What “behavioral” novelties have appeared on the real estate market and what price changes consumers should be prepared for.
How the buyer has changed
At present, those who are engaged in sales in the real estate market note: the buyer has changed, becoming more prepared, knowledgeable.
‘Sometimes the client's professionalism on the issues of real estate is commensurate with that of a manager,’ Alexey Boldin, Head of the Sales and Marketing Complex of Leader Invest company, admitted at a recent roundtable held by Vesti.Real Estate online newspaper within the framework of the Russian Forum of Real Estate Market Leaders. ‘After all, before taking the last decisive step — buying an apartment — people have got in touch with a number of developers, real estate agencies, banks. They make serious preparations, study the market.
In recent years, the real estate sector has been dominated by a so-called smart consumption, where a person is willing to pay only for what is vital to him or her. Reasonable needs do not imply any additional (and, moreover, overhead) services, such as points of entrances with designer delicacies, a swimming pool in the basement or a terrace on the roof.
“Smart” usually comes with “green”. The concept of “green and smart” in normal-people speak means that today the humane scale of housing is valued: low-rise buildings, a social infrastructure within walking distance and certainly a park nearby.
‘The purchase format “for renting” has now receded into the background. People buy housing, mainly for themselves and their children’, Alexey Boldin says. ‘Sometimes one may ask: for whom is the purchased apartment? The answer is ‘for the son or daughter’. — And how old are they? — ‘Ten or twelve.’ That is parents act proactively, acquiring square meters of housing, which their children will need in the near future’.
An absolutely new trend is to live in the city’s historical center. It is a landscaped urban environment, a rich cultural life different from that on the outskirts that attracts. Therefore, the infill construction in the historical part of Moscow is becoming increasingly popular. So, when it comes to trends in demand, its main “density” is in the comfort segment and business class. Experts suggest that these segments will be developed in the near future.
As Sergey Shumilov, head of the Land.RealEstate.Construction practice of Infralex law company put it, this trend is set by the following factors: entering the market of a new category of buyers — businessmen returning to Russia because of the sanctions, who buy housing for themselves and their families. There is also an increased demand from regional buyers. According to experts, they account for up to 20% of transactions in this category, that is, wealthy citizens are moving from other cities to Moscow. And one more factor is an overall decrease in the cost of housing in the market — by 16% over the last three years — which increases its investment attractiveness.
The growth in demand is also due to a mortgage program. Maria Litinetskaya, a managing partner of Metrium company, stresses that in the first quarter of 2018, the maximum number of issued mortgages (6,662 units) was recorded, which is 87.3% higher than the year before. At the same time, it is worth noting the fact that the share of mortgage purchases is steadily growing. While at year-end 2014 in the mass segment, the value was 16%, at year-end 2017 it was already 48%. In the business-class segment, a similar situation has occurred. In 2014, the share of credit transactions accounted for 16%, while in 2017 it was as much as 33%.
High rates of appearance of new projects facilitate an increase in the number of transactions in absolute terms. In particular, for example, in the first quarter of 2014, there were 3,800 apartments of the mass segment and 5,000 of the business class in the primary real estate market. At quarter-end 2018, the supply in the economy and comfort classes has reached 17,800 units, while in the business class there were 17,000 lots.
Should you buy housing now or should you wait?
The average consumer is now concerned with the following question: what kind of risks he may face due to the transition from shared construction to project financing. As is known, since the summer, banks will start to monitor developers.
‘The consumer will not face anything particularly bad, except... the rise in housing prices,’ Lyubov Tsvetkova, Chairman of the Board of Moscow Investors Association, ironically notes. However, the average buyer will have much more confidence in the future as well, according to Lyubov Tsvetkova.
‘Many developers, even large ones, use a risky scheme in the current system of an equity participation agreement: the funds of equity holders' are used to finance previously unfinished projects, resulting in a pyramid, in which each new group of co-investors finances the development projects of the previous group. In the new system of project financing, banks and institutional investors will not assume such risks and will actively apply already well-developed mechanisms to ensure targeted spending of money by developers’, Sergey Shumilov believes.
Now that a project financing has been introduced, a developer will be able to receive money from a bank only after fully fulfilling all obligations to the client. That is, the reliability of the system increases many times. Authors of the reform can be understood. Let’s agree, no one wants to have deceived co-investors and the government doesn’t want it either. Nor does it want to be liable for debts of the builder.
According to Maria Litinetskaya, sellers and creditors with the help of the government will still be able to develop an optimal financing scheme, in which developers will not suffer from the growth of prime cost due to credit servicing, while consumers will not suffer from the rise in prices. The roadmap of the reform, developed by the Russian Ministry of Construction, has specified that customers' money on escrow accounts can be used to fund construction, but only under the control and responsibility of the bank. This will allow lenders to reduce the cost of borrowed funds for the developer. If the authorities let market actors develop a mechanism that suits all parties, the cost of construction will grow by no more than 3-5% in costs per square meter of the construction. In this case, a buyer will not probably notice the change in prices, especially that stretched out in time.
But we should be prepared for the fact that the share of small entrepreneurs in the market will gradually decline, only large companies will build housing. But if the number of developers decreases, so will competition. And then we should expect an increase in house prices. Forecasts vary: from 10-15% to 25-30%. According to CEO of RUSICH concern, Boris Leskov, with the growth in sales and the arrival of funds to the account, an interest rate of about 12% per annum should decrease, which means that large actors in the developer market will be able to afford not to raise prices and remain competitive. Those who cannot ensure a good sales volume will not be able to remain on the market since it is very likely that they will operate at a loss.
However, there will not be a sudden consolidation of the market. Neither today, nor tomorrow, but, say, in two or three years. This suggests the following:
‘Housing should be purchased now as there is the most favorable situation for this in the market,’ Lyubov Tsvetkova advises. ‘In a couple of years, those apartments which construction was launched before the reform will be finished, while prices will go up.
‘In 2019, we will come either to projects with escrow accounts (escrow account is opened in order to temporarily store money until the payment is made with a known purpose, in this case — for purchasing apartments), or to projects with only secondary housing — ready-to-move housing in new buildings’, another expert, Vasily Fetisov, who Sales Director at Etalon-Invest company, predicts.
What comprises the added value
‘Our prices are already growing,’ Dmitry Volkov, Commercial Director of Samolyot state enterprise, admits. ‘Approximately, 0,8% per month. This is not very much but the trend itself is well marked. What affects the prices? As usual, this is primarily the degree of readiness of the project. Secondly, the development of the territory and region where the object is under construction. When the house is not located in the open fields and there is already some kind of infrastructure around, it looks much more attractive. Accordingly, this is reflected in the price, which grows somewhere by 5-10%’.
‘At the moment, the scheme and conditions for interaction between banks, developers and buyers have not been worked out yet, which makes it difficult to accurately forecast changes in the growth of property prices’, Ruslan Stukalov, CEO of Samolyot state company ponders about factors of the price growth. ‘We assume that banks will issue loans to developers at a reduced rate, which will tend to the difference between the loan interest and the deposit interest, which is expected to be 3-5% per annum’.
Another price factor is the transport accessibility of the facility. If it is located in the vicinity of the metro station, the Moscow Central Ring stations, its cost goes up. And, finally, the added value is created by all sorts of product improvements — beautiful entrance spaces, modern elevators, ready-made playgrounds and so on.
Can developers build cheaper housing?
Sure, the consumer is also interested in a potential of the developer in terms of reducing the cost per square meter.
‘Alas, such possibilities are almost exhausted for most developers,’ Lyubov Tsvetkova said. ‘Building contractors have already lowered their margins and are operating for profit ranging from 5% to 10%.
According to Lyubov Tsvetkova, contractors sometimes operate with a zero profit, just not to drop the team. Specialists are puzzled over where to find reserves for further lowering the cost of housing.
Honestly speaking, they exist. One of the options is the scale of the project itself. In large projects, the cost per square meter is reduced. Another thing is that not all developers have such large projects in their portfolio.
When it comes to the policy of dumping on the buyer’s part, there is usually a chance to use it when buying real property from small developers. They are more accommodating in terms of discounts, bonuses because they are burdened with urgent loans. They find it more profitable to complete the construction as soon as possible and leave the project. With such developers, it is possible to bargain. And in this case, housing prices can be much lower. However, whether this know-how will remain on the market now is a big question.