The latest event of the Moscow Center of urban studies “City” – a discussion session devoted to the outlook for Moscow’s construction industry amid a crisis – took place at the VCIOM Institute on March 29. Representatives of large and medium-size developers, economists, real estate agents, urban specialists and sociologists took part in it.
The participants noted that the industry is entering a new reality characterized by a drop in profitability of projects. In their opinion, the main drivers of recovery must be new tools for attracting investors, simplifying procedures and projects implemented jointly by the city and business.
The experts discussed three questions: the condition of the Moscow real estate market and how the market affects the industry in general; how infrastructure projects affect the construction industry; and whether Moscow’s urban development policy helps the industry adapt to the crisis.
The participants rated the condition of the Moscow real estate market as average, noting that there were both opportunities for the growth of construction and risks of a construction downturn. In this situation, infrastructure projects implemented jointly by investors and the city (the Moscow Government) become a growth driver, for example: construction of the Metro, roads, transport interchange hubs and other transportation facilities. The round table participants determined that infrastructure projects had a beneficial effect on the construction industry and noted the strong potential for this effect.
Anatoly Shpakov, Head of the Marketing Department of VTB-Proekt, believed that prices would not drop any further: “We’ve already hit bottom, judging from real estate prices. The cost per square meter is approaching the production cost. The price per square meter can’t drop any further, and we need to find new ways to stimulate the industry.” More importantly, our monitoring shows steady demand for real estate, which means that supply has to grow.
Irina Ilina, Director of the Institute for Regional Studies and Urban Planning at the National Research University Higher School of Economics, noted that there were several factors behind the rise and fall of market prices: “An analysis of some companies shows that they are continuing to cut prices for available real estate in all sectors – residential, commercial and office. Supply is still fairly high, but this mainly due to completion of investment projects that were started several years ago. So today, we can say that many investors are very cautious about entering the market in all real estate categories. I think that in the near future we may have a certain balance between supply and demand, due to lower real estate prices on the one hand and a decrease in supply on the other.”
Erast Zhiryakov, Director of Mosrealstroy LLC, noted that to a large extent a buyer’s choice today is due to the need to invest available funds in real estate and prevent cash depreciation rather than a desire to improve their living conditions. Developers are also changing their behavior: “New projects that at the planning stage or at the start of construction are now being revised in order to reduce risks. When large complex projects are divided into phases and with revised commissioning dates, they are no longer a complex, but rather detached buildings, which reduces their risks.”
Evgeny Mezhevkin, Head of the Research and Analytics Department of PSN Group: “Buyers today can generally choose to live almost anywhere within Moscow’s old boundaries. There was actually no such choice in 2013, 2012 or 2008; therefore, today, with respect to housing, I think the market development of Moscow’s construction industry is experiencing a qualitative recovery. Today, builders are actually fighting for buyers, who are spending more time thinking, choosing from 7 or 8 projects instead of 2 or 3, focusing more on quality of housing and infrastructure, and who prefer to buy apartments in finished buildings instead of buying into shared equity construction.”
The experts looked at infrastructure development during project implementation as a separate topic. Specifically, they noted that the current economic climate makes it difficult for investors to invest in social projects like kindergartens, schools, hospitals, etc. Andrey Kirsanov, Deputy CEO of MR Group, defined the problem as follows: “Developers build social facilities with their own money, and then hand them over under contract to the city, but still pay taxes. Previously, the high margin on projects allowed them to do this, but today, when projects are heading toward cost, spending a lot of money on social facilities is generally becoming impossible. Legislative changes are needed in this area, specifically, to exempt investors from taxes for building a social facility and handing it over to the city. The public-private partnership mechanism in this area must also be more clearly established.
On the other hand, Irina Ilina, Director of the Institute for Regional Studies and Urban Planning at the National Research University Higher School of Economics, noted that the city not only needed social facilities, but also public infrastructure, which in turn become an additional incentive to develop areas. “We have carried out studies to assess public infrastructure in Russian cities, and have concluded that in many cases public infrastructure facilities can become development drivers for areas, including individual housing projects. It’s no coincidence that when it comes to housing, there are certain unique types of housing districts, especially in New Moscow or Moscow, especially if they are somewhat compartmentalized, for example, a school of dance, a theater school, a school of physics, sports centers, and so on. So infrastructure becomes a development driver.”
Evgeny Mezhevkin, Head of the Research and Analytics Department of PSN Group, confirmed the research results with specific examples: “A number of large projects are currently being implemented in Moscow, and if you look at the infrastructure they build, they are complete cities. For example, ZIL has a library and concert hall, and Tushino has sports schools, stadiums and swimming pools. Today, there are cases where infrastructure actually becomes a kind of driver. Now every developer is focusing not only on social infrastructure, like schools and gardens, but on something more. They’re looking for something attractive.”
According to the participants of the City Moscow Urban Center event, projects implemented jointly by government and business must become development drivers. The program for construction of a network of transport interchange hubs now underway throughout Moscow was cited as the perfect example.
Andrey Malygin, Director of the TIH Development Department of Mosinzhproekt JSC (the managing company for a number of TIH projects), said that today TIH are being planned in order to minimize disputes over occupied land. “During preparation of urban planning documentation, we try to locate TIH facilities such that TIH technology is on occupied land; and then if necessary we will work out a mechanism for expropriating land for use by the city, but we will locate commercial projects on free city land.”
Malygin explained the substance of cooperation between the government and the city as follows: “Cooperation on TIH construction means that financing is required from the investor, while the city will carry out the engineering part of the project.” This arrangement reduces both engineering and administrative expenses, since the city itself provides urban planning documentation for the projects, which makes entry into a project much cheaper. “The city has made an important decision today – that the city will carry out overall engineering, and then by putting the investment project out for tender, the funds invested in construction of the engineering part will be returned to the budget. This means that the city is no longer tied to the investor’s interests and can implement the engineering part of TIH, which is the key component of the TIH program – making passenger transfers between various types of transport convenient and fast,” he emphasized.
It was also noted that housing construction is included in TIH projects today. Erast Zhiryakov, Director of Mosrealstroy LLC: “Together with Mosinzhproekt, we are currently looking at the option of building housing developments in hubs within a number of TIH projects. In terms of selling residential space, they are more attractive than separate residential areas without a connection to TIH, let alone commercial space. The interest is in linking commercial infrastructure to TIH, making it attractive on the market.” Andrey Malygin also confirmed these options: “The law allows construction of housing developments within TIH projects. In fact, we have such developments located within the boundaries of the site plan for a number of projects. They are actually the main driver allowing implementation of this project in general. We understand that this infrastructure is the only way we can attract an investor.”
There was special emphasis on the topic of administrative barriers and the efforts of the Moscow government to remove them. Alexey Raskhodchikov, Deputy Director for External Communications of Mosinzhproekt JSC, talked about the “From Project to Object in 9 Steps”, which is designed to eliminate excessive procedures for builders. He also talked about a study carried out by Mosinzhproekt among managers of construction companies in Moscow. The results showed that industry representatives have already seen a positive effect from the efforts of Stroykompleks to remove administrative barriers. According to the surveyed experts, the shift to online government construction services has played a key role in simplifying procedures for approving projects.
The round table participants said their experience confirmed the results of the study. As Erast Zhiryakov, Director of Mosrealstroy LLC reported: “The pace of construction as a whole has increased. Administrative barriers have actually decreased.” Ekaterina Krylova, Director of the Moscow Investors Association, acknowledged that there had been progress with respect to administrative barriers, but noted some shortcomings that still needed work: “There are still problems with utility companies, which either inflate prices for connecting to infrastructure or delay connection.”
However, it was also noted that administrative barriers are no longer the industry’s main problem. The round table ended with a brainstorming session on the topic of how to recover from the crisis. The participants said that the main problem in the construction industry today is in financing and consists of two key components: insufficient internal funds and a lack of low-cost loans. Therefore, tools for recovery must be found in the fiscal space. Ekaterina Krylova, Director of the Moscow Investors Association “The general public is our customer. And I believe that one measure is to boost demand by refinancing mortgages, not by the end of the year but over an extended period. What we’re looking for is 7-8% instead of 12%. That is, more affordable mortgages. This means that residents themselves will be able to specify the builder and the most interesting projects; i.e., they will vote with their feet. This boost in demand comes from below in order to support the industry.”
According to Irina Ilina, Director of the Institute for Regional Studies and Urban Planning at the National Research University Higher School of Economics, Moscow could more actively invest in construction of social housing for people on the waiting list, military personnel, large families, and so on. “We know these programs have been cut back in recent years. Social housing is limited and the lineups are long. I think that directing a portion of public funds to provide housing to all people in need more quickly will allow us to “blow” the bubble on the real estate market somewhat.
Andrey Kirsanov, Deputy CEO of MR Group, presented his proposal: “Russia overtook European countries long ago in the amount of housing privately owned by citizens. It’s the highest anywhere. Our figure has been 85% for a long time now. In European countries, this figure is 40-50-60%, which is already considered a lot. This is normal: people find housing where there’s work and they live there. We don’t really have this culture. We’re used to owning something and then finding work near this housing. The next vector is probably expansion of rental housing, and the government must come up with some actions to develop this housing.”
Alexey Efimov, Director of the Expert Center for Real Estate Analytics of the Higher School of Economics, said that one of the solutions was to expand the use of public-private partnerships to the business sector.
He also noted the need to develop production facilities in Moscow, which would be an additional incentive for real estate development. “Industry is actively moving to Moscow Region, and demand is following it. This means that all the projects we’re talking about today must consider industrial development among other things. Bedroom communities, including Moscow, are doomed. Only integrated development of Moscow, which among other things considers innovative development, will allow Moscow as a whole to grow.”