Residential leases and further buy-outs: a circular steeplechase

Residential leases and further buy-outs: a circular steeplechase
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Currently, buying a flat is increasingly unrealistic for the common citizen. However, market developments offer customers new formats.

The topic of the residential leasing causes either a rise or a decrease in attention at different times due to the weak conceptual framework of the law and long-term investment pay-offs. And again, the State Duma is asking if Russians need residential leases, and if so, how can the law be updated before it starts?


What is rental housing?

According to law 217-FL, the most available rental housing is low rent municipal apartments from a special social housing fund in the case of family income not surpassing a specified level in each region of the Federation.

One cannot let, privatize or even repair such a flat, Nickolai Tsigunov, President of the “Premier” GC, stresses.

In 2015, only about 500,000 m2 of rental housing was built, and only in some regions of the RF – Kaluga, Novosibirsk, the Khanty-Mansi Autonomous Area, and the Altai region. The construction of such housing is a measure meant to stimulate the construction industry’s development. In fact, about 90% of constructed rental houses are projects of large enterprises erecting housing for their voluntary recruits.

Besides, these are let at the market price: for example, in the Kaluga region, the rent for a one-bedroom flat is about 20,000 roubles, but at the same time, according to, the rental cost of such a flat is from 10,000 to 17,000 roubles.

Some developers are making efforts to construct commercial apartment buildings, but these are an exception. The Rublevo-Miakinino project and the Y’ES apartment-hotel may be mentioned as examples, but due to the legal status of the latter, taxes and maintenance costs are rather high, so the prices in the hotel are, let us say, not for the common man.

Obstacles list

Firstly, there is the initial orientation of the state and constructors towards profit maximization. As Alexander Puzanov, Director General of the “Urban Economy Institute” fund, in pre-revolutionary Russia such buildings were constructed for educational institutions, orphanages and charities. They were also erected for commercial use, but rarely.

In the West, rental housing was also widespread after WWII, Europe having been significantly destroyed. Many European countries chose the road of commercial rental housing construction by construction associations. The activity of these organizations was strictly regulated by the state: even the salaries were regulated by supervisory councils.

In the sector of commercial rental housing, profit margins for its creation and exploitation are regulated by the state, and developers agree to provide a non-commercial housing fund with a definite number of apartments for specified categories of families. Monthly rental in such housing is about 10—15% of the free market price, which is achieved by low credit rates for construction associations.

Secondly, the problem is that it is impossible to continue to receive easy money, without which the rental cost will equal the market price.

Thirdly, there is no integration of federal legislation on the regional level, i.e. there are no corresponding governmental regulatory acts to develop the regional legal framework in the RF.

Also, experts have mentioned the lack of free land and information on the needs of definite regional rental housing. But the main thing is that a vast number of competitors - private leasers – represent the “grey market”.

Live and buy out

But while some are looking for reasons, others find opportunities. A positive change in the development of rental housing has arisen on the market. A developer of one of the residential complexes in the center of New Moscow has shown initiative and has offered to test the flats before buying them.

The mechanism is as follows: a resident may rent a furnished flat at the price of 23,000 roubles for a one-bedroom flat and 27,000 roubles for a two-bedrooms flat, including all utility and maintenance charges, and a tenant pays only for the water and electricity expenditures according to meters. These prices will be frozen until the end of this year.

Temporary Moscow registration can be issued if necessary. The peculiarity of the offer is that a tenant may buy out the housing with already-paid money – or can go on renting a flat as well as refusing it.

It is too early to judge the results of the developer’s strategy. However, having talked with participants on the realty market, we have heard different opinions.

— For many people it is a very attractive option, Maria Zhukova, Director of the “MIEl-Rent” company, thinks. One may live in a flat for many years and finally buy it out when little is left of the initial market price. The thing is, if a developer waits for several years, he will raise rental costs from the second year of rent onwards.

Well, in such cases a tenant-buyer may always move to another region, choosing housing according to his own budget. This is the advantage of the offer if compared with mortgage loans, when it is very problematic to refuse housing.

And how profitable the offer is for the developer himself, is a big question. The thing is that within such a scheme, the term of the project payback increases significantly, which is, of course, no fun for a developer. More than that, the rental business is far from the developer’s business and cannot become a mass phenomenon in Russia as of yet, experts think.

— Even if such a format were to spread further, it will be of a local character, the NDV- Realty company specialists are sure. — Developers are interested in getting fast money, and if there is a demand, nobody will let flats. Besides, a rent-to-own scheme is possible only with houses where the flats are finished and decorated.

But choosing between bankruptcy and the non-performance of obligations and an increase of a project’s repayment period, the latter is preferable: a developer preserves his reputation and has a chance to keep his business.

Some experts think that such a method of selling flats might be more viable if the state bought part of the flats from a developer and then used them for social renting.

By the way, short free renting (two days and one night) for “testing” a flat is currently being offered in two residential areas of Novosibirsk. And it is here that we may speak about the marketing approach: in New Moscow we can see a transitional format, in which a developer tries to use every opportunity to populate an absolutely new district as soon as possible, making it more attractive to future customers.