Natalia Pyryeva: ‘Residential real estate market in Russia has become more active after the spring collapse’

Demand for new buildings is recovering after the spring collapse

The sales of new buildings in Moscow in April-May of this year fell sharply after a rush of demand in January-March. The growth of activity in the residential real estate market in the first quarter was facilitated by the desire of buyers to close transactions under the previous terms rather in anticipation of an increase in rates, and then the desire to invest savings in housing in order to save funds from devaluation and other risks in the context of the unfolding conflict around Ukraine and the subsequent Western sanctions.

In April, 5,2 thousand equity participation agreements (DDU) in housing construction were registered in Moscow, which is by 45% less mom and 35,5% yoy, in May the number of DDU decreased by 7% mom and 31% yoy, to 4,9 thousand. A sharp decline in activity in the capital's real estate market was associated with high prices for apartments in new buildings, the unavailability of mortgages, and a general deterioration in the welfare of the population.

In June, the demand for new buildings in the capital began to recover after the spring collapse, and 6,3 thousand DDU were registered at the end of the month, which is by 29% higher mom, but still by 34,4% lower yoy. The revival in the market was formed due to the reduction of mortgage rates, the entry into the market of a significant amount of new supply, as well as the launch of subsidised mortgage programmes with a rate close to zero by many developers.

Dynamics of DDU in Moscow relative to 2021, %

According to the results of the first half of 2022 , 30,6 thousand new buildings were registered in the market of Moscow. DDU with the involvement of mortgage funds, which is by 13% lower yoy, but by 70% higher than in 2020. Nevertheless, as the rates decreased, the demand for mortgages intensified, and the number of DDU applications involving credit funds in June increased by 33,3% mom, to 5,1 thousand. It is worth noting that the share of mortgage transactions from the total number of registrations of DDU in the capital in January-June amounted to 48% against 67% in 2021. This trend is explained by a decrease in the availability of mortgages, the entry of cash buyers into the market, and the general cooling of demand in the real estate market during the period of economic turmoil.

Change in the number of registrations of DDU in Moscow with the involvement of mortgage funds, units

Increase in prices for new buildings reached 26,5% in Kazan

In most regions of Russia, the behaviour of buyers in the real estate market was similar, so in January-March there was an increase in prices per square metre against the background of general excitement caused by the aggravation of the foreign policy situation, a jump in the exchange rate and a sharp change in rates. In April-May, the growth of prices for new buildings in Russia slowed down due to cooling demand due to the wait-and-see attitude of the population against the background of economic and foreign policy instability, a general drop in household incomes, as well as due to that many who sought to buy housing had already done so earlier. Despite the revival of demand in early summer, the growth rate of apartment prices continued to slow down, as sales are still far from last year's levels, even with cheap mortgages.

On average in the country for the first half of 2022, prices in the primary real estate market increased by 20,9% yoy, to 109,3 thousand rubles per square metre. Most of all, new buildings became more expensive in Chelyabinsk (+35,8% yoy), Kirov (+31,8% yoy), Tver (+31,6% yoy), Vladikavkaz (+31,1% yoy), Ryazan (+31,1% yoy), Chita (+30,6% yoy), Volzhsky (+27,7% yoy), Saratov (+27% yoy), Barnaul (+26,8% yoy) and Togliatti (+26,7% yoy).

In Kazan, the prices of new buildings in the first half of the year increased by 26,5% year-on-year to 9,03 million rubles, a square metre rose by 25,9% — its cost was 165,4 thousand. In Moscow, the cost of housing increased by 7,7% yoy, in Moscow Oblast — by 12,4% yoy, in St. Petersburg — by 13,5% yoy, in Leningrad Oblast — by 15,9% yoy. Among the studied 70 cities of Russia, square metres fell in price only in Murmansk — by 14% yoy.

We expect that in the second half of 2022, sales volumes in the residential real estate market in Russia will be lower than similar indicators in 2021, the slowdown in price growth will continue, the share of mortgage transactions from the total number of DDU registration will continue to gradually increase from the lows of April-May due to the availability of favourable offers from banks and developers. However, we do not expect that incentive programmes in the medium term will be able to radically cheer up the market against the background of economic uncertainty and the deterioration of the well-being of Russians.

Developers are demonstrating dynamics better than the market

With the easing of monetary policy and the subsequent reduction of mortgage rates, the quotes of public Russian developers after the fall in April began to show upward dynamics in anticipation of increased activity in the market. The best dynamics was demonstrated by LSR shares, which have risen by 4,2% since the beginning of the year, despite the fact that the company temporarily refused to pay dividends.

Among public developers, LSR and Samolet presented operational reports for the first half of 2022, both turned out to be much better than expected. As the LSR reports showed, the company's sales volume in January-June increased in monetary terms by 12,8% yoy, to 53 billion rubles, and in physical terms — by 1,6% yoy, to 308 thousand square metres, while the share of mortgage transactions was 75% versus 68% a year earlier. It is worth noting at the same time that most of the new contracts were concluded in the shock first quarter, while the indicators for the second quarter turned out to be worse than the values year-on-year, which confirms the above point about the situation on the real estate market in April-June 2022.

Meanwhile, the operational indicators of Samolet for the first half of the year turned out to be even more optimistic. New real estate sales increased in monetary terms by 82% yoy, to 78,7 billion rubles, and by 64% yoy in physical terms, to 468,7 thousand square metres. The share of mortgage sales in the reporting period decreased slightly to 73,3% from 74% a year earlier. It should be noted that the developer's sales in the second quarter were stronger than similar values in 2021.

The strong reports of LSR and Samolet reflect the current situation in the real estate market — strong demand in the first quarter against the backdrop of economic turmoil, a decline in sales in April-May and a significant recovery in activity in early summer. We believe that, despite the economic and foreign policy instability in the country, the residential real estate market is not in crisis, but it is going through hard times. In the second half of the year, according to our estimates, sales of new buildings will remain at the level of June, but will not approach the record volume of transactions in the second half of 2021.

The largest players in the market will maintain a stable position, and we are focusing on PIK and LSR, which have a solid advantage over other developers in the form of a high level of public confidence, sufficient liquidity reserves and business diversification. Each of the companies minimally depends on foreign materials and equipment, having either its own capacities, or cooperating mainly with domestic manufacturers.

At the moment, taking into account the turbulence in the stock market, as well as a high degree of uncertainty in the Russian economy and in the real estate market, in particular, we have placed our recommendations and target prices for shares of Russian developers for revision.

Commercial real estate is going through hard times

Over the past six months, activity in the commercial space market has fallen much more seriously than in the residential real estate market. The most difficult situation is recorded in the retail and office real estate segment, where rental rates on average fell by 23% yoy amid a sharp decline in demand and an increase in vacancy rates.

The total area of retail real estate built in Russia in January-June decreased by 75% yoy, to 94 thousand square metres, which was the lowest since 2004 (72 thousand square metres). A similar situation is observed in the retail real estate market in Moscow — the volume of new construction decreased by 44% yoy, to 37,1 thousand square meters, or to a minimum since 2017 (15,5 thousand square metres). The vacancy rate in the capital's shopping centres in the first half of the year was about 12% against 10% at the end of 2021. At the same time, it should be noted that large objects are among the most affected, while the popularity of small district shopping centres is growing, the vacancy rate of premises is low, and attendance either remains at the same level or increases slightly.

According to our estimates, the negative trend in tariffs and the introduction of new space in the segment will continue in the medium term due to the high competition of owners for tenants in the face of the loss of a significant share of foreign companies that temporarily suspended their activities in Russia or left the domestic market altogether. Additional pressure on the activities of shopping and entertainment complexes is also exerted by the ban on the screening of Hollywood films in Russia, which was introduced by many American companies in March 2022. According to estimates of the Commonwealth Partnership commercial real estate agency (until April 2022, the company was known as Cushman & Wakefield), if key foreign brands stop working in the country, the vacancy rate in Moscow shopping centres may increase to 30% by the end of 2022, whereas if at least some of them decide continue working, then the indicator will be fixed at the level of 18-20%.

A similar situation is observed in the office real estate segment: according to the results of the first half of the year in Moscow, the volume of commissioning of office facilities decreased by more than 11 times yoy, up to 38 thousand square metres against 446 thousand square metres a year earlier, the construction of many business centres has been put on pause, new construction is not at all relevant yet. The vacancy rate of premises increased to about 8% in the second half of the year against 6,7% at the end of 2021, and we believe that the increase in the vacancy rate will continue in the near future due to the same reason for the departure of foreign companies from Russia.

We believe that in the long term, large tenants will appear among domestic players who will be able to replace the outgoing/departed foreign brands, the format of the life of both shopping centres and office buildings will change as Russian entrepreneurs adapt to new economic conditions. However, in the perspective of 2022, we do not expect a significant recovery in the commercial real estate market.