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Russian Luxury Estate Market Is on the Rise

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In recent years, Russians have gained a reputation for picking up luxury properties in cities like London, attracted by the safe-haven status they offer. But the prime real estate market in Russia's capital offers great returns - for those willing to take the risks, analysts say.

Demand for prime real estate market in Moscow – and correspondingly, property prices - is on the rise, according to luxury real estate experts, with both domestic and foreign buyers attracted to the city.

"Many Russian property buyers invest both in London and Moscow," Olga Tarakanova, head of City Sales at Knight Frank Russia, told CNBC saying that the quality of construction and design were "absolutely comparable to high-end homes in London or Paris."

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"The value of most properties that have been on the market during the last 3-4 years has risen twice…Even on the re-sales market, there are some properties that were built about 5 or 6 years ago which now cost $35,000-50,000 per square meter."

"There is a great opportunity to earn on investments ranging from 30 to 70 percent per annum (depending on the project) in Moscow…That is why Moscow prime property remains very attractive for private investors," Tarakanova said.

Nine million dollar Moscow apartment. Source: Knight Frank

To put those figures into comparison, luxury property in Hong Kong's city center (the world's number two prime property market) cost $47,500 per square meter in the last quarter of 2012, according to Knight Frank's latest "PIRI Index" of the world's leading prime property markets.

Meanwhile, London luxury real estate – which came third place in the index - in prime areas such as Kensington and Belgravia (coincidentally the location of London's very own "Red Square" – so-named after the influx of Russian billionaires investing in property there) fetches approximately $41,000 to $46,300, according to the PIRI index.

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Though Moscow's real estate market still has far to go to compete with its international counterparts, it has recovered considerably since a property crash in 2009.

"Prices were falling in early to mid-2009 and shortly thereafter began their steady growth. In Moscow [now], prime residential real estate is very expensive," Maxim Mokeyev, executive director of Moscow-based Evans Property Services, told CNBC.

The average price per square meter in all of Moscow is around $8,000 but head towards the center and the prices rise accordingly, Mokeyev said. The average price for apartments located within the Garden Ring (the peripheral ring of the city center) is over $14,500 per square meter. "At the same time, the most expensive properties can be listed with an asking price of $50,000 to $60,000 per square meter," he added.

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Mokeyev told CNBC that a million dollars could buy you a one- or two-bedroom apartment in a decent renovation or a larger property that would require additional investment to be considered "livable" by western standards. "Outside of the Garden Ring, you could probably buy a larger (3-4 bedroom, 125 square meter) apartment with a good interior renovation," he said.

A report released earlier this year found that 87 percent companies surveyed across 15 European countries said that Russia was an attractive or very attractive for properties, compared to 83 percent for Europe.

Nine million dollar Moscow apartment. Source: Knight Frank

The Ernst & Young report found that 40 percent of respondents expected to see an increase in prices for residential properties in prime locations such as Moscow and St Petersburg, compared to 29 percent of investors in 2012.

But while it saw an increase in property prices for larger cities with a population of over one million people such as Moscow, Ernst and Young found that most international investors wanted to invest in retail and office spaces.

Indeed, the Russian residential property market is not without pitfalls.

"The feature that singles out the Moscow market is that buying a property on an initial stage of construction here, one has to pay 100 percent of the amount demanded," Knight Frank's Tarakanova said. She added that non-residents also face a 30 percent tax on capital gains made from the sale of property.

Most risks were posed by delays in the construction process, Tarakanova and Maxim Mokeyev agreed. "The major risks are delays in construction, inability to connect to local infrastructure (electricity, sewage, etc.) as well as the possibility of indefinite project freezes," Mokeyev said.

"Due to all of these risks being fairly high, buying off-plan provides significant rewards. Prices for similar properties can vary greatly depending on the project phase - this is especially true for economy or business class residential properties. High-end elite properties usually show a smaller price differential between off-plan and completed projects due to the very high level of prices even at the earliest stages of planning or construction," he added.

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