Elite Housing Profits Win Back Investors

27 September 2005

Last week, St. Petersburg-based RBI construction holding said it would commit most of its future projects to shopping and logistic center projects, joining a long row of builders turning their strategic focus to the commercial sector.

The company's statement, however, came as it unveiled its latest elite housing project, Novaya Zvezda - a $30 million development that has already sold all but five of its 78 apartments, although the flats have yet to receive the final interior planning and design.

While the CEO of RBI, Edward Tiktinsky, would not disclose the profitability of Novaya Zvezda project, he said it was "a financially sound investment." Just in March the company started construction of Dom Le Grand on the Nevsky Prospekt, a boutique center with several floors of premium-class apartments and top-floor suites overlooking the thoroughfare.

While Vitaly Votolevsky, general director of Peterburgstroi Skanska construction firm, notes that "in 2005 developers completed less residential projects than in any of the previous three years," the trend has not been simply away from residential and into commercial real estate. It has been away from cheaper, standard housing of medium-class and lower.

Victoria Kulibanova, development manager for Astera real estate agency, said falling profits on "standard, medium-class and lower residential housing" have aggravated constructors' interest in housing at a time when "the number of flats on the market far outweighs demand."

The total area of new residential space appearing each year has jumped from 3.8 million to 5.6 million square meters, according to statistics from Peterburgstroi Skanska.

It makes sense, with tougher competition and few profits, for constructors to turn eyes to the booming commercial sector, Kulibanova said. Construction firms Peterburgskaya Nedvizhimost, Nevsky Sindikat, Vozrozhdeniye, LEK, IVI-93 among others have followed the trend to move into commercial property building. About 60 projects of shopping and entertainment centers are underway in the city at present, Kulibanova said.

A PRETTY PENNY

The profitability of standard real estate projects is about 10 percent, while shopping centers provide double the returns: about 18 percent to 20 percent, Kulibanova said.

Which means that "only elite residential projects may rival commercial real estate in profitability with about 25 percent," Kulibanova said.

A similar forecast, between 20 percent to 25 percent, was given by Igor Luchkov, head of the assessment and analytical department at Becar real estate agency.

Constructors and developers can earn well on real estate if they provide "special features" and spend more, Luchkov said. The market has shown that the lower the investment, the smaller the profits, he said.

Half of elite housing project Novaya Zvezda's 30,000 square meter space is occupied by extra facilities: a swimming poll, gym, rest rooms, among others.

Such extensive infrastructure often allows higher returns, which otherwise may be as low as 15 percent on apartment building, Luchkov said.

The relatively low incomes come as a result of the stabilizing of prices on the real estate market in the summer of 2004, Votolevsky said. "The price even fell by up to 2 percent. At the same time, construction costs have steadily increased," he said.

With unpredictable new laws regulating construction, Votolevsky believes the best prospects on the Russian market lie firmly with commercial real estate, which "from the large institutional investors' point of view is very attractive."

U-TURN IF YOU WANT TO

Market insiders, however, denied that constructors and developers have turned from residential real estate.

"It is impossible and dangerous to focus on a single market segment. Looking at Western companies we see that most of them transform into holdings sooner or later," said Andrei Urtiyev, senior manager at the St. Petersburg Union of Construction Companies.

"I'm sure that new elite projects will emerge. Demand may decrease or increase but it can't disappear completely. You'll always find people ready to buy expensive property," Urtiyev said.

The number of elite residential projects in the city backs the interest housing still has for investors, he said.

Among the top elite housing projects, experts and market insiders named the Fifth Element (developed by Stroimontazh construction firm), U Rosstralnykh Kolonn (by Lenspetssmu) and several projects carried out by Vozrozhdeniye construction company on the Nevsky Prospekt and Shpalernaya Ulitsa.

"We saw some alarming trends on the housing market earlier, but the situation has stabilized. Companies have found out a solution," Luchkov said. "Why would they quit a [residential] market that shows signs of life?"