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ANALYTICAL NOTE
Trends of the Russian residential real estate market
April 2007
The volume of housing stock in Russia is approximately 2.8 billion square meters. About half of the housing was built before 1970. In terms of housing provision (excluding quality and comfort), Russia lags behind many countries in the world. If on average there are 20.7 square meters of living space per person in Russia (in Moscow about 25 square meters per person), then, for comparison, in the USA this figure is 70 square meters, in Great Britain — 62 square meters, in Germany — 50 square meters, in China — 27 square meters (in Shanghai 34 square meters per person). According to UN social standards, there should be at least 30 square meters of living space per capita. In 2006, 50 million square meters of housing were built in Russia, i.e. 0.33 square meters. per person, while to replenish the housing stock that is being retired due to wear and tear, as well as to improve housing conditions for the future, according to international standards, it is necessary to build about 1 sq. m. per person per year. For comparison, in China today this figure is equal to this value.
We believe that the main factor in the growth of housing prices in 2006 was high effective demand, including deferred demand. It was formed as a result of the influx of funds from exports into the country, which have exceeded imports for several years in a row. The volume of housing is not growing at the same rate as the accumulated trade balance from year to year. The positive trade balance of the Russian Federation in 2006 was 164.4 billion US dollars. These funds, one way or another, became the income of Russian citizens, and some of them were invested in the most reliable, although one of the most conservative, investment instruments — real estate. In addition, I would like to note that Russian companies attracted funds on international capital markets — in 2006 this figure was about 60 billion US dollars, and the total debt of commercial structures is comparable to the reserves of the Central Bank. Some of these funds in the form of salaries and disposable profits from the activities of enterprises are at the disposal of citizens and, consequently, in the real estate market. Let us add that in 2006 Russian companies attracted 16.5 billion US dollars during IPOs, — since in most cases Russian companies conduct business on the territory of the Russian Federation, part of these funds are the income of Russian citizens. In 2006, the growth of the housing stock was only 1.79%, and if you take into account the disposal of dilapidated housing, then even less. The consequence of this disproportion was a significant excess of demand for housing over supply, which caused a 75% increase in prices in 2006.
Mortgages are becoming an attractive tool in the residential real estate market for many citizens. If in 2005 the volume of the mortgage lending market was 4.5 billion US dollars, then in 2006 it was already 13.5 billion US dollars, and the forecast for 2007 is 17 billion US dollars. Moscow's share currently accounts for at least 50% of the total volume of the mortgage services market. It is obvious that the mortgage lending market began to form in Moscow earlier than in the regions, due to the high concentration of financial flows in the capital, however, it seems that in the future Moscow's share will gradually decrease, and the regions' share will increase. The dynamic development of mortgages is a natural expansion of banking services that meet international standards. Despite all the advantages of this service, mortgages are nevertheless a catalyst for price growth.
In the last decade, the growth of the population living in large cities has become a global trend. The peculiarity of Russia is the low population density per unit area and the underdevelopment of infrastructure, mainly transport, in the country as a whole, which pushes citizens to live in megacities. Although, according to Rosstat, the ratio of urban and rural populations has been relatively constant over the past ten years, in fact the situation is different. In search of work, a large number of rural residents, renting housing (without registration), live in large cities and want to buy an apartment, which also affects the growth of the price per square meter.
Against the background of high demand for housing in megacities, the number of sites for development is decreasing, and the existing sites involve significant costs for the withdrawal of industrial enterprises, land lease, connection to utility networks, as well as encumbrances in the form of social infrastructure. Today, only large developers such as MIRAX GROUP, INTECO, PIK, Sistema-Gals, DON-Stroy and some others can participate in the development of megacities. As a result of the high cost of construction in large cities, lower-quality panel housing is being pushed out to the suburbs, and the share of business and premium class housing is growing in megacities. Such housing is today the most profitable for developers and attractive in quality for wealthy city residents. Rising housing prices lead to the fact that the construction business is becoming profitable not only in the capital, but also in regional centers, and recently the profitability of construction, for example, in the Moscow region has exceeded Moscow indicators.
According to the results of 2006, prices in the suburban real estate market did not grow as significantly as for housing within the city. If in Moscow prices for apartments rose by 80%, then suburban housing went up in price by about 40-50%. The main problem when buying a country house for permanent residence remains the underdevelopment of infrastructure. Although recently attempts have been made to change the situation — of the announced large projects in the Moscow region, fully provided with infrastructure, one can name <Rublevo-Arkhangelskoye>, the territory of the <Kommunarka> collective farm, <NovaRiga>, <Zeleny Mys>. It should also be noted that in the Moscow region, most cities and cottage villages, even with a developed infrastructure, are largely oriented towards <interaction> with Moscow, mainly in terms of jobs. It is noteworthy that abroad the concept of <suburban> does not exist at all. real estate: there, the development of territories is more uniform — the suburbs have their own municipalities, schools, kindergartens, clinics, and workplaces.
The Moscow suburban real estate market has shown a tendency for supply to exceed demand for upper-price segment cottage communities and a shortage of economy-class communities. At the beginning of 2007, several companies announced their intentions to develop this promising area. Perhaps, expanding the supply of economy-class communities will be a solution to the housing problem for many families and will lead to some outflow of buyers from the metropolis' real estate market.
The introduction of land plots that are owned into circulation opens up great prospects for the residential real estate market. Such a practice has long existed in many countries and has proven its effectiveness. Legislation in this area has not yet been sufficiently developed, and banks practically do not provide loans for construction using land as collateral. This instrument should primarily encourage the construction of private homes.
Formation of a civilized real estate market, which includes open investment auctions, bringing the reporting of development companies in line with international standards, enables the development of such a tool as Real Estate Mutual Investment Funds. This financial instrument is widespread in Western Europe and the United States. Today, there are about 155 closed real estate mutual funds in Russia, the total capitalization of which is 65.1 billion rubles. In most cases, the fund's assets are invested in properties located at the location of the management company. Considering that 207 out of 282 management companies are located in Moscow and the Moscow region, it is obvious that the main investment objects are in the Moscow region. The growth of mutual funds may be the reason for increasing market transparency and more accurate assessment of the cost per square meter. The development of real estate mutual funds in the regions will mean the establishment of the same <rules of the game> for developers in the entire Russian residential real estate market.
In 2007, with growing incomes of the population, relative development of mortgage lending and a deficit of sites for construction, especially on the Moscow market, it is not worth talking about a noticeable of the market. The halt in price growth at the end of 2006 was caused mainly by the fact that prices became inaccessible to people with relatively high incomes, a significant part of whom resorted to mortgage lending services. Therefore, given the stable situation in the country, the continued dynamic development of business and, as a result, the gradual growth of incomes of the population, we can expect that by the end of summer or the beginning of autumn we will see a noticeable increase in prices on the real estate market, which, however, will not be nearly as jumpy as in 2006. The desire of citizens to improve their living conditions will push the market to further growth. In 2007, Russia plans to commission 56 million square meters of housing, perhaps this figure will be exceeded. However, this is completely insufficient to meet demand. In our opinion, the figure of 100 million sq. m. per year will ensure acceptable market saturation.
The note was prepared by the analytical service of the MIRAX GROUP corporation
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