Rental housing: investors do not play charity

Rental housing: investors do not play charity
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Is the commercial rental housing market under threat?


The first “pilot” project on the creation of rental housing and apartments in Russia is to be put in operation in October 2017. 10 bln private investments are planned to be leveraged in 2017 for the implementation of the priority program, and then a further 55 bln until 2020. The state authorities are going to introduce the best world practices and expect to be seriously assisted by investors. But is the Russian market ready for that?

There is demand for rent, there is no market

The lower citizens’ incomes are, the higher the demand is for rental housing in Russia. Whereas the market development driver abroad is the high mobility of the population that triggers internal migration, in Russia the financial factor is the key one.

Despite the fact that the institute of owned housing is still strong, the majority of our citizens cannot afford buying a flat or a house. Students, young families, people having moved to another city searching for work and even sometimes retired people form the biggest categories of tenants from Russia’s population. According to official data, one quarter of Russian families rent housing, and 8m more are ready to move to rental flats to improve their living conditions.

The demand seems to create a civilised market.  However, things are not that simple. “Grey” rent presently, according to different evaluations, totals 80% - 90% of commercial rental housing. Actually, these are private flats and houses, or even rooms, which are let by owners, and the contracts are concluded either orally or are for the first 11 months at best.   

Owners do not want to pay the 13% of profit tax for the let square metres, and very rarely do they dare to register as private entrepreneurs (by the way, in this case, when using the simplified tax system the tax rate is only 6%). The motivation is simple: because it is almost impossible to prove the letting of the housing, why share the income?

Tenants do not object either as they are afraid that tax expenses will increase the cost of the rent. However, both tenants and flat owners forget about social guarantees, protection against fraud, and the fact that both parties are actually breaking the law in such “grey” deals.

The situation in the elite rental housing sector is slightly better due to the rates being much higher, and a clearer scheme where regulated guarantees are convenient for both parties.

Rental housing: investors do not play charity

Rental housing: investors’ charity

During the next few years the state intends to make the housing market less shady and return to the practice of constructing commercial apartment buildings.  The Housing Mortgage Lending Agency (HMLA) will deal with the creation of pilot projects. The potential opportunities of the segment will be demonstrated by the example of the first such homes. 

— We are to show that rental housing and commercial apartment buildings can develop and are economically attractive for investors, — Irina Balkarova, the HMLA Managing Director, says. — We implement all our projects via share investment funds. We shall offer investors, including private, a financial product. It will give them an opportunity to get income and participate in the growth of the realty cost.

The Agency will offer shares on the market this year. There are about 70,000 sq. m in the HMLA’s portfolio in Moscow. According to Irina Balkarova, the rental projects being prepared are of great current interest and will be demanded on the market.

But the development of the rental sector under state support and, in turn, by commercial letting projects implemented by independent realty market players are the two different stories. In the current economic condition, with the existing taxation system and preferences, businesses are not interested commercially in such projects. They will merely amount to charity for an investor.

— The HMLA is a slightly different scheme, with a lot of preferences, Elena Solovyova, Deputy Chair of Board of Investors’ Association, gives her reasons. — Actually, the development of the commercial housing market is quite likely, but the issue of financing is very important.

Following the expert, if the state provides for definite preferences comparable with those for social rental housing, then investors may become interested in commercial rental housing. And its pay-out must be at least 10—15%.

But there is no such payback in this sector, Director General of the Veles Trust managing company, Ekaterina Chernova, objects:

— Being an investor, I am not interested in rental housing, because its profitability is low, — the top-manager explains. — There is no money with similar profitability. With 5—6% per year nobody will invest for 10—15 years. For it to become interesting either the rates should go down or the profitability go up, but the market does not make this possible.

— The rental housing market is mainly non-commercial throughout the world. In European countries, such as Sweden, retirement funds own rental housing, the expert is sure. — They have money, so they can afford long-term investments with low income generating capital. And in Russia, there are no such long-term investments.

More than that, it is simpler for a company to sell objects at their primary cost or not to build anything than to invest in rental housing projects, experts admit.

— Actually, there is a situation whereby a developer chooses to deposit money and not build anything, which does not solve a lot of problems connected with the rental business, the Metrium Group Managing Partner, Maria Litinetskaya, comments.

Free land plots, taxation preferences, long-term tax holidays and state subsidies are provided for social rental housing. There are no such conditions for commercial projects, so developers and investors do not see any prospects here. 

It is difficult to forecast when the situation on the Russian market will change and if, indeed, it will even change in general.

How shall we build?

In Europe the majority of housing is rental: in Berlin it amounts to about 80%, and in Sweden it stands at more than 55%. In the Czech Republic the owners even hold competitions among tenants, while in Great Britain the number of offers on housing sales is minimal, although rental rates grow faster than the prices for housing.

In Russia it is quite the contrary: about 85% of housing is owned.

Besides, there are other factors crippling the market.

Firstly, Russians are uncertain about their future, and having a property gives them a sense of stability. People are prepared to rent a flat until they save enough money for their own one.

Secondly, there is a mono-centric trend, with the migration directed to Moscow and a couple of other metropolises. Thus, the geography of commercial rental houses is restricted. But it is quite realistic that the construction of rental housing can be stimulated, even without direct subsidising, experts think. 

According to Maria Litinetskaya, the developers who deal with the construction of rental housing would be greatly supported by more transparent and less expensive procedures concerning connections to communal networks, state assistance in the construction of road infrastructure and construction of schools and nursery schools. Private-public partnership may also enhance the investment attractiveness of this sector.

Additionally, there is a problem with already built housing which does not sell, which could also be used for rental. It is a possibility of getting money not from sales, but from rent instead, although rental houses mean long-term money.

The owners who let housing could receive a license, which is cheaper than tax and means the owners are protected by law.

Additionally, some social guarantees are likewise necessary for tenants. Legal rent with an adequate price would surely be more attractive than “grey” rent deals.