During the XIII Annual Real Estate Market Professionals Conference, titled “Market Rebuild: Real Estate and Beyond!”, Andrey Berezin, Chairman of the Board of Euroinvest Development, assessed the potential of the apartment housing market and the willingness of developers to engage in such projects.
A Fresh Path
The discussion was sparked by a bill supporting the rental housing market, which is being considered by the State Duma of Russia. The official introduction is scheduled for early 2023. The bill suggests creating favorable conditions for developers who choose to undertake the construction of so-called income-generating properties. These residential buildings and apartments will remain the property of the developer or another legal entity owner. Tenants will rent such apartments from the owner, and their relationships will be governed by transparent legal instruments.
The developing bill proposes special conditions for income property developers. Primarily, it offers preferential loans for constructing this type of housing, reducing developer risks and aiding companies entering the market without sufficient capital for risky investments. Additionally, legislators aim to introduce a zero tax rate on land, property, and income for those who construct and manage such properties.
The demand for income properties is expected to be high. Rising housing prices, coupled with declining citizen incomes and challenges in the mortgage market, inevitably lead to a shift in consumer strategies. While people previously preferred purchasing real estate, they are now compelled to rent. If the landlord is not an individual but a reputable company offering transparent terms and competitive prices, there should be no issues with the occupancy rate of income properties.
Developers Express Skepticism
Despite this, even well-established developers with experience in new market niches are hesitant to invest in this type of construction. Their stance was clarified by Andrei Berezin, the Chairman of Euroinvest Development.
As one of the most influential developers in St. Petersburg and an experienced businessman investing in promising projects, he cannot be accused of excessive conservatism. However, according to him, Russia is not yet prepared for large-scale construction of apartment buildings.
Andrey Berezin believes that the necessary conditions for making this type of construction economically viable have not yet been established in the country. After all, the construction and operation of apartment buildings lack legislative and administrative precedents. Furthermore, the return on investment for such real estate is measured not just in years but in decades. As a result, the owner of this business must have a corresponding planning horizon. However, amidst a systemic crisis, making predictions even for the next year is challenging. Consequently, few private developers are currently willing to invest in such projects. This is why there are only isolated cases of income-generating properties in Russia, built at the developers’ own risk to test a potential new market niche.
This is why Euroinvest Development, despite possessing adequate resources and competencies, is not rushing to enter the income property construction market. The company has experience with successful high-risk projects in new niches, such as apartment complex construction. Although that project has already paid for itself, the company decided to suspend that direction during the crisis. Additionally, apartments and apartment buildings have significantly different payback models.
Andrey Berezin views the draft law being considered by the State Duma in its current form as insufficient.
“Benefits and subsidies alone will not solve the problem. We need a balanced system of laws, business relations among all contractors involved in such projects, and most importantly, tried and tested law enforcement practices that will protect investments in these projects,” said Andrey Berezin following the conference.
According to the businessman, Russian law is currently unbalanced. It has well-developed mechanisms for protecting the rights of citizens who rent accommodation. However, the rights and interests of developers constructing apartment buildings and investors in such projects are still lacking. The extent of government intervention in pricing within this market is unclear. Cases involving persistent non-payers are not well-defined. There are too many legal gaps in the complex system of interactions between the state, investors, developers, and tenants. It will take more than a year to balance and fine-tune this collection of rules and practices. Only after that will there be a chance that the apartment building market will transition from isolated risky experiments to widespread implementation.
Is There a Demand from People?
Market participants should also consider another noteworthy aspect. Not all potential tenants are eager to have legal status, as it imposes additional obligations on them. This applies to both long-term renters and, often primarily, those who rent for just one or several days.
In the first case, it’s related to the need to declare one’s residence. A person who moves from another region to a big city may not register at their new address for years. For informal landlords, this detail is not crucial. What’s important to them is that the tenant pays rent on time, doesn’t cause problems with neighbors, and doesn’t damage the property. However, legal entities working closely with the government will need to address this issue as well. Of course, they can provide all the relevant data to law enforcement agencies and other state institutions regarding who rents their apartment, where, and under what conditions.
As for short-term rentals, clients from various backgrounds use these services. Often, these are professionals on business trips. If their employer covers their accommodation expenses, legal renting will only make reimbursement easier. However, people also rent apartments for other purposes, such as parties or intimate encounters. In these cases, any potential for publicity only deters potential clients and directs them towards the informal sector, where fewer questions are asked.
Will Income Properties Gain Traction?
Currently, this niche is primarily occupied by the informal rental housing market, which has its own dynamics and is actively evolving. Until recently, this sector was dominated by the likes of elderly ladies renting out rooms to students or owners of second or third apartments who similarly rented out their properties for extended periods. All relationships between landlords and tenants were strictly individual, and prices were determined by spontaneous market mechanisms.
New trends have emerged lately. For instance, investors are purchasing apartments in new residential complexes during the early stages of construction. After the building is completed, they renovate the apartments and rent them out for long-term or short-term stays. In the latter case, a distributed apartment hotel infrastructure is often established. This means there is a company with employees (those posting listings, processing payments, cleaning apartments, etc.), payment mechanisms, and everything else. However, this often occurs without forming a legal entity, paying taxes, or interacting with state regulatory bodies.
The introduction of income properties could significantly transform this market. After all, they imply transparency of all mechanisms and mutual accountability among all participants in the process. This entails additional legal and financial obligations. As a result, it may be quite challenging for legally operated income properties to compete with apartments rented out through informal arrangements.