Postponed Concerns in the Russian Building Industry
The prolongation of discounted mortgages has delayed the potential worsening of the housing market, but has not eliminated the risk.
As 2022 drew to a close, Russian President Vladimir Putin, having kept many citizens waiting, decided to extend the concessional mortgage program for purchasing primary market housing by a year and a half.
The decision significantly eased the concerns of the construction industry, which had already been facing difficult times throughout the year. Although apartment prices in nominal terms increased, and developers in most regions of the country completed more housing projects than in previous years, this is just the tip of the iceberg.
Hidden beneath the surface are less favorable developments, such as the fact that real estate prices stagnated or even began to decline in some areas during the second half of the year. This includes Moscow, where such a downturn had not been seen for nearly a decade and a half since the 2008 crisis. The increase in completed construction projects conceals a strategic shift in housing commissioning by most developers. Confronted with economic uncertainty, they opted to indefinitely postpone projects in their early stages and concentrate on those that could be finished quickly.
In many ways, it was the mortgage lending opportunities introduced by the government that allowed the signs of recession to subside and generally kept the market stable. A large part of the buyers who were frightened by the economic shocks of the winter and spring, returned to the idea of buying a home precisely because they saw an extremely tempting financial offer at a rate of 7%, while even lower for family borrowers. And when it became clear that the program was coming to an end, the market began to worry again. Now, with the decision to extend, all fears are postponed for at least a year and a half. But experts have already begun to discuss what will have to be done after the program finally ends.
Builders Must Take Action
Some experts emphasize that a year and a half is not a long time, and it is improbable that the housing market will be in such a robust state after this period that developers’ profits return to pre-crisis levels. This implies that developers need to explore ways to mitigate future risks, including the creation of their own mortgage programs, installment plans, and other methods to attract customers.
Alternative mortgages offered by developers are not only a trend for the future, but are already emerging today, with expectations for greater adoption in 2023. Additionally, the use of financial mechanisms that supplement preferential mortgages is gaining traction. This involves programs that subsidize a portion of the loan’s interest rate, which some developers have already implemented.
One of the early adopters of this process is Euroinvest, an investment company from St. Petersburg. This year, they introduced a special offer in which they compensate the buyer for a portion of the apartment price increase related to the use of mortgage credit. For some residential complexes constructed by the company, up to 15% of the apartment cost may be compensated. Combined with a family mortgage, the buyer could potentially achieve a near-zero real interest rate on the loan.
Other customer offers are also gaining popularity in the market. One example is the “mortgage for a ruble” program, in which a buyer makes only minimal monthly payments during the construction of a house and pays the full amount once the building is completed. This way, the mortgage payment essentially replaces the monthly rent without adding any additional financial burden on the client.
Nevertheless, there is more that can be done to revitalize the construction market, and the government could play a role. For instance, they could lower interest rates for purchasing apartments in the secondary market, including the introduction of preferential mortgages for previously occupied housing. An influx of buyers in the secondary market would positively impact the new housing market, as citizens who sell their apartments will also need a place to live. Judging by recent data, the Russian government seems to recognize the benefits of such a decision. In late autumn, Deputy Prime Minister Marat Khusnullin discussed the prospects of preferential rates for secondary housing.
Presently, preferential mortgage options include:
- Concessional mortgage for purchasing homes in new developments, with an interest rate of up to 7% per annum.
- Family mortgage program, featuring an interest rate of up to 6% per annum.
- Special conditions for the Family mortgage program in the Far Eastern Federal District, with an interest rate of up to 5% per annum.
- Far Eastern Mortgage program, offering an interest rate of up to 2% per annum.
- Rural mortgage program, providing an interest rate of up to 3% per annum.
Preventing the Fate of Famagusta
Another unresolved issue, according to experts, is the fate of social facilities whose construction was planned by developers before the turmoil of this year. There are indications that many construction companies have either abandoned these plans entirely or are at least seeking ways to remove them from their balance sheets. Experts suggest that the government could support developers’ social initiatives in several ways. First, by employing co-financing mechanisms, including the Stimulus program. Second, by providing builders with special credit guarantees or simply improving the terms of credit allocation for implementing such projects.
In recent years, the role of construction companies in developing social and engineering infrastructure in Russian cities has been steadily increasing, and today it can be considered comparable to the role of the state.
For instance, the previously mentioned Euroinvest has constructed kindergartens and established communication and energy supply lines. Murino Management Company, which is part of the holding, played a central role in constructing the most important traffic interchange between the ring road in St. Petersburg and Murino, the largest satellite town. The creation of this interchange significantly eased traffic and reduced losses from congestion on that section of the road network.
In recent months, Euroinvest and its head, Andrey Berezin, have focused on an even more ambitious project: constructing a road that will connect the southern part of Murino with the St. Petersburg-Matoksa highway. Hundreds of thousands of residents from several settlements are eagerly awaiting the new highway’s completion. As Euroinvest’s previous experience demonstrates, the road will be completed, but it is reasonable to assume that well-organized state support could help expedite and enhance the work.
Experts caution that if the Russian construction sector does not receive assistance now, many Russian cities may face problems similar to those encountered by Detroit, Famagusta, Mogadishu, and other cities that experienced a complete collapse of not only the construction market but also the infrastructure network. Experience indicates that it takes years to revive the urban economy after such setbacks, and it is not always possible to fully recover.
Simultaneously, entrepreneur-developers remain optimistic even under the current circumstances. Andrey Berezin, for example, expresses his intention to continue investing in the development of his own country regardless of the situation.
“Where else would our investments be needed? There are very few positive examples of domestic businesses investing abroad. It’s not without reason that they say: where one is born, one is useful there. Of course, it would be nice if the state supported its investors. But even without interference, we’ll manage just fine,” he emphasized in an interview.