Why do house prices go up? How do new shared construction rules break the market? What will happen to the elite class housing and why is business class becoming more attractive? Partner material with Areal-Property, the Developer of the Marinist Residential Complex.

Macroeconomics

On July 01, amendments to Federal Law No. 478 came into force: now, developers may not arrange construction using the shared construction participants’ moneys which are blocked on special escrow accounts until the work is completed. Since funds from shared construction contracts are substituted with bank loans, this will predictably lead to higher prices for primary housing. The effects of such new rules are yet to be evaluated, but just a premonition of it has affected the market: according to Primorsky Statistics Office, there is a significant increase in price of residential real estate with the simultaneous reducing supply at the market.

In this manner, a “perfect storm” is forming at the real estate market: the cost of construction due to an increase in the cost of raising funds in combination with a lower level of supply at the market. Add to this the new regulations for developers who are required to invest at least 15% of their own funds in the construction and have at least 3-year experience at this the market; in other words, some of the players will leave the market. All these factors together guarantee a price shock for the economy segment, comfort class and premium-class housing.

The advantage of the new rules is that now it is not necessary to study thoroughly the “personal file” of a developer. The experience of troubled projects, shortage of own recourses, lack of support from large banks - such pages of biography most likely will not allow such a company to initiate any construction. We should not trust everyone recklessly, but strong companies committed to long-term operation really survive at the market.

It is worth paying attention to a significant detail. According to the law, objects with a readiness of at least 30% where at least 10% of the areas have already been sold under shared construction contracts are exempted from the switching to the new financing scheme. There are grounds for believing that the growing activity of a number of construction developments in the past year is associated with this factor. And here two questions arise. The first is whether the developers who have invested enormous resources in the attempt to “make it before July 01” estimated their strength? To be in time, as you know, in laying the legal foundation for further unhurried construction according to the previous rules. And the second question is what will happen to the market in a year or two if there is a drop in housing rental by 15% even with such a more or less general commotion?

Until it is started

In other words, real estate will rise in price sharply. Bad news for everyone ... except for those who can invest in it, and immediately, if possible. Which project to invest in?

Today, investment in housing of economy or standard segments is hardly reasonable. Suppose that against the steadily growing price of new buildings to the level previously specific for higher categories of housing, a significant portion of “economy” customers will go to the secondary market where price increase is not so noticeable. It is better to pay attention to expensive segments.

Business class projects are in great demand: in 2018, 24% of housing under construction in Vladivostok were in this category. This is a classic “double-purpose” investment when an apartment is often purchased for own use but with the expectation of a future good sale.

Investments in real estate that is initially classified as the business segment are much more predictable. The level of architectural, engineering and technical solutions? It is the same as for the so-called “elite”. Location? At least not worse. Viewing characteristics? Exactly the same. Margin of investment? Given the risks, return on investment is easily even higher.

For example

In Vladivostok, there are few projects of residential complexes of business class or higher level, and within the historical center there is only one, Marinist.

The complex is already difficult to classify as “being under construction”; Areal-Property Company involved in the project jokes: “We are in perfect shape, 90-60-90, i.e. 90% readiness, more than 60% purchased, less than 90 days before delivery”. The project is almost completed, so the switching to escrow accounts will not affect the Marinist.

The Residential Complex is connected to external lines, commissioning operations are in progress, the improvement of the internal “no car courtyard” is being completed. During the tender, the management company has already been nominated - Compass Company will operate the building until a contract is concluded with owners. However, the building has not yet been commissioned (it is expected in late September) and there are still vacant apartments, given that there is always a slight increase in price after a house is commissioned... perhaps interested investors should consider this opportunity.