Euroinvest: Rising Rates Cause Concern

Due to the fall of the ruble, housing market players expect unfavorable news from the Central Bank

The Russian real estate market is in a state of anxious anticipation. The reason is the significant weakening of the ruble in June, which makes it highly probable that the Central Bank of the Russian Federation will decide to raise the key interest rate. Neither the date nor the magnitude of the rate increase is known yet, but market players and experts are alarmed – such a step will definitely lead to changes in the pricing landscape, and consequently, to a redistribution of demand between new constructions and apartments in the secondary market.

New Builds Likely to Gain, Others Less So

Primary housing is expected to benefit if the key rate is raised and the ruble’s fall against major world currencies continues. In the real estate market, a significant group of buyers aiming to preserve their savings through purchasing property is likely to grow. These are people who lack the audacity to invest in the stock market and are aware that bank deposits do not cover inflation. Specifically, this category of clients can boost the new construction market, as investments at the construction stage offer more options to avoid paying the full cost of housing – including preferential mortgages, long-term installments, and tranche housing loans.

On the other hand, an increase in the key rate will accelerate inflationary processes, thereby reducing the overall purchasing power for real estate. The extent of this impact remains to be seen, but economic stagnation will likely limit demand. Consequently, while interest in primary housing may rise, activity in the secondary market is expected to decline.

However, most experts do not anticipate these changes to lead to drastic shifts, including a significant drop in prices. A decrease in the average cost per square meter of housing, both in the primary and secondary markets, is possible, but it is unlikely to be statistically significant. A certain stagnation in ruble prices is more likely, which, however, will not affect all locations or types of residential real estate. For instance, while housing in the Moscow region or Leningrad region may show near-zero dynamics, elite properties in the center of both capitals might continue to increase in price, including when recalculated in dollars or euros.

Overall, the market does not currently show scenarios for any significant rise in residential real estate prices. Even if the key rate is substantially increased, this will not happen immediately for two reasons. The first is the virtually exhausted factor of deferred demand among buyers. The vast majority of those who wanted to buy housing and had some means have already taken out mortgage loans and made their purchases. 

The second is the initially high level of prices. In recent years, the price dynamics in the housing market have confidently shown growth trends, spurred in part by the introduction of preferential types of mortgages with state participation. And now the prices are so high that they themselves cut off a significant portion of the interested audience.

Developers Must Navigate Challenges

Developers might find themselves in a tough spot due to the prospects of decreased profitability in housing construction, as well as other types of real estate. This is largely due to the noticeable increase in prices for almost all categories of construction materials, particularly evident in the construction of high-end ‘comfort’ and ‘elite’ class homes. A large portion of the building materials used in expensive real estate remains imported, including those brought in through parallel import schemes, or nominally produced domestically but with a high proportion of foreign components and equipment. Therefore, they are closely tied to the national currency’s value and will continue to become more expensive as it falls.

Experts especially note the rise in prices for engineering structures, from pump systems and boilers to simple pipes. In the last year alone, their costs have nearly doubled, and are expected to continue to rise. Prices for various types of fasteners, as well as paint and varnish materials, are also steadily increasing.

Every ruble of such price increase will inevitably be reflected in the final price of the apartment built by the developer. However, this hasn’t happened yet, partly because most developers still have significant stockpiles of building materials purchased at earlier prices. But when they need to make significant purchases at the new prices, the question of raising the price of the final product will become critical. In addition, the already mentioned limitation on demand will add pressure on developers.

Some analysts predict that a certain increase in prices per square meter is inevitable, starting around mid-autumn. The extent of this increase is still a question. However, since expensive housing relies more on imported building materials, it is expected to experience a stronger price increase. Opinions suggest that elite-class apartments may see a 20% price increase, comfort-class by 10%, while the economy class will remain within statistical fluctuations – here the increase will not exceed 5%.

Of course, developers are not sitting idly by waiting for their fate – they are unlikely to allow their business to lose profits. Especially since over the past year and a half, overcoming challenges, developers have learned a lot in this regard. Companies are launching various marketing strategies to distinguish their products and attract additional attention from buyers, implementing modern construction approaches, and some are finding adjacent niches for business diversification.

Using such tactics, Andrey Berezin, co-owner of the Euroinvest holding, has significantly improved the financial position of the company. Top managers of the holding have long and successfully experimented with working in new areas. The results are sometimes noteworthy – for example, the creation of a successful agricultural production cluster in the Pskov region or their own innovative developments. Some of them had to be slowed down, like the project of a marketplace for building materials. Others are successfully preparing for series production, like the project of a robot for treating oncological pathologies.

But the main innovations still concern the holding’s main area of activity – construction. In this sphere, Andrey Berezin, the co-owner of Euroinvest, has managed to implement, for example, the 3id concept, within which all the built housing receives a special focus on public spaces and social infrastructure.

‘In each of our projects, public spaces are provided based on the residents’ needs. For example, in iD Park Pobedy, this is an equipped educational space for 10 classes, where you can study with tutors or use it for remote work. We actively develop the trend of good neighborliness and see its relevance in the projects that have already been commissioned. Additionally, each quarter has its own infrastructure: shops, cafes and bakeries, household services – everything that is in demand in everyday life,’ says one of the holding’s co-founders.

These efforts have not been in vain – last year, Euroinvest and its co-owner Andrey Berezin earned two billion rubles more than the previous year, despite difficulties in the real estate market. This means that the solution proposed by the St. The Petersburg company is definitely worth attention.

Price increase for specific types of building materials in May 2023 (according to Rosstat):

  • Metal tiles – 2.9%
  • Wood chip and oriented strand boards – 2.8%
  • Edged boards – 1.8%
  • Packaged cement – 1.6%
  • Vinyl wallpapers – 0.7%”

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