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Financial crisis hitting developers in Russia with winter olympic project facing scale back

Russian banks, affected by the global credit crunch, have raised interest rates for builders to a record 25% and rapidly rising rates for mortgages are making it harder for developers to sell the properties they do manage to complete, driving down prices.

'Developers are facing significant problems because of lack of capital,' said Alexei Yazykov, a real estate analyst at Renaissance Capital. 'The meltdown may push many developers to the brink and force them to speed up the sales of their assets if they have anything to sell.'

The construction industry, which accounts for more than 5% of Russia's gross domestic product, registered 16% growth in 2007, but liquidity problems this year, even before the current crisis, have given cause for concern.

A number of big developers have already announced measures to help deal with the crunch, including Sistema-Hals, which last week started fishing for investors to help it raise $500 million for projects.

Dmitry Lutsenko, of Moscow-based developer Mirax Group, said his company has cancelled $4 billion of new investment projects and would focus on existing projects instead.

Even showcase Kremlin-backed projects are facing problems. Yury Reylyan of Basic Element, who is in charge of a $4 billion infrastructure project to get the Black Sea resort of Sochi ready for the 2014 Winter Olympics, said some aspects of the project may need to be scaled back because of falling demand.

'Every market player is nervous about events unfolding, and everyone is apprehensive of swings in morale in the real estate market,' said Maxim Gasiyev, regional director of investment services at Colliers International in Moscow.

'Most developers are adopting a wait-and-see attitude, but some will change strategy as soon as it becomes clearer how seriously the global financial crisis is affecting the local market,' he added.

But for those property investors with money there are bargains according Alexei Mogilov, director of regional real estate development at Penny Lane Realty. 'Banks are selling off estates left in their charge as collateral securities, and this is prompting some realtors to consider selling such assets too. As a result, the market is full of assets that were difficult to purchase before now,' he said.

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