Apartment Suites Tend to Business

Yevgeny Yegorov

In the Y'ES apartment hotel, 85-90†percent of suites are rented out. Half of the renters stay from a†week to three months.

Eight out of ten buyers of apartment suites in St.†Petersburg acquire them as a source of income.

In St. Petersburg today you can buy suites in 23 apartment hotels. According to the St. Petersburg Real Estate Consulting Center, they have a total area of 288,800 sq.m., representing 4.2 percent of the total volume of new housing construction. (For comparison, suites make up 25-30 percent of the of new building market in Moscow, according to various estimates.) There is 166,400 sq.m. in apartment suite complexes on the market, which is 5.3 percent of the total volume on the primary market.

But three dozen more apartment hotels are now in the design or pre-launch stages. In the first half of the year, six new sites appeared on the market. These included the Royal Park from Kortros in the Petrograd district, the Bright World: I Am a Romantic from Seven Suns Development on Vasilyevsky Island, Lakhta Park from Concord in the Primorsky district and Art Studio from RBI in the Central district. Soon another building in the popular Salyut complex at the intersection of Danaysky Prospekt and the Pulkovo Shosse — another 500 units Ч will begin sales.

According to the experts of Knight Frank SPb, in the first half of the year, developers introduced 205 apartment suites (14,500†sq.m.) in the Del Arte and Moscow Sky complexes and five buildings in Sestroretsk First Line: Medical & Wellness Resort project. That is a third less than was introduced in the last six months of last year. The demand is there. Developers have sold 25,200 sq.m., which is 16 percent more than in the same period of 2015. Analysts noted an increase in consumer interest in recreational apartments, mainly because of new offerings at low prices. For example, in the Seven Suns Development project at the Sestroretsk Dunes, a studio starts at 1.8 million rubles ($28,000).

According to Evgenia Litvinova, project manager Petersburg Real Estate, mass-market category recreational suites cost customers an average of 122,000 rubles ($1900) per square meter, which is 16.4 percent higher than the average price of apartments in the same class in the residential neighborhoods of St. Petersburg. In the first half of 2016, prices remained practically unchanged. In business class, it was 159,000 rubles per square meter, 6 percent below the level of housing prices in this category. In the elite segment, it was 354,900 rubles per square meter in the existing areas (7.2 percent more expensive than regular housing), as a rule. This was due to a unique location. There is nothing to compare the 302,400 rubles per square meter in other areas with. They are not building elite house in the Kurortny district.

The main change in the past year and a half has been in consumer motivation. As Sergei Nogai, manager of the Salyut! project noted, in the first stage of the complex, those who were going to rent out the apartments and those who acquired the premises for its own needs (as temporary housing, second homes, etc.) were balanced at 50/50. Now the former outnumber the latter 80 to 20. "People are tired of the crisis, of economic uncertainty," Nogai said. "They want to have a steady and reliable source of income." Additional services and legal protection make it possible to set rental rates 15-20 percent higher than residential rental. According to Nogai, one of the major problems in the apartment hotel sector is management companies' lack of experience. The current management companies, even the best of them, can handle rental contracts with owners, but are not always ready to solve the numerous problems that come up later. Now the investor in the Salyut! project, the SoyuzInvest Development company, is in talks with international hotel operators. There will be a classic hotel in the complex, but project organizers want the operator to take over apartment suite management as well.

Alexander Pogodin, CEO of the YE'S apartment hotel chain, says that 85-90 percent of the apartments in the complex on Ho Chi Minh Street have been rented. Of these, 60-70 percent were through the management company (transferred to the management of YE'S Management Company). Half of the tenants rent premises for a period of one week to three months, and half for longer.

The new apartment hotels have managed to overcome the Kolomyazhsky syndrome. (One of the first "boarding houses" on Kolomyazhsky Prospekt housed a number of small brothels, leading to a series of scandals and the departure of the Finnish investors from the project.) Video monitoring, the presence of a receptionist and cooperation with the police department have made life for guests at apartment hotels quite safe.

On the whole, issues with registration of residency have been resolved. The YE'S complex has a program whereby information about anyone who checks in is sent to the Federal Migration Service online. Then the tenant decides whether or not he needs a certificate of temporary registration. If so, the FMS will issue it on the basis of a contract for the provision of hotel services.

SoyuzInvest Development

In the Salyut! complex, there will be a "classical" hotel, and the developer wants the international hotel operator to manage the suites as well.

According to Pogodin, suite owners are usually registered as individual entrepreneurs. This allows for tax benefits.

So far, apartment suites are not subject to taxation by cadastre. Taxation based on cadastral value is levied on the owners of large (more than 3000 sq.m.) retail and office facilities and, starting this year, homeowners. Apartment suites are neither one nor the other. As a result, total expenses for a minimal suite, including utilities, are 4000-5000 rubles per month. The average room in apartment hotels in residential areas rents for 25,000-35,000 rubles per month.

Typically, in the popular business-class Docklands complex on Vasilyevsky Island, 60 percent of buyers purchase apartments for themselves Ч that is, to live there. The higher the expenses on the unit, the less likely recoupment is in any foreseeable period of time. However, in the mass-market segment, the purchase of an apartment suite to rent out is not so much business in its purest form as it is a safety netЧa useful asset that can be used in different ways. The main difference from a usual "gray" rental is the range of services, from bicycle rentals to household appliance rental, rental of storage rooms, etc.

There are indications that the idea of investment is beginning to prevail among buyers of business-class apartment suites. For example, the Prime Residence apartment hotel is being built at the intersection of Alexander Nevsky and Khersonsky Streets. That is downtown, not far from Nevsky Prospekt, and it is possible that, five to seven years ago, an investor would have entered this location with some claim to exclusivity. The Yard company, however, chose a different concept. It built an eight-story apartment hotel, in which units start at 2.6-3 million rubles. The first section of the apartment hotel is designed for 560 units. According to Yard group chairman of the board Andrei Koshkin, 100 percent of the buyers of apartment suites in the Prime Residence are investors who are purchasing the property for future rental. The company is making 10-15 sales a month.

At Seven Suns Development's newly built Bright World: Inside complex, buyers' motivation is more complex, due to its location: it is being built on the site of the Dune resort. Its extensive grounds (17 hectares) accommodate extensive recreational infrastructure: sports facilities, cycle paths, tennis courts, etc. It will have 1800 units on completion of construction. "It is difficult to say how many renters there will be," said Seven Suns Development sales director Alexei Bushuev. "We don't ask about details specifically. But the buyers themselves often say they always wanted a place on the coast to relax at, in the woods and near the city. I believe that most customers purchase apartments for themselves."

Recreational apartments have won themselves the right to exist, even though the concept is based on a legal conflict: housing cannot be built there. But the desire is there. The first projects of this type went through scandals of varying severity. Pioneer went to court to prove its right to build apartment suites in a resort area. Seven Suns Development faced legislative appeals and reviews. Concord, which belongs to well-known entrepreneur Evgeny Prigozhin, is now in arbitration trying to prove its right to privatize the ground under the houses and townhouses of Lakhta Park. Therapeutic spa facilities were planned under contract with the city, but in fact it turned out as an apartment hotel with fitness.

It is important to note that apartment suites no longer elicit negative reactions. For most customers, it is a well understood product, with certain advantages and some limitations. Officials have ceased to threaten developers working in this segment with changes in regulations and an increase in their "social burden." Construction Minister Mikhail Men has promised "to resolve issues with permanent registration" in apartment suites by the end of the year, which, undoubtedly, will increase their popularity.

Sales in most complexes are subject to Federal Law 214-FZ, which allows sales not only of future apartments, but also of "other facilities" (although shareholders' safeguards do not extend to buyers of apartment suites). Housing Mortgage Lending Agency managers promise preferential mortgages for those who buy apartment suites. In general, the development of this segment is in keeping with the state program on creation of rental apartments. Housing problems do not have to be solved by purchasing housing. Renting is a reasonable option.