2-storey building on one plot, but a multistory building on a nearby plot, the land prices of the two plots will be significantly different." According to Ms. Kondratenko, the cost of land accounts for 10-15%, on average, of the overall expenses in a project.

Regarding the costs for transferring land from one zoning category to another, according to Ekaterina Kashtanova, there are no specific rates available, but it is possible to formulate the factors that influence the growth or decrease in the cost of these services. "If it is a question of changing the category of land (from agriculture purposes to industrial, for example), the cost will be higher than if only changing the type of permitted land use. Such transfers are finalized at regional administration level. At the district level, only changing of the permitted land use code is performed," says Ms. Kashtanova. "As a reference point we can list the prices for changing the permitted land use code in the regions bordering the Moscow Region: here the cost can vary from $50 to $150, in some cases up to $200 per hundred square meters of land".

Trends

• Increased supply of liquid land plots in Moscow and beyond it through surrounding areas due to the rush sales of assets by owners burdened by debts requiring fast repayment;
  
  
• Increase in the number of potential buyers interested in making land market investment purchases ;
  
  
• More flexible approach to prices shown by owners during sales negotiations for land assets;
  
  
• The period of rapid growth in prices of land plots has come to an end, the prices of low-liquidity land assets have dropped significantly;
  
  
• The land market in Moscow Region has recently been replenished by plots, adjacent to settlements, which have been transferred to these settlements and zoned as "residential lands".
  

Forecast

The development of the land market depends to a great extent on the financial status of its participants, the future of which is currently rather vague. Will the number of companies, forced to part with their land assets grow? Will the number of investors having opportunity and willing to buy them increase? Will there be those willing to implement development projects that will need this land? The answers to these and many other questions will depend on the activity and price formation on the land plot market. Now these questions can only be answered by guessing the future economic situation in the world and in Russia, now gripped by the crisis. Experts believe that the situation will be clarified, concerning the development of the land market, as well as the entire real estate market, no earlier than in the spring of this year.