What’s Moving the Real Estate Market?

February 3, 2012


Top managers of Russian developers and homebuilders discussed a number of questions including regulation, management competitiveness, the market beyond Moscow, the cost of land, investment and the future outlook.

What would you change in the industry? It is no secret that developers have long been unhappy with regulation of the industry. Some cities (St Petersburg, Ekaterinburg) are better in this regard, while others (Moscow) do not even have an approved city development plan. If granted a wish to make a single change in the industry, the panelists would do five things. First, introduce a clear city development plan specifying development terms and conditions for all land plots and moving from an authorization-based approval process to a notification-based one; second, introduce a law on complex development and improve the law on ownership and tax legislation; third, cancel open land auctions; fourth, come up with a single plan for development of territories that will be supported by construction of building material capacity; and fifth (something that all the speakers agreed on) have as little involvement from the state as possible and urge the authorities to try to avoid bad PR for developers.

Competitive management also discussed, although views diverged. Leonid Kazinets of Barkli argued that the management of most Russian real estate companies is just as good at having connections that help get access to lucrative land plots and ease the approval process, but their professional qualities are quite questionable, having a negative effect on quality and implementation time of projects. If faced with management of Chinese companies, most would lose out to the competition. Igor Levit of LSR Group and Artem Eyramdzants of PIK Group, on the contrary, argued that the management of large homebuilders is quite professional and can build projects nearly as fast their Chinese counterparts, with the main reason for smaller volumes vis-a-vis Chinese peers being smaller market capacity (demand).

Is there a market beyond Moscow? Absolutely yes. While the regions indeed have seen an uneven recovery, there is definitely demand and a market outside of Moscow. Renova StroyGroup’s Akademicheskiy project (totaling some 9.0 mln m2 of residential and 4.5 mln m2 of commercial space in Ekaterinburg), LSR Group’s home in the St Petersburg market and PIK Group’s presence in Kaluga, Yaroslavl and other regions are good examples.

Why is land so expensive? Igor Levit opened this discussion with a quote from Mark Twain: “Buy land, they’re not making it anymore”. But in general, all the speakers agreed that only infrastructure-ready land in locations with a strong job market was of any value, and the rest may be worth little if nothing. Veniamin Golubitskiy of Renova-StroyGroup said that the land market was the only one that has not recovered post-crisis, while Dmitry Mints of O1 Properties said that land in the center of Moscow for commercial projects is scarce in light of the new city administration’s intent to limit commercial development i n the city center.

Foreign investment on the rise. As the market transitions and matures, the number of quality properties has been on the rise, which has made the choice for foreign institutional and specialty investors wider. Gordon Black of Heitman Private

Equity noted there were probably 20 high-quality properties in Russia worth consideration. At the same time, he also voiced a concern that developers were very focused on selling at as low a cap rate as possible, while investors were concerned with the sustainability of high rental rates. The two do not go hand-in-hand, which may suggest that the currently high spread of commercial property over Sovereign yields may persist. Mr Mints, however, was much more optimistic on the potential for further narrowing of the spread, which is one of the highest among the world’s capitals (over 350 bps in Moscow versus London’s 150 bps).

What does the future bring? All homebuilders were very upbeat on the sales outlook for 2012, noting strong demand and support from growth in the mortgage market. For commercial properties, the outlook for Russia was also upbeat, especially relative to the rather gloomy backdrop in developed markets, where a lack of financing from liquidity-strapped banks will restrict buyers and constrain price appreciation.