In the cold war days, lavish dachas (villas) just outside Moscow were the exclusive preserve of the Politburo with the rest of the population squeezed into small, decrepit and drab government-owned apartment complexes.
That has changed dramatically since glasnost (1991) and Moscow is one of the rare booming markets worldwide and offers a wide range of luxury properties.
Moscow prices are now among the highest in Europe, especially in areas where the elite and foreigners live. Between 2000 and 2006, resale prices rose 514 per cent.
The average price of off-plan property as of June 30, 2008 was Dh7,475 per square foot, an increase of 11 per cent over December 2007. Prices for affordable housing increased rapidly in the first half of 2008, while growth in the prime residential property market was steady.
New projects continue to be launched - the biggest number of prime off-plan property is in the Ostozhenka area. The largest part of supply in the newly built prime residential market comprise properties priced between Dh5.5 million and Dh11 million.
The resale market has also done well. Average resale price was Dh8,482 per square foot in June 2008. Prices increased by 19.7 per cent in the first half of 2008 compared to December 2007. The highest number of prime residential buildings was constructed in Arbat, Ostozhenka and Sretenka with the most expensive properties in Ostozhenka, Prechistenka, Tverskoy and Pluschika and the cheapest available in Sretenka.
Interestingly, the prices of resales are increasing faster than that of off-plan property. Flats costing more than Dh36 million account for 5.5 per cent of the supply in the prime residential market.
Moscow's key areas generate modest gross rental yields, an average of 5.2 per cent, a lot less than the yields of 7-10 per cent in 2007, a clear indication that rent increases have not kept pace with the rapid price appreciation during the past year.
What fuels this price rise? One is the oil and gas boom - Russia is the world's leading natural gas exporter and the second leading oil exporter. In 2007, it was the world's top oil producer, overtaking Saudi Arabia.
This has a massive impact on Russia's economy, which expanded by a blistering 8.1 per cent in 2007, up from 7.4 per cent in 2006. Average annual GDP growth from 1999 to 2006 was 6.8 per cent. Real GDP per capita increased from $1,834 in 1998 to $9,075 in 2007.
Another driver has been the privatisation of state-owned housing units. A third factor is lack of quality housing; most Russians live in ageing Soviet-era apartments and more than half of these units are badly in need of repairs.
In 2006, private ownership of properties in Moscow was allowed both for locals and foreigners. Both rental income and capital gains for foreigners is taxed at 30 per cent. Total transaction costs are among the highest in Europe at 20 per cent of the property value including 18 per cent VAT and most of this is paid by the seller.
Sale transactions always take place in banks - the buyer deposits full purchase price in a safe deposit box and the bank will release the money to the seller only upon registration of title in the buyer's name as Escrow accounts are not yet popular. The mortgage finance market is small and underdeveloped in Russia at just 2 per cent of GDP and hence most transactions are in cash.
One view of the market is that prices are unsustainable and will fall soon, especially as they are pushing against affordability limits and the ratio of prices to per capita GDP is one of the highest in the world - always a danger signal.
Other negatives to be considered include unexceptional yields, high transaction costs, high income taxes, pro-tenant environment and property rights issues. Corruption and bribes are rampant. In 2007, Russia was ranked 143rd out of 179 in the Corruption Perceptions Index by Transparency International, which ranks countries from least to most corrupt. Recently, Prime Minister Medvedev said corruption was costing the economy $120 billion annually.
To be fair, the positives cannot be ignored. Moscow moved up a lot in transparency rankings as per the latest Jones Lang LaSalle report compared to 2006 and are poised to become transparent, which is always good for foreign investment.
The government has recognised the corruption issue and has cracked down. Also, Moscow is still not in oversupply territory. Finally, one should never discount the effect of high oil prices and the resultant liquidity and high disposable income on the property market.
Binod Shankar is a Chartered Accountant and CFA Charter holder and has spent several years working at senior levels at several of Dubai's largest property developers analysing, inter alia, local and global property markets. This article does not constitute investment advice and potential buyers are advised to conduct their own upfront due diligence.