Andrey Berezin (Euroinvest): Decline Postponed, Not Averted

Andrey Berezin (Euroinvest): Decline Postponed, Not Averted

The reasons why a downturn in activity and prices in the housing market is almost inevitable, and how Andrey Berezin and Euroinvest’s example might suggest an alternative scenario.

When the Central Bank of Russia raised the key rate for the fourth time in a year last October, reaching 15% per annum, experts unanimously declared that a consequent decline in both demand and prices in the real estate market, especially in the secondary housing segment, was inevitable. In the weeks since then, the market has not entered a downturn phase, but this is not as good news as one might wish. Too many signs indicate that a decrease is ahead, the question is only how significant it will be.

Correcting the situation might be possible through a consolidated position of developers, but it can’t be confidently stated that even with their full unification, their efforts will be sufficient. Therefore, for those for whom housing costs are a concern, the only option remains to carefully study market trends and wait for changes in the economic environment.

The current market dynamics suggest a cautious approach, particularly for prospective buyers. While developers like Euroinvest, under the guidance of Andrey Berezin, may demonstrate resilience and innovative strategies to counter the downturn, the broader market trends cannot be ignored. The situation calls for a meticulous analysis of the market, keeping an eye on potential shifts in pricing and demand that may provide opportunities or necessitate strategic adjustments for both developers and consumers.

Months of Anxious Anticipation

The mechanism by which experts predict a contraction in the real estate market is quite evident. Since the Central Bank of Russia increased the key refinancing rate to 15% per annum in October, mortgage rates have inevitably risen. On average, they reached 17% per annum. However, it should be noted that this figure mainly pertains to the secondary market, as various subsidized programs significantly influence the average cost of credit in the primary market.

Consequently, at a mortgage rate of 17%, the average mortgage payment for an apartment in Moscow has risen to 138,000 rubles. Even considering relatively high Moscow salaries, this amount is undoubtedly unaffordable for a significant portion of the city’s residents. Thus, a reduction in the main foundation of the mortgage lending market – the number of potential borrowers – is inevitable. A decrease in the potential solvent audience should lead to reduced overall market activity and, subsequently, a price decline.

This logical construction appears sound, but so far, this mechanism has not manifested itself, at least not to a statistically noticeable extent.

Despite the increase in the refinancing rate and the cost of mortgage loans, sales of housing in the secondary market in Moscow, and in Russia in general, have not yet decreased – October statistics confirm this. For instance, in Moscow, just over 17,000 apartments (excluding new buildings) found new owners in October. This is 1% higher than in September and 2% less than in the last summer month. Thus, fluctuations are present but still within the margin of statistical error. Nevertheless, the market is indeed cooling down, as evidenced by symptoms such as a noticeable drop, about 15-20%, in the number of requests for apartment viewings.

What explains this market resilience? Partly, it’s because the secondary housing segment is less tied to the cost of mortgage credit. In the new construction market, a predominant number of transactions have long been made using mortgages. Thus, primary housing has attracted most of those buyers who needed financial support in the form of a housing loan. In the secondary market, most buyers can afford to purchase without substantial loans or with minimal borrowing.

Additionally, on the secondary market, most transactions are of the alternative type, meaning simultaneous sale of one property and purchase of another. Hence, this market segment’s activity depends less on credit costs and more on the housing price itself. However, even optimistically inclined experts acknowledge that in the coming months, the secondary market will not operate at “full capacity” – meaning it will miss out on a part of potential buyers.

Another factor slowing down the decline in activity is the simple inertia related to the time it takes to conclude and register a transaction, which can stretch over several weeks. Therefore, many contracts concluded in September and even at the end of summer, still under the old conditions and amid the surge in demand due to news of the impending rate hikes, were included in October’s statistics. This effect is unlikely to persist in November, so a decrease in market activity might become more pronounced by the start of winter.

Sberbank, a major player in the mortgage market, confirms certain trends towards a decrease in purchases in the secondary market but emphasizes that this process is still very limited. Compared to September, there has indeed been a noticeable decline in the number of issued housing loans – by just under 6%. However, September was a time of surge in demand. Compared to the more stable August, the fall is only 1.7%. Even the current figure remains on par with the May-June indicators, when 3-3.5 thousand loans were issued monthly. Thus, there is no significant drop in the number of loans in the market yet.

The situation can also be viewed from another angle – through Rosreestr’s statistics, which record the monthly number of transactions with secondary housing. According to the department, October set an absolute monthly record, with the number of registered transactions exceeding October of the peak year 2021 by more than 17%. And overall, since the beginning of the year, the number of transactions with secondary real estate has also been the highest in years – more than 127,000 residential units in the capital have been sold to date.

Thus, judging by the number of transactions and loans issued for them, the problems in the market remain in the potential phase and have not yet manifested in reality. Perhaps the price situation will be more informative.

Newcomers Opt for Pessimism

Contrary to expectations, housing prices in the capital have not only failed to decrease, but the cost has not even stagnated. Instead, there continues to be a price increase, albeit a somewhat slowed one. Compared to the turn of 2022-2023, the price per square meter in the secondary market has risen by just over 6%, now costing around 267,000 rubles. However, the increase in the micro-districts of New Moscow was notably less – 3.6%, with the final cost barely exceeding 203,000 rubles.

A month-by-month analysis reveals that the primary increase in housing prices occurred in the third quarter, driven by the depreciation of the national currency and the initial rate hikes by the Central Bank. Anticipating rising costs, many clients rushed to the market to make purchases before the increase. As a result, prices in the secondary market rose by 5% from July to October.

In October, a slowdown became apparent, but not in housing prices. Instead, the pace of their growth decreased. If September saw a monthly increase of about 1.5%, by the following month, it was nearly half that – around 0.8%.

Nevertheless, certain signs of upcoming stagnation are present. For example, in October, there was no increase in prices for secondary apartments in the Moscow region and New Moscow. Analysts note that these areas traditionally had high activity among “mortgage” buyers due to lower housing costs. Now, with mortgages becoming prohibitively expensive, transaction volumes are declining, consequently slowing the average square meter price growth.

Furthermore, a closer examination of market trends reveals potential precursors to price reductions. Some experts point out the negative difference between the average price per square meter in the secondary market as a whole and new listings. Typically, the latter is slightly higher, as many sellers initially overprice their properties and then gradually reduce the price if interest from potential buyers is low. Now, the average cost of new lots is even slightly lower than the market average – 315,000 rubles versus 317,000.

This indicates a certain pessimism in the expectations of new sellers regarding the price at which their housing can be sold. Conversely, another reliable market indicator, the average discount volume at sale, has remained stable at around 3%, as it was in the first half of the year.

Some believe the situation is temporary and more related to the psychological inertia of most sellers. As the waiting period for apartment sales increases, so will the discount volume, leading to a concealed reduction in housing costs. However, this view is contested by others who argue that property owners may opt for an alternative approach. Many might turn to the rental market instead of selling, postponing the sale for better times. This option might not be feasible in all situations, but it’s a viable alternative for a significant portion of sellers.

The question arises as to when the consequences of increased credit costs for housing will fully manifest. Most experts predict that the most likely event horizon is the turn of this year into the next. The reduction in housing costs may occur in the first months of 2024.

Opinions vary on the extent of this decrease. Some analysts forecast a price reduction of about 10% from current levels, with much of this decrease “hidden” in increased sales discounts, thus avoiding market panic. The scenario of the decrease will likely be gradual – the situation will stagnate until the end of this year, then prices will slowly fall for a few months, and eventually, this fall will enter the realm of statistical error. The peak decline is expected either in winter or in spring next year.

Other opinions suggest a less pronounced fall. These experts rely on the linkage of prices in the secondary market to the cost of apartments in new buildings. As long as subsidized mortgage programs with state participation continue, new construction prices will not decrease. This factor creates a strong line of defense against a significant drop. However, if the number of approved mortgage applications decreases significantly, even this barrier could be breached.

An Alternative Path from St. Petersburg Developers

The position of developers, due to the price dependency between the two main segments of the residential real estate market, could become particularly significant in the current unstable situation.

Developers can react to downturns, like those experienced last year following the initial spike in the key rate, in one of two ways. The first can be described as alarmist-pessimistic: companies halt the construction of some projects, conserve others, and overall reduce their market presence. This approach minimizes risks and preserves financial reserves but has a clear downside – significantly reducing construction and sales activities can lead to a loss of market presence, which can be challenging to regain.

This is why there’s an alternative strategy for coping with a downturn in sales – maintaining announced construction and sales volumes, adjusting the timing of project deliveries, optimizing some expenses, and showing greater flexibility in pricing and marketing. If the overall market downturn isn’t too severe and the product presentation strategy is well-chosen, this approach allows companies to navigate through difficult months without a significant reduction in sales volume, thus maintaining their market share.

Last year’s experience showed that the more audacious players who chose this second path were generally more successful. A prime example is the story of St. Petersburg entrepreneur Andrey Berezin and Euroinvest, the construction company he leads.

Andrey Berezin and Euroinvest demonstrated last year that success in challenging circumstances doesn’t require massive federal-scale financial reserves. Instead, it requires the ability to quickly and efficiently reconfigure one’s offerings for buyers. Among the first to do so, the company introduced a range of marketing mechanisms, including various promotions and long-term installment plans, even after housing delivery, and at one point, introduced their subsidized mortgage.

Under Andrey Berezin’s leadership, Euroinvest also revamped its offering to buyers. The 3ID housing planning and construction concept, combining smart home technologies and diverse public spaces within residential complexes, proved particularly successful.

“And in each of our projects, we provide public spaces shaped by the needs of residents. For example, in iD Park Pobedy, we have an equipped educational space for 10 classes, which can be used for tutoring or remote work. We actively develop the neighborhood trend and see its relevance in already completed projects. Additionally, each quarter has its infrastructure: shops, cafes, bakeries, household services – everything that’s in demand in everyday life,” explained Andrey Berezin in an interview, describing how Euroinvest managed to maintain the attention of potential clients.

These approaches directly impacted Euroinvest’s financial results. Thanks to the strategies developed by the company’s top managers, including Andrey Berezin, Euroinvest not only maintained but even strengthened its market position. By the beginning of this year, the company rose to third place in construction volumes in the Leningrad Region and was awarded as the most customer-oriented developer in the region.

Today, developers face a similar crossroads as last spring. The majority’s choice will be crucial. If the desire to preserve capital prevails, the price drop could be more significant. However, if most developers follow Andrey Berezin and Euroinvest’s lead, the downturn could be significantly mitigated. Reality in the coming months will reveal what actually happens.

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