What's A Nice Real Estate Boom Doing In A Place Like Moscow?

Moscow, of all places, has suddenly become one of the world's hottest real estate markets. As inflation soars and the ruble crumbles, Russians are looking to real estate to cushion the blow. It's a tricky game because of confusing property laws, but demand is growing, particularly from Western companies desperate for offices and apartments. Says Andrei A. Stroyev, chairman of Perestroika JV, a three-year-old construction venture: "There's a huge market just beginning."

Prices tell the story. Apartments bought a year ago in private deals for 20,000 rubles -- about $350 at black-market rates -- now go for $20,000. Coveted one- or two-bedroom apartments in central Moscow sell for as much as $ 50,000. In the six months since the Moscow City Council began holding property auctions, prices have soared as high as 5.5 million rubles -- or about $100,000 at black market rates -- for a three-room apartment. Konstantin Davidov, manager of Nest International Ltd., a new Moscow real estate brokerage, says apartment rents may soon rival New York's.

LEASE SHOCK. Commercial rents already do. In the past year, Perestroika JV has raised its average office rental fee from $65 to $85 a square foot -- more than triple the New York rate. RealInvest MMI, owned by Chicago's Hugh McCaffery and the joint venture Dialog, says rents climb almost daily at the offices it leases from the Moscow City Council and renovated. Even McDonald's Corp. is betting on a boom in Moscow property. It has plowed big ruble profits from its two-year-old Pushkin Square restaurant into a brand-new 12-story downtown office building that has already been 60% leased to dollar-paying foreigners.

Fueling the residential market is the increase in emigration. Despite a taboo on holding land, apartment ownership has been allowed for years. But since emigres may only take with them a tiny sum of hard currency, they beat the system by selling their apartments to foreigners and arranging to have hard currency deposited in foreign accounts.

The market explosion recently got an extra boost when Moscow began allowing residents to assume ownership of the state apartments in which they live. Now, many retirees are moving in with their children so that they can sell or rent their apartments for cash, most of it dollars from the booming black market. Others, such as a 32-year-old actress who earns 250 rubles a month, are snapping up second apartments with their savings to rent out for extra revenue. "I need to find a way to make money so I can feed my son," she says.

Like real estate everywhere, the Moscow market has its seamy side. Some Muscovites are showing signs of racism, demanding that dark-skinned Armenians or Azerbaijanis be prevented by law from speculating in Moscow real estate. Shady types are working scams, such as charging big sums just to show a flat. One way or another, Muscovites are showing they can hold their own in one of capitalism's toughest arenas.

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