Why are developers and banks afraid of rental housing in Russia

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Why are developers and banks afraid of rental housing in Russia
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Nadezhda Kosareva, Urban Economics Institute

The topic of rental or, rather, letting housing is gradually becoming one of the keynote concerns for further housing construction development. It is no secret that the availability of letting is a factor of the new economy’s success as it is no longer tied to the raw base location but oriented towards highly qualified mobile labour resources.

In large cities around the world, renting is the prevailing form of living. For example, in Berlin, 80% of all residential housing is rental, while in Moscow it is the opposite with 85% of housing being owned by the people who live in it. These are rather contradictory tendencies. And the earlier we start adjusting the situation, the sooner we shall be able to solve the problem of mobility.

Nevertheless, the subject is difficult to develop in Russia. In spite of the law on rental housing having been adopted in 2014, only a few and occasional projects have been implemented in Russia since then. To a great extent this has happened because the Russian market (banks, developers, etc.) do not yet understood what it is exactly. The situation resembles the one of 1995 when nobody knew what a mortgage was. The matter is new, and the risks are vague.

Meanwhile, if we consider the mortgage market in the USA, we can see that individuals may get such loans only for individual houses, and a mortgage for tenement houses is the prerogative of legal bodies operating rental housing.

In addition, the risks of investment in rented houses when compared with individual housing are assessed as being lower. The probability of an individual borrower’s default is rather high. If a tenant loses the ability to pay he is simply replaced by another one, and the mortgage repayments do not suffer.

Returning to Russian soil, there is, of course, the problem of the presently undeveloped demand for rental housing. Much depends on the buyers’ psychology. For 20 years we have become accustomed to the idea that housing should be owned. However, I see now that the new generation’s attitude to it is quite different.

For example, those who currently work in Tatarstan who then move to Moscow before returning to Kazan as there is a demand for their skills there. These people try not to psychologically depend on property.

Recently, we held a meeting of a debating club at the Urban Economy Institute, where the topic was “Letting construction projects in Russian cities”. Experts in this field were invited there.

The discussion showed that real rental projects already exist, and that the rental housing market is developing gradually, although there are problems.

It is clear that an amendment to the law is required. Firstly, there must be an opportunity for new such assignments. Developers are afraid of starting with a whole block of flats, but they could allocate some part of it for rent. Of course, such a proposal may have a lot of negative consequences mainly connected with the management of such a “mixed” building, but measures could be taken to decrease the risks.

Secondly, federation subjects must have an opportunity to locally settle an additional set of citizens who might be non-commercial tenants. Because local authorities are more aware of what regional development headlights are a priority.

An idea was proposed to use concessions or life-cycle agreements in applications for rental housing development projects.

Putting this another way, the topic of rental housing is being seriously discussed and looks prospectively good. However, at the beginning, each project should be assessed individually and factor in its location, whether there is any demand, the cost per square metre of the construction and the rental charge. Positive results from the implementation of such projects will certainly provide impetus to the further development of this area.