Income Against Risks

Yekaterina Batynkova
Director of Elite Property

The elite real estate market today comprises complexes almost completely ready for refurbishment, as well as complexes on construction sites at various stages of readiness. It is worth noting that the market of ready houses is fairly narrow and is therefore a segment that is in great demand, and so it can be difficult to invest in. Therefore, the developments most attractive for investment are those at the earliest stages of construction, especially since half the developments in which flats are offered for sale today are mere shells under construction. Among these we can identify several of the most popular complexes among investors: Sadoviye Kvartaly, Italyansky Kvartal, Angliisky Kvartal and the luxury house at 8 2nd Frunzenskaya Ulitsa.

Most of the ready houses and houses under construction on offer today are concentrated in the area of Khamovniki, which includes properties in the areas of Ostozhenka and Prechistenka, as well as areas outside the Garden Ring. We have observed that these developments enjoy an active interest from buyers, among whom are not only investors but also end-users buying housing for themselves and their families. According to our data, the volume of offers in this area makes up 41 percent of the total market. For comparison, 21 percent of offers are in Zamoskvorechye, and 15 percent are in the Presnensky district. The popularity of these three most “expensive” areas has been influenced by developments such as Impersky Dom, Vyzantiisky Dom and offers on Ulitsa Ostozhenka.

There is a lot of interest in these developments from buyers who are equally likely to be investors as end-users buying housing for themselves and their families. The most favorable period for investment was from the third or fourth quarter of 2009 to the first quarter of 2010. Throughout 2009, the price range of elite real estate was in general adjusted downward. Thus, we have documented sales at the Sadoviye Kvartaly development at a price of $6,200 per square meter, which is explained by the building’s incompleteness, its long period of construction, and discounts. However, the second quarter of 2010 already saw a gradual increase in price for almost all developments.

When choosing sites for investment, it is important to understand that among ready properties and those with a high degree of readiness, such as those planned for completion in late 2010, the real estate market today is dominated by properties in the high price bracket. The average starting price of 1 square meter is 300,000 rubles ($9,900). As a rule, over the period of construction, house prices could rise by 40 percent to 60 percent, an increase because of low buyer interest in homes at the early stages of construction and hence a low price from real estate developers. This situation is, of course, because of the market crisis: Investing in projects at an early stage can be more profitable but also more risky. Finished projects, by contrast, are becoming expensive and less profitable.

It is not surprising that today the bulk of consumer demand, 94 percent, is focused on proposals in built developments or developments with a high degree of readiness. The average area of a flat acquired in 2009 was 162 square meters, compared with 178 square meters in 2008. Overall, in 2009, apartments for $12,000 per square meter were in demand among 65 percent of buyers. It is worth noting that in 2008, 50 percent of transactions were concentrated in a higher price bracket — $15,000 to $20,000 per square meter. Thus we see a reduction of purchasing budgets. As a result, the share of investment transactions in 2009 dropped to 6 percent, which for the most part was transactions at costs up to $7,000 per square meter, at sites at the initial stages of construction, with high construction activity at the sites.

The big plus of properties with a high degree of readiness is the opportunity to look around the apartments and the complex, to assess the quality. This is what attracts buyers today. However, if price growth rates continue for construction sites with low levels of readiness, the attractiveness of ready properties will only increase till the end of 2010. And in 2011, taking into account the stable economic situation in Russia and the significant decreases in the volume of construction of luxury housing in the Central Administrative District of Moscow, experts predict an increase of 7 percent to 10 percent in the cost of flats in the elite sector.

It should be understood that at some stage of a house’s construction there arises a balance between investment risk and profitability of investments in the development. Taking into account certain factors, such as reputation of the builder and seller, a high rate of house construction, and so on, the risk may be justified. But now and in the near future, the main market for investors will still be ready homes.