Elite Apartment Sector Grows in St. Petersburg

For MTSt. Petersburg realtors are upbeat on new construction, but say nearly half of city residents are unhappy with their apartments.
Prices for residential real estate in St. Petersburg jumped by more than double forecast levels over the first half of 2003, with the elite sector leading the way. Market analysts said the trend is likely to continue until the end of the year, after which the market may stabilize.

In the first half of 2003, prices for apartments in newly built houses grew 15 percent to 17 percent, against an expected growth rate of only 10 percent. The city's real estate specialists said the higher prices are due to ruble inflation versus the shrinking dollar, the higher costs of building supplies and higher disposable incomes.

Meanwhile, the city's construction market is booming. Some 800,000 square meters of new residential real estate was built in the first half of 2003, and the year's total is expected to top 1.5 million square meters -- 300,000 square meters more than in 2002. The city's construction committee said the same growth rate is expected for at least two more years.

Along with more house building, prices and costs are also growing, with stable demand guaranteed.

Construction companies said that everything built in St. Petersburg finds a buyer. But the share of apartments not sold by the time the authorities approve a building for use is growing slightly and stands at 9 percent, compared with between 2 percent and 3 percent last year. Nevsky Syndicate realty said apartments not sold during construction may enter the category of "apartments in newly built houses," while it's becoming increasingly difficult to find a one- or two-room apartment for sale in a new building.

Analysts at Peterburgstroi-Skanska said that in 2002 city residents spent $570 million on apartments in houses still under construction and estimate they will spend $850 million in 2003.

Yet while demand is increasingly outstripping supply, some experts said this is more a sign of a worsening housing crisis than simply a straightforward boom.

Major problems arise from overcrowding in the city. Just under 5 million people live in an area of 300 square kilometers, which makes the city one of the most densely populated in the world, according to Advecs-Rosstro realty.

The city is one-fifth the size of Moscow, while the Leningrad region, with a population of just 1.5 million, is twice the size of the Moscow region.

Some real estate specialists believe that uniting St. Petersburg and the Leningrad region into one administrative region, coupled with the development of transport infrastructure, could help solve the housing crisis.

Unlike in Moscow, there are no high-rise blocks in the center of St. Petersburg, due to bans enforced by the St. Petersburg administration's architecture office to protect the city's architectural heritage.

Unstable, wet soil on the city's outskirts and difficulties in putting out potential fires above the 17th floor also limit high-rise building.

Another problem is that St. Petersburg has the highest percentage of communal apartments in Russia. According to different estimates, there are about 150,000 communal apartments in St. Petersburg, down from more than 210,000 in the early 1990s.

Khrushchyovki, the outmoded and dilapidated five-story blocks built during the Khrushchev era, also pose a challenge.

Both khrushchyovki and communal apartments are plagued by problems such as worn-out water pipes, sewage systems and other utilities, along with a high rate of heat loss.

Philippe Bogdanoff, a partner at Kirsanova Realty, an affiliate of top-end specialist Sotheby's International Realty, said the Khrushchev apartment blocks were inspired by examples of prefabricated housing in France in the late 1950s. "That really solved the problem of housing at that time," Bogdanoff said. "It was a very good solution. There was just no way that they could have done it differently."

According to the city administration's construction committee, although these houses built between 1958 and 1970 were intended to have a service life of 20 years, they are still in use today. Some 11 percent of city residents still live in around 190,000 khrushchyovki apartments.

"After we studied the situation thoroughly, we came to the conclusion that demolishing such houses would not be economically feasible or cost-effective and decided to launch a program of renovating the [city's] khrushchyovki," said Natalia Sheludko, a spokeswoman for the committee.

In July 2003, the Moscow city government, which has a good track record of renovating khrushchyovki in Moscow, signed an agreement with St. Petersburg for Moscow construction companies to help St. Petersburg renovate these apartment blocks.

But the demand for new housing comes from dissatisfaction with living conditions citywide, not just from residents of communal and khrushchyovki apartments, according to research carried out by Sistema-Hals Northwest.

Forty-seven percent of city residents are unhappy with their apartments, the survey found. Some 16 percent of all families in the city live in communal apartments, while 9 percent rent apartments or rooms.

Twenty-eight percent plan to improve their living conditions; 46 percent of these people intend to buy an existing apartment, 24 percent to buy a newly built apartment and 19 percent are investing in apartments in buildings still under construction.

Construction is busiest in the Vyborgsky and Primorsky districts, while most city residents plan to acquire real estate in the same district they live in.

The survey found that apartment quality was as important for St. Petersburgers as location.

According to the Toy-Opinion research agency, most people look to move due to poor apartments and utilities, lack of floor space and poor transport links.

Sistema-Hals analysts said that St. Petersburg residents now demand more from apartments in terms of size, layout and building infrastructure.

"Most people say they prefer 3-meter ceilings, so including high ceilings in the design is not so much a competitive advantage for construction companies as a requirement of the market, a norm," said Irina Payusova, the company's spokeswoman.

According to Sheludko, the most popular kinds of apartments are either one-room apartments or elite real estate. "That just proves again that we do not have any middle class whatsoever," she said.

Viktoria Pereira, a spokeswoman for developer St. Petersburg Renaissance, said the criteria for elite apartments in the city differ from Moscow. "Firstly, an elite apartment in St. Petersburg can only be in the center, while in Moscow the notion of the city center has been considerably expanded over the past few years. Secondly, an elite apartment block in St. Petersburg can't have more than 30 or 40 apartments."

However, there are also some similarities, such as the use of high-quality building materials resistant to cold and humidity, with unique architecture, top-quality infrastructure and good location.

According to Pereira, the upper market sectors can be broken down into the midrange, premium and exclusive sectors. "There are some apartment blocks where facade apartments are exclusive, while those overlooking inner yards are considered premium apartments."

The city's main elite locations are still the historic areas of Nevsky Prospekt, Chernyshevskaya metro station, the Petrograd Side and Kamenny and Krestovsky islands.

Dmitry Kiselyov, vice chairman of the Okhta Group, said elite apartments are not only to be found in the city center.

"Most buyers are looking not only for an apartment in the center, but an elite place," he said. "And now we are witnessing a new trend for St. Petersburg in the migration of elite housing to the suburbs."

Most analysts believe the sector will continue to grow in the near future, mainly because residential real estate in St. Petersburg is undervalued. If the government launches a successful mortgage system, then real estate prices could rise steeply, experts said.

But Pereira said the elite sector would level out next year, as growth in demand and new construction projects slows.