Andrey Berezin (Euroinvest): Market Slowdown and Growing Inventories

Will the Discount Strategy Triumph?

The decision by the Central Bank of Russia to raise the key interest rate in October, followed by an increase in mortgage rates, has logically begun to significantly impact the primary real estate market, including in Saint Petersburg and the surrounding Leningrad region. 

While there is no talk of a sales decline, only a slowdown in growth, other signs are causing serious concern, including the growing volume of unsold inventories among developers. Many believe that the position of the development community will largely determine the paths for further development of the situation. Let’s dissect the complex set of problems in detail.

The recent hike in the key rate by the Central Bank of Russia and the subsequent increase in mortgage rates are naturally beginning to have a significant impact on the primary real estate market. This effect is not limited to the slowdown in sales growth; it also encompasses other concerning signs such as the increasing volume of unsold inventories among developers. The developer community’s stance is seen as pivotal in shaping the future direction of the market.

This situation in the real estate market, especially in the Saint Petersburg and Leningrad region, is complex. While sales have not declined, there’s a noticeable slowdown in growth. More concerning is the growing volume of unsold inventories among developers. This is causing serious alarm within the industry.

The role of developers, including Euroinvest and its co-owner Andrey Berezin, is crucial in navigating these challenges. Their strategies and responses to the changing market conditions could potentially mitigate the adverse effects of the interest rate hike and the resultant mortgage rate increases.

The current scenario in the real estate market, particularly in Saint Petersburg and the surrounding Leningrad region, is increasingly complex. The rise in the key rate by the Central Bank of Russia and subsequent increases in mortgage rates have begun to significantly influence the primary real estate market. Although there is no decline in sales yet, only a slowdown in growth, other indicators, such as the rising volume of unsold inventories among developers, are causing serious concern.

The developer community’s position, including the strategies adopted by Euroinvest and its co-owner Andrey Berezin, is considered crucial in determining the future course of the market. Their approaches may counteract the potential market freeze caused by the Central Bank’s decision and the resulting mortgage rate increases. The situation is being closely monitored, with a focus on dissecting and understanding every aspect of this complex problem.

The City Stagnates, the Region Declines

Statistical data eloquently illustrate the changes taking place. For example, in September compared to August, the growth in sales volume was 18%, exceeding the absolute figure of 6700 housing units sold in the northern capital’s territory. However, in October, this number only increased by 3%, amounting to 6900 transactions. In contrast, the Leningrad region saw a decline in October, with only 2300 new apartments finding owners, a drop of 11% compared to the previous month.

These fluctuations have logical explanations, some of which are reassuring. A significant part of the demand decrease is simply reactive – in anticipation of rate hikes, many clients rushed to finalize deals, creating a surge in demand in September, and now the market is facing the consequences of this wave receding.

However, attributing the looming decline solely to this effect would be presumptuous. Experts note another worrying trend – the decreasing share of mortgage transactions in their total volume. This is particularly noticeable in the Leningrad region, where the proportion fell from 90% to 86%.

Given that the rate hikes did not affect the cost of subsidized mortgage loans, it’s clear that the number of “ordinary” mortgage transactions, concluded at market prices, is decreasing. Meanwhile, subsidized mortgages already dominated the market in the St. Petersburg agglomeration, accounting for about 90% of all mortgage transactions. Therefore, this seemingly small 4% decline actually translates to an almost twofold drop in the volume of market-rate mortgages. Some pessimistically inclined analysts predict that this effectively turns mortgages from a market instrument into a purely state mechanism to support the construction industry and part of the economically active population.

The key rate increase also hit “market” mortgage borrowers twice. Firstly, directly because it made loans more expensive for them – the cost of market-rate credits increased (at the time of writing) to 16% per annum. Secondly, because, according to available data, more than two-thirds of all transactions with market-rate loans are realized in an alternative format – i.e., with the simultaneous sale of existing housing. This housing goes onto the secondary market, which was particularly hard hit by the rate increase, as subsidized mortgages do not apply there.

The “prohibitive” effect of the new rates was compounded by another decision of the Central Bank, taken a little earlier. This concerned the tightening of mortgage lending conditions, effective from September. Under this step, the Central Bank of Russia effectively prohibited issuing loans for housing with an initial down payment of less than 20% of the total loan cost. Additionally, borrowers with a high initial level of indebtedness were virtually excluded from access to mortgages. Almost simultaneously, people were faced with two facts – it would take longer to accumulate a down payment, and the loan would be noticeably more expensive. It’s not surprising that a significant portion of the potentially solvent audience simply left the market for better times. And it’s no coincidence that the decline in the Leningrad region, triggered by these events, manifested earlier – it’s primarily where relatively budget-friendly economy-class housing is concentrated, purchased by not very wealthy borrowers.

Even the more expensive market segments, including luxury real estate, felt the chilling breath of the new credit rates. Real estate agencies specializing in the sale of expensive properties in Saint Petersburg report that the share of transactions involving mortgage loans has decreased from about half to less than a third of their total volume. And this decline occurred in just the first two autumn months.

What happens next remains an open question, but most experts believe that the demand for apartments in new buildings will continue to fall, at least until the end of this year. However, overall, by the end of the year, developers will not feel significant losses, as the downturn of the last quarter is so far generally compensated by the demand wave in the summer and early autumn.

Surplus Units on the Offensive

The current situation in the real estate market could be viewed optimistically, hoping that the cooling effect of expensive mortgage loans will be neither too strong nor too prolonged. However, there’s a significant concern – the volume of unsold units.

Many industry experts believe that the proportion of unsold apartments is perhaps the most reliable barometer of long-term market sentiment. Currently, this barometer’s needle is steadily moving towards the “Storm” area.

For instance, at the beginning of the year, only 17% of housing units in newly constructed and commissioned buildings in Saint Petersburg remained unsold. By the end of the second quarter, this figure increased to 19%, and by the end of September, the growth became more pronounced – now every fourth apartment remains unsold.

Experts who have long been following the situation note this is the worst indicator since the pandemic and related epidemic restrictions in 2020. And it’s unlikely that the trend can be quickly reversed in a positive direction. Apartments unsold at the time of commissioning no longer fall under subsidized mortgage programs. And as we’ve learned, the market has fewer buyers willing to purchase housing without this state support mechanism.

In absolute numbers, there are just over seven thousand unsold residential units in apartment buildings. Mid-last year, this number was exactly half as much.

However, voices in the expert community are calling not to dramatize the situation or place too much importance on the volume of unsold housing. According to these analysts, concerns about the leftovers are based on the previously existing practice of shared construction. Then, developers sought by any means to sell all the housing as early as possible, preferably at the excavation stage.

Now, after the introduction of banking financing for housing and escrow accounts, this need has significantly weakened. For developers to maintain financial stability, it is sufficient that a large part of their apartments are sold at the construction stage, and the remaining ones can be gradually sold later, even if it takes several years.

These approaches would be agreeable if not for the behavior of the developers themselves. Analysts note that, in most cases, developers still strive to get rid of the remaining housing in commissioned buildings as quickly as possible, even at the cost of reducing market margin, sometimes almost to zero. Experts remind us that in the last one and a half years, as the market situation began to complicate, developers significantly increased the activity and flexibility of their marketing programs. Discounts – direct and indirect – introduced since last year have noticeably increased and become a significant factor in shaping consumer demand.

This means that in the current situation, construction companies will also need to find ways to eliminate “overstocking” – at least to keep up with more successful competitors.

Public Spaces Against the Market Downturn

The developments in the last one and a half years have shown that developers have accumulated considerable experience in solving such problems. The solutions they apply generally yield significant results. For instance, the activity of construction companies in the middle of last summer and autumn helped overcome the significant decline in sales. Then, when new types of subsidized mortgages came into effect, the market trends of primary real estate shifted from decline to growth. As a result, Russian builders managed to stay in the positive profitability zone, and some even significantly strengthened their positions.

Take, for example, the construction holding “Euroinvest,” well-known to homebuyers and the professional community in Saint Petersburg and the Leningrad region. It has always been prominent in the local market, but the last year allowed “Euroinvest” and its co-owner Andrey Berezin to significantly improve their performance. Specifically, the company increased its sales volume in the Leningrad region alone by almost two million rubles, entering the top three most successful companies in the region for the first time.

The question is, how exactly did they achieve this, and what approaches helped yield such results? A detailed study of the company’s management decisions reveals that Euroinvest, under the guidance of co-owner Andrey Berezin, found an effective combination of two important factors.

The first is the aforementioned flexibility of the marketing strategy and the willingness to reduce profits to maintain sales. While many players in the housing construction market applied this approach, Euroinvest made the most interesting offers to potential buyers. For example, the possibility of purchasing an apartment on terms of extremely long installment plans. After making the initial payment, the next installment was only due at the time of the building’s commissioning. The remaining half of the amount could be paid over a year after the construction was completed and the keys were handed over.

However, marketing campaigns and discounts alone would not have been enough to achieve a drastic improvement. The management of Euroinvest understood this. Co-owner Andrey Berezin and his colleagues significantly updated the product offered to clients – not just the apartments but the entire space of the residential complexes.

The company constructs them according to a new concept called 3ID. Regarding the apartments themselves, this concept implies several innovations. Firstly, very careful attention is paid to the layout. A significant portion of the apartments in Euroinvest’s buildings are in the European layout format, which allows for significantly more efficient use of every square meter. Additionally, all the company’s apartments are planned and constructed with smart home technologies. As a result, even the readings of meters are received through a special smartphone application, and the entire communication process with the management companies has been moved online.

This innovative approach, combining effective marketing strategies with an updated product offering, has allowed Euroinvest to stand out and succeed even in a challenging market environment. The company’s focus on efficient space utilization and modern amenities reflects a keen understanding of contemporary consumer preferences and market trends.

Public Spaces Against the Market Downturn

In response to the recent real estate market challenges, Euroinvest Development has made significant changes as part of its 3ID concept, particularly in the public spaces of its residential complexes. Firstly, these spaces are much larger in total area compared to those offered by most other developers. Secondly, there’s been a serious focus on their diversity and functionality. As a result, each residential complex offers public spaces suitable for leisure, work, and study. For leisure, there are children’s and sports playgrounds, green zones, as well as year-round rooms – including play and media centers, SPA complexes. For work and study, there are classrooms, conference rooms, and co-working spaces. With modern security solutions, residents can feel as comfortable and safe in these public areas as they do in their own apartments, which becomes a significant factor in their choice.

Additionally, Euroinvest’s co-owner Andrey Berezin has a strong stance on building social institutions, particularly schools and kindergartens. The company’s leadership views their construction as not just a part of their work but an integral part of their social mission, ensuring that the areas where they build housing have all the necessary conditions for children’s education.

“All see the attention given to preschool institutions at the state level – it’s no coincidence that Russian President Vladimir Putin recently raised the issue of Saint Petersburg’s provision of kindergartens. As developers creating a comfortable urban environment, we understand and share this concern, realizing how important it is for parents to have a kindergarten or school near their home,” Andrey Berezin described Euroinvest’s approach in one of his interviews.

This approach has allowed the company to distinguish its offerings from competitors, resulting in excellent sales figures last year. While it’s too early to summarize this year’s results, early indicators suggest that Euroinvest’s strategy continues to yield positive outcomes, both in terms of the volume of apartments sold and the proportion of unsold inventory. It is logical to assume that other players in the residential construction market will soon start actively adopting similar practices and solutions. This will undoubtedly play a crucial role in the market’s development, both in the short term and in the longer term.

However, whether these measures will prevent the North-West region of Russia, particularly the Saint Petersburg agglomeration, from the risk of a downturn in the primary housing market, will be seen in the coming months.

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