First signs that apartment prices can go down as well. Economic analysis by Info-Prim Neo

The prices of apartments in Chisinau in May this year saw the first decrease in the past few years. Yet, during the next two months the sellers gained ground so that in August the realty agency Lara announced a price of 912 euros per square meter. Nika-Imobil posted a price of 880 euros per square meter. Realty agents said the prices were close to the psychological barrier of 1,000 euros per square meter after a 13-17% increase, depending on the class and location. During the next two months, the apartment prices had dropped. From an average price of 912 euros in July to 871 euros in August and 867 euros in September, the realty agency Lara said. These were the first signs that the apartment prices can go down as well, influenced by the relatively lower sales and the difficulties faced by the sellers following the lower demand for apartments from speculative investors and from the citizens working abroad as well as by the more difficult access to loans for end-users. The situation witnessed a year ago, when the demand was lower than the supply, seems to repeat. It is more difficult for the construction companies to sell the new apartments. They spend more time looking for clients. The prices on the primary market could also fall from the average level of 750 euros that they reached. Company managers, not speaking about the experts that are more pessimistic as a rule, expect a 10-15% decrease in prices. How real are these forecasts? Rather real if we remember the financial crisis of 1998. A year earlier, before the regional financial turmoil, apartment prices reached 300 USD per square meter. The crisis hit the realty market too. The prices fell to 150 USD in the year 2000. The situation was different at the end of the ‘90s. The prices of real estate were increasing moderately. The prices in Chisinau were much lower than in other European capital cities. Today we have unreal prices. “The prices of land are exaggerated and as a result the apartment prices also increase,” said company managers when asked by ‘Business Expert’. “I cannot believe that an apartment in Chisinau costs as an apartment in Paris,” said an expert. Another expert said that “the latest rises in the prices of apartments were not healthy and sustainable. They had nothing in common with the reality as the apartment prices are much lower than the purchase power.” “The prices went up so much that even the Moldovans working abroad cannot afford buying apartments,” say authors of the Realty Guidebook 2008. “The prices of non-residential buildings could drop following the about 70% decrease in demand. But the real prices will not go down, only the exaggerated ones,” say representatives of realty agencies. More than a half of the 200 buildings that started to be erected in 2005 were to be put in commission in 2007. But some of the buildings are 24 months behind the schedule, also because the apartments are not sold. The Realty Guidebook says that 50 apartment buildings started to be constructed in 2006, but the plans for 2008-2010 include the construction of only 20 buildings. It is another sign that the situation on the market has changed, though the developers are optimistic. Some of the developers even plan to build impressive buildings, including closed-type elite condominiums. The rate of sales will probably decrease when the crisis deepens and will rise after the European financial markets calm down as they make the buyers uncertain, drive prices up and cause difficulties in obtaining bank loans. The participants in a recent roundtable meeting that included specialists in the field did not rule out a stagnation of the market that will result in a 10% decrease in prices. “A higher decrease is rather improbable,” they said. What is the argument? We do not have large foreign investment in the realty market. The Moldovans send more and more money home and, evidently, they are right when they say: remittances increase, but foreign investment is paltry. But it seems that the risk does not come from here. The financial market collapsed because it was swallowed. The real estate in Moldova is in the same situation. Even if the population had the hundreds of millions of euros they say, a small reduction in realty prices and a worsening of the living conditions following the rise in the prices of food products and the tougher impact of the financial crisis will reduce the wish to invest in realty. The survival will be the major problem, in a pessimistic scenario. But who can guarantee that this will not happen? Land prices in the neighboring countries have already decreased, developers stop building residential complexes and realty prices go down. For the time being, we can still see such announcements as: ”To foreign investors’ attention! We guarantee revenues of minimum 25% a year to those that will invest in new constructions in Chisinau and Moldova”. But there are cases when the apartments are sold at virtually the cost price or even lower. The profit margin oscillates between 5% and 10%. The 43 construction companies and over 110 companies that sell real estate do not feel safe anymore.