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The realty market: beware of low incomes, not large expenditures  

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The realty market: beware of low incomes, not large expenditures  

In the current crisis conditions, those who are actively looking for new ways to abandon old schemes will win on the realty market.

The reason for the current crisis on the realty market is not just the general economic crisis in the country. There are features specific to the industry. They include, first of all, the usage of simplified financial schemes. These had worked right before one definitive moment, but in these changed conditions they have failed. One should not expect significant improvements to the situation until the market participants acquire new financial mechanisms. The time for simple solutions has passed.  

 

The rouble revolution

For decades, the main currency on the realty market has traditionally been the American dollar. In 2015, the market abruptly switched over to the domestic rouble. The reason is obvious: the depreciation of the Russian currency.

The investment volume in the realty market in 2015 totaled $3 bln, which was 30% less than in 2014. According to Olesya Dziuba, an expert in the realty market, in 2016 the market volume in dollars won’t change much as compared with 2015. However, in roubles it will go down by 30%.  

The contingent of those who implement realty always changes. Historically, the institutional investors’ share was 15—20%. The contribution from private investors before 2014 did not surpass 5—10%, but in less than two years it has grown to 30%. This is connected with the price hike in debt financing: it is more profitable to invest one’s own money in realty.  

On the Russian capital market, second place was firmly occupied by capital from Europe and North America, but lately it has been pushed into the third place by the investment flood from the Middle and Far East. However, contrary to our hopes, there has not been a big inflow of Chinese money.

Into what kinds of realty do investors put money? Office realty is at first place, and the next is retail. However, in 2014 – 2015 the retail share began to go down as rent revenues decreased.  The third place is occupied by stores.  

The market risk premium on the Russian market has grown, and the market itself has returned to the volumes of 2010.

On the whole, the situation is rather complicated. Banks are not lending money, new projects are not starting, and as a result the hitherto smoothly running businesses of many developers are failing.

 

Consider everything and choose the best

All opportunities for money-making should be considered in these conditions. One widespread scheme is to look for partners with their own capital for risk reduction. Another variant is the co-financing of a project by anchor retailers who get a realty share in the finished object.

Investment diversification in the sectors is very promising: e.g. both a trade center and housing are being built, and the housing sale provides for the financing of the main object’s construction.

Due to the reduction of rent inflows, the cost of trade centers has decreased by 30—55%. They have become more profitable to buy but less profitable to construct, as the payback term has grown significantly.

Investors are searching for maximally profitable objects, and this tendency should be taken into account in stimulating their interest.

There is money on the market, the C&RE company Head of Department, Elena Podlesnykh, is sure, but there are few willing to put out money and invest it in business.

Are another five sparse years coming?

In these crisis conditions, many developers’ survival depends on their relationships with the banks. An opportunity for a meaningful dialogue has now appeared.   

It is important that the opportunity is based mainly on pragmatism; banks get a greater advantage from a mutual understanding with their partners than from collecting pawns. City authorities are also quite forthcoming, making the contracts’ condition milder. This is really significant, as the current crisis is likely to be lengthy.

The realty market leaders, upon being asked when, in their opinion, the market would return to the levels of 2015, the majority responded that it would take at least five years.

 

Reaching synergies

The market for developers’ services is changing in Russia – not as developers change, but under the impact of objective, mostly financial factors. The main change is that the majority of developers cannot use bank credit any more, as banks simply do not want to lend money.

It is quite usual now for three parties to take part in a project: a developer, a landowner and an investor. All the participants have to stay in the project until it is completed in order to get their share, explains the Project Management Director of the “Sapsan” GC, Dmitry Ivanov. Otherwise they may lose their margin.

There are fewer developers now who can finance construction by themselves, and there are delays to getting hold of the margins. In such conditions, one should search for a combination of methods. For example, banks have got lots of land as pawn. It is difficult to sell the land, but a credit institution may be offered the chance to take part in the project, contributing the land plot as its share.  

This is a bargain for banks, as the CB requires that a pawn should be readily marketable, and if a bank enters a project with a land plot as its share, the price of the land rises. The bank, in its turn, gets the opportunity to lend mortgage loans to future residents, but the bank’s profit is not restricted to that - the bank may obtain square meters of the residential area at the previously agreed-upon price, and then sell them at the market price.

The most valuable part of the scheme is that a strategic partnership between a developer and a credit institution arises, which may continue in other projects.

The lessons from the crisis

Not so long ago, we had a seller’s market in this country. The situation is now different: consumers are dictating their requirements on the market and demanding the developers’ “reload”. If one goes on simply selling square meters, he is likely to quit the market fast.  

A realty buyer appreciates not the function but the environment now. It is necessary that the reaction to the demands should be quick, changing the design and configuration solutions of flats on the spot.

Life itself forces developers to take revolutionary decisions, like those used in Amsterdam during the Dutch realty crisis. There, the trade centers constructed near highways were reconstructed as parking lots. 

There is no universal recipe for how to do business in this crisis period. But there is a negative side, which concerns those solutions and steps which are not to be taken, as practice shows that the results will be poor.

People have long been aware that cheap housing is not quality housing, and there are a lot of offers on the market. So customers do not just follow the price – sometimes they want to get into another environment. Thus, developers should not reduce expenditure at the cost of the corresponding environmental creation. Sometimes it is more beneficial strategically to decrease one’s own margin than to decrease the prime cost of construction.

Currently, we have a unique situation which has not previously occurred in the post-Soviet period: offer on the market is well ahead of demand. In these conditions, well-developed projects are popular and poor ones are not in demand, the Executive Director of the Sezar Group, Ghasan Arkhulaev, summarizes.  

If the project is good, it starts to finance itself from one definite moment: via equity participation agreement, for example. Those who simply builds square meters lose.  People should be offered a new concept of life. As one of the famous developers said: “Do not be afraid of large expenses; one should be afraid of low income”.

The current situation is stimulating the creation of new tools for attracting finance and for the construction economy’s improvement, Ghasan Arkhulaev is sure.

The crisis is not depriving anyone the opportunity to work on the market. It simply requires new methods.

 

Vladimir GURVICH

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