Feb. 7 (Bloomberg) -- The $50 billion makeover of Sochi is visible from space.
In 2007, soon after the Russian city won the bid to host the 2014 Winter Olympics, cosmonaut Fyodor Yurchikhin took a photo of it from the International Space Station: a snarl of streets and housing near the beach on the Black Sea giving way to undeveloped foothills and valleys.
Last year, before Yurchikhin returned from space bearing the Olympic Torch, he took another shot of Sochi. The reborn city boasts several thousand new and rebuilt roads, squares, bridges, airport runways, hotels, apartment buildings and Olympic arenas for ice hockey and today’s opening ceremonies.
President Vladimir Putin’s ambition goes beyond a show of Russian prowess in creating an Olympics with arenas shaped like a frozen water drop and a snowy peak. Using the Games as a springboard for Sochi, Putin pledged a year ago to elevate the tourist area for middle-income Russians into “one of the leading world resorts.” As the Games begin, the president’s goal for Sochi is looking like a miscalculation.
“Putin wants Russians to get that feeling of a great country back, that feeling that was lost after the Soviet Union collapsed,” said Olga Kryshtanovskaya, a sociology professor who is researching the country’s business and political elites at the Russian Academy of Sciences. “Sochi is his mobilizing project at a colossal expense and maybe at the cost of overstressing the economy.”
The state banks and billionaire developers who helped spend a record $50 billion to fuel Putin’s vision face possible losses after overdeveloping the coastal city, said Ilya Volodko, a director of Macon Realty, a firm that researches Sochi’s property outlook. Developers built five times as much space as the market can absorb in the next three years at a time when sales are stagnant, Volodko said.
They added more than 4 million square meters (43 million square feet) of housing and hotel space, according to the Federal Statistics Center and documents from the state corporation Olympstroy. That’s about 60,000 units filling several thousand buildings spread throughout Sochi. The new apartments amount to a 60 percent expansion of housing in Sochi, where about 345,000 people reside.
Russian banks may try to bring down mortgage rates, currently at 12.5 percent, to help sell residences in Sochi, said Evgeniya Starkova, marketing director of MR Group, a Sochi real estate developer.
“Banks will try to raise attractiveness and stimulate demand” for the properties that will hit the market when the Olympics end, Starkova said.
Still, mortgage rates in the south of France are about 3.5 percent, according to Empruntis.com, a website that compares borrowing costs.
“This year will be decent for Sochi in terms of tourism because there is big Olympic interest,” said Yuri Barzykin, vice president of the Russian Tourist Industry Union and a former vice governor of the Krasnodar region that includes Sochi. “Troubles will begin when the year ends. Sochi housing construction looks like those cities China is building in Africa. These monsters will stand vacant and then will be pulled down.”
Sochi is just the latest of Putin’s projects meant to engender national pride. Russia spent $21 billion on the reconstruction of Vladivostok on Russia’s Far East ahead of 2012 APEC Summit to promote economic cooperation in the Pacific Rim.
Sochi, which runs more than 100 kilometers (62 miles) along the Black Sea in southern Russia, has for decades been a popular destination for bureaucrats and employees of state-owned companies. After the 1917 Revolution, Sochi was designated as a federal resort city and by the 1930s the government had put up about 60 hotels offering healthcare and resorts with nearby restaurants. Soviet dictator Joseph Stalin had a dacha, or country house, in the city.
The subtropical city, with an average temperature of 73 degrees in July, has narrow, rocky beaches next to a busy highway lined with dilapidated cement walls. The water near shore is brown because of the recent partial reconstruction of the Mzymta’s riverbed. The river brings tons of mud from the foothills of the Caucasus Mountains to the sea.
By the 1990s, central Sochi had become a mix of grim Soviet-era apartment towers, hotels, small houses, palm trees and year-round traffic jams. About 3.8 million Russians vacationed there last year, according to Dmitry Kozak, a deputy prime minister, at a press conference in Sochi this week. Wealthier Russians head to European ski resorts, Asian seaside hotels and African safaris instead, said Nikolay Kazanskiy, a managing partner at Colliers International Russia, a real estate consulting firm.
“Sochi is the city for guys from the Ural mountains and Siberia,” he said.
Putin and Kremlin officials stay in Sochi’s exclusive resorts away from the masses. The president favors Bocharov Ruchei, a compound with a private beach and a botanical garden.
Today in Sochi, wider streets, boutiques selling Ulysse Nardin watches and Louis Vuitton handbags, and a plethora of new glass and steel towers are not the only things that stand out. Visitors can’t miss the hundreds of “For Sale” signs hanging from those buildings.
With more than 15,000 new units on the market by the time the Olympics end, Macon Realty’s Volodko said developers may need at least a decade to sell them.
The prices in Sochi are another reason Europeans are reluctant to buy apartments, Kazanskiy said. The Karat apartments in the Hyatt Regency hotel, which is developed by Snegiri, a company co-owned by billionaire Roman Abramovich, are among the most expensive in Sochi.
Set to open later this year, the hotel will offer 137 flats starting from $11,000 per square meter. They feature sea-view terraces, wallpaper hand-decorated with Swarovski crystals and a furnished sea float.
“Spain is closer and cheaper,” Kazanskiy said.
Apartment prices jumped about 50 percent overnight in 2007 when Sochi won the bid for the Olympics, Volodko said. They kept rising even during the 2008 financial crisis on speculative purchases, reaching an average of 115,000 rubles ($3,300) per square meter in 2013, Volodko said. That’s more than three times the figure for all of Russia.
“Sochi prices are at a peak and won’t grow substantially, so the property is not interesting as an investment for the moment,” said Elena Yurgeneva, Knight Frank Russia & CIS elite property department head.
The Russian government is looking for ways to support developers and save the market from “getting killed for many years,” First Deputy Prime Minister Igor Shuvalov said in November, according to Interfax news agency. Volodko said banks that have made loans to developers have had to take apartments back and sell them at a 35 percent discount.
Vladimir Dmitriev, chairman of Russia’s state development bank Vnesheconombank, said in January after a meeting with Putin that developers will get a two-year moratorium on making loan payments. He also said a government commission has been formed to deal with the issue of investment returns and decide on the future of financially troubled projects. The bank loaned 240 billion rubles to developers of hotels and sport arenas in Sochi.
“We understand the projects are difficult ones if we talk about hotel infrastructure, about buildings that will be finally sold on the market,” Dmitriev told Putin, according to a statement on the Kremlin website. “Of course investment return from these projects in two to three years can’t be expected.”
The government and developers will have to do more to attract tourists and investors to Sochi after the Olympics, said Alexei Grachev, tourism department head in the Sochi mayor’s office.
“Ideas for post-Olympic development of Sochi as a resort are at a very initial discussion on local and federal levels,” Grachev said.
Putin already is planning more high-profile events for Sochi. He said the city will hold a Group of Eight Summit in June and a Formula One Championship in October on a new track near Olympic Park. Sochi also will host the 2018 World Cup.
“We are positive, we see business trips to Sochi intensified,” Snegiri marketing director Polina Severukhina said. “Also there rumors that Sochi can become a gambling zone. That would raise the demand.”
Russians who don’t visit Sochi can see the enormity of its transformation in Moscow at the Central House of Artists, where the cosmonaut’s before and after photos are on exhibit.
Barzykin, the tourist union executive, said the rebuilding of Sochi’s roads and electrical and sewage systems has been a success.
“What we can’t say is that Sochi is a new tourist brand ready to be shown on the market,” he said.
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