The head of one of the leading companies on the Moscow region’s housing market shares his opinions on the current situation in the construction industry.
The President of “Granel” GC, Ilshat Nigmatullin, answers questions from our journal.
— Mr Nigmatullin, what issues of the construction industry’s development, from your point of view, should be discussed at the State Council on construction first of all?
— The task of the state is to provide continuous work for the construction industry. The president of Russia and many ministers have stressed that one job in construction provides 7 jobs in related branches. In Moscow alone, 500,000 people work in the construction sphere, which means that 3.5m people work in allied sectors. This totals 4m workers, and that is only in the capital’s region.
It is important for us developers that the State Council should include a discussion on additional measures for mortgage loan availability enhancement in Russia on the agenda. The state has already supported the mortgage loan market. One can hardly expect a rate decrease in 2016, but the decrease of the initial contribution to 10% might be considered. Depending on the credit conditions, we may forecast the amount of flats to be sold on the primary market. If the initial contribution could be decreased, we’d get an additional influx of clients, maybe up to 20% more.
— How do you assess last year’s results and what trends do you forecast for the further development of the housing construction market?
— 2015 was quite successful for us: we commissioned about 400,000 m2 of housing, and in one of our projects, the first stage was completed a year ahead of schedule.
Speaking of sales volumes, they are significantly less all over the market than in 2014. Our company’s sales at the beginning of 2016 were at a good level – even better than in 2015.
— Delivering a speech at the recent 11th All-Russia Congress of Construction SRO, Minister Mikhail Menn stressed that one of the tasks of the Ministry is to exclude the cost of utilities systems and internal development roads from the cost of a square meter of housing. Your comments?
— Every developer who starts the construction of a new object issues a project statement including the term of transferring the flats. If a developer breaks the term, he will pay a hefty fine.
Let’s consider the example of a town in the Moscow region where 30 – 40 construction companies work, on average. Local authorities will have to deal with all the paperwork connected with the utilities systems construction. Are they ready to cope with such volumes? This is the first question. And the second is, who will finance the construction of the utilities systems? And lastly, who will be responsible if they are not ready and connected on time?
I am a developer, and I understand how much time it takes to build a utilities system. But sometimes it happens that people have already moved to the house and live there, electricity and water supplies are connected, etc. – but the documents for the utilities are only executed two years later. For example, we, as a developer, paid for electricity for a whole residential area in Balashikha because we could not expedite the documents to Moscow United Electric Grid Company JSC, as it is more convenient to get timely payment in full from a developer than to collect money from residents. Now we have to draw up invoices for the local people again.
From the technical point of view, if the city’s authorities deal with the utilities infrastructure object construction, they must be responsible for the construction date observance. We will be glad if the construction of utilities systems is financed by the state budget.
How realizable is this in the current conditions? Where will the state find money for this purpose? The issue may be worth considering at a state level and might relieve a developer of the responsibility for systems connection.
— Is the current situation on the realty market a crisis or just the new reality?
— My standpoint is that it is a new reality, which will last for at least 5 years. It is the new state of the market, not a crisis. This situation will last, so we are to get accustomed to working in these new conditions. There is no point expecting last year’s indices in the near future.
We can only artificially increase sales if the Central Bank lowers the rate to 8—9%, and mortgage loans are lent at 9—10% a year. The decrease of the initial contribution from 20% to 10% will also stimulate a pick-up in buying activity.
— I cannot but ask; what did SU-155’s bad experiences teach developers?
— Firstly, SU-155 had large-scale production plants. Mr. Balakin expected economic growth. If you had told anybody a year and a half ago that a dollar would cost 70 rubles, you would not have been believed! I think that he did not expect such catastrophe.
I suppose that SU-155’s main mistake was using non-transparent schemes in selling housing. Now the state is discussing amendments to 214-FL including a tightening of the developers’ control, and the bankruptcy of SU-155 played a partial and specific role in this.
In general, the main reason for such an occurrence is mis-management. Balakin did not do anything illicit; he was working to overcome the situation. In its turn, the state took the right measures and entered into a commitment to complete the objects and turn around the plants in SU-155’s structure.
— So, every cloud has its silver lining. This case has taught developers a lot. First of all, it revealed that a man can do no more than he can - occupy a lot of regions and build everywhere - didn’t it?
— Mr. Balakin was mistaken with the regions. If the Moscow and Moscow region realty keeps selling, the regional markets will stop. The implementation of regional projects demanded financing, and he had to transfer the money from Moscow object construction. That’s why the state wants, according to 214-FL, the money for the construction of a specific object to be used only for that object and not to be redistributed to others. It is a very good initiative. It will be hard for developers to work, but we’ll manage it.
— Speaking about 214-FL, how do you assess the amendments in this basic document regulating co-funded construction?
— At present, the amendments in the bill draft are being discussed in the second reading. The result will depend on which of them are adopted. There are a lot of issues to discuss and argue about.
For example, the escrow accounts mechanism. Escrow account maintenance does not cancel out the old scheme of selling flats on the primary realty market, and legislators are right in many aspects. A company constructing an object costing 10 bln rubles cannot have one excavating machine. It is evident that something is wrong. According to the new demands, the amount of authorized capital of a group of companies must be equal to 1 bln rubles. In fact, it is not a big sum of money, taking into account the prime construction cost in the Moscow region.
— Well, how would you comment on the words from Deputy Alexander Khinstein, who said in an interview to our journal, concerning the second and third readings of the bill draft introducing the second unit of amendments in 214-FL: «We shall not allow the construction of schools and hospitals with the money of co-funders»?
— And at whose expense should these objects be constructed then? Suppose we sell housing at the price of 80,000 roubles a square meter. This price includes expenses on the construction of schools, nursery schools, polyclinics, etc. If we reject it, then let the state deal with it. But does it have money for that? No, it does not.
A developer is used to taking care of the social objects on the territory of his residential areas. If there are no such objects, the demand for the housing will be lower. What does a developer begin with?
— Yes, residential buildings. Within the first stage, at least one nursery school is put in operation. A school is usually built a year later: people move to new flats, do repairs, etc. It takes a year to build a school.
Khinstein asks us not to spend co-funders’ money on the construction of these objects. Well, we shall spend it when the residential buildings are built. It does not make any difference.
— For the last two years, Federal State Statistics Service (Rosstat) claims record volumes of housing were put in operation: more than 80m m2 in 2015, and in 2014 and 2015 together, more than 160m m2. May we speak about the housing market overstock?
— As far as overstock is concerned, the term is inappropriate for the Russian realty market. There is a vast need for improvement to dwellings, but the problem is that the population does not have money for it.
In Moscow the preparation of approval documents for a new project takes about two years, and in Moscow region, about a year. The volumes achieved in 2014 had been prepared in 2010 by developers. In 2016, we shall not have such results.
In my opinion, the new housing supply volume will stay at the level of 78-79m per m2. Besides, the figure includes individual housing construction, and the population has to save money at present.
Judging from the recent meetings with developers, I may forecast that a decrease in housing construction volume is expected on the market. Moscow is a special case: almost every person in the region wants to buy a flat in the capital, so realty in Moscow has always been bought and will always be.
The volumes of housing put into operation in Moscow will not drop. The Moscow government has claimed that the housing supply volume in 2016 will surpass that of 2015. The condition in the regions is quite different: there is a serious fall.
— One of your colleagues spoke about the developers’ 10%-12% margin last year, which is at breaking point, taking inflation, etc. into account. One cannot always dump – it is the road to nowhere. As far as I understand, this year will be hard. At what minimal margins can a developer work?
— Any developer can work with a margin at 10%. It is rather a good index. If we divide the profit for the periods, we won’t get 10% a month. That will be one year’s profit. As far as our company’s projects are concerned, we have a greater profitability, as we have almost no bank loans. Those who have a credit burden have more difficulties. They have to pay vast rates for borrowed money – up to 15—17% a year. For now, it is too much.
But speaking about a large-scale housing complex, it is quite a different situation, as the bank will lend only 5% of the whole volume of construction.
Even if the margin decreases to 7—8%, everybody will go on working. Everybody will economize, and they will have to, otherwise they will have to leave the market. We are interested in working even at a 5% margin.
— Many developers say that a buyer can now dictate conditions. What is most in-demand regarding your projects at present?
— It is no secret that small one-bedroom flats with an area of 32—33 m2 and studios with an area of 23—25 m2 are mostly in-demand now. If earlier we’d designed one-bedroom flats with an area of 42—44 m2, now we offer two-bedroom flats of the same area.
Of course, these are very small flats, and for many people they are temporary housing. When the economy recovers, and people start to earn more, they will improve their living conditions. But right now the market dictates a demand for small-scale accommodation. This might be right: it is better to have 25 m2 and minimal credit than to have a bigger living area and bear a harder credit burden. People have learnt to count their money.
— And in conclusion, let me ask our traditional question: how do you spend your free time and what are you fond of?
— My children are my hobby. I have three daughters and spend all my free time with them. The younger girls went in for dancing, and one of them reached a professional level, but half a year ago she changed to another kind of sport. As parents, we worried about it. The eldest daughter is finishing the famous 57th School in Moscow. Now she is taking the Unified State Examination ahead of time and we hope she will get a gold medal. I hope she manages to enter the university she has chosen.
Alexander GUSEV, Alexei ANDREEV