Rental Housing – Development Opportunities

7 September 2022

Rental Housing – Development Opportunities

KEY CONCLUSIONS

Rental housing is a popular format

“When we invite a person to work in both regional and federal governments, it says "housing provided" in the contracts. In that case rental housing is definitely the best option at the moment. And moreover, this provides room for adapting, because people come and go, while the square meters remain,” Sergey Nosov, Governor of Magadan Region.

“Rental housing is a product that has proven its worth on the market. Yes, it is really in demand <...> there were doubts at first and many did not dare to go into this segment. However, we have seen that DOM.RF has made a significant progress in the construction of rental housing lately, and we see tangible demand for it. In reality, it is essentially an analogue of the so-called ‘maneuvering fund’ within the constituents of the Russian Federation,” Alexey Belik, Prime Minister of Sakhalin Region.

Rental housing market got room to grow

“According to statistics, about 11% of families in the Russian Federation live in rental housing. In the Far East this number is slightly higher, about 14%. However, we know that in other countries rental housing takes up a much higher share – from 30% to 50%. In large cities such as Berlin, the share of rental housing reaches 80%. In Russia, we have our own history of mass privatization, so rental housing is not as widespread. Nevertheless, we see the potential for this market to grow by at least two times,” Veronica Janushkevich, Director for Rental Housing Development, DOM.RF.

“Polls show that 60% of the Russian Federation's residents are ready to come and work in the Far East for different time periods: a year, two years, someone is ready to consider long-term prospects for development in the territory. But they expect certain conditions to be created: a place to live, social infrastructure. This is why we see rental housing as an important solution to the second stage of the development of the Far East. The first stage is to rev up the economic engine, which has created these jobs and launched the economy. Rental housing is key to the entire Far East development cycle we are working on,” Elvira Nurgalieva, First Deputy General Director for Social Development, Corporation for the Development of the Far East and the Arctic.

“Businesses today is interested in this niche (rental housing for students – Ed.). As I said, there are 50,000 students in HSE. And in other regions, I think the number of students is also in the tens of thousands. These are the new city residents. And it is a good market, an advanced market for investment,” Veronika Minina, Vice-Rector, National Research University Higher School of Economics.

“In the Far East, 47 percent of people are not able to come up with the down payment and service the loan even with a 0% interest rate. This must be resolved somehow: people want to improve their housing conditions. This is the first message. The second is that there is a lot of migration, especially among young people. Young families want to live today <...> they have families because of the housing conditions, we must give them this opportunity. And the third message. We are looking at 200 million square meters that are now rented. People are leasing. This business works <...> And as a business, it must be developed,” Vitaly Mutko, Chief Executive Officer, DOM.RF.

“The development of the Far East began at a rapid pace in 2013, ever since the decision was made to create the Ministry. During this time, the federal laws on the Free Port of Vladivostok, the territories of advanced development, and these special preferential regimes have allowed a number of enterprises to create new production facilities <...> During this time, more than 2,700 new enterprises, residents of FPV and ASEZs were created, and these enterprises created 105,000 new jobs during this period. And we are waiting for another 50,000 jobs by 2024 under binding agreements with the residents <...> All these unique enterprises in the Far East require unique specialists. And for them to come to the Far East, to work in the conditions that do not look like a shift crew <...> it is important to create conditions that can attract these professionals, can help implement these enterprises, and possibly make them fall in love with the region, keep these people in the territory, and allow them to develop these enterprises,” Elvira Nurgalieva, First Deputy General Director for Social Development, Corporation for the Development of the Far East and the Arctic.

PROBLEMS

Rental market needs to be taken out of the gray area

“Rental housing market is a completely disconnected layer of the economy, which is in fact just absent. It is not regulated in any way, 99% of the rental housing that exists on the market – no one pays any taxes on it. The rights of neither landlords nor tenants are not protected. In other words, it is total chaos and total failure,” Vladimir Koshelev, First Deputy Chairman of the Committee of the State Duma of the Federal Assembly of the Russian Federation for Construction, Housing and Communal Services.

“If we have a total of more than 56 million residential properties included in the registry, and the registry contains information on no more than 4,000 such transactions (rentals – Ed.) <...> We see that we need to create the most transparent infrastructure services that eliminate illegal activity in this market,” Maxim Smirnov, Deputy Head, The Federal Service for State Registration, Cadastre and Cartography (Rosreestr).

Apart from corporations and students, rental housing matters to state employees

“We talked about corporate rentals, we talked about student rentals, but we forgot all about the government. We also invite the professionals here. And I am not even going to talk about regional authorities. What about the federal ones? If the rent of a two-room apartment in Magadan in a so-so house it runs from 35 to 40 thousand rubles. How do you invite a specialist to a federal authority or to the police force? They do not have the highest salaries in the Far East <...> These are state authorities, state administration, and this issue must be resolved, again, within state institutions and state institutions,” Sergey Nosov, Governor of Magadan Region.

Issue of return of investment on rental housing for business

“Back when we were looking at business diversification at its peak, back when the rates were quite low, we were finding this kind of rental business to be quite low-margin and long in terms of commercial development recuperation. It turned out that you were giving all the proceeds to repay the debt to the bank. At the current cost of project financing and the cost of debt, it is plain impossible (construction of rental housing – Ed.) for commercial structures,” Ivan Polandov, Chief Executive Officer, PIK-specialized homebuilder.

Rental market overheats with arrival of large-scale projects

“We built several houses in order to mobilize specialists, despite the fact that we already had a developed production site in Tobolsk, but nevertheless we had to construct two more buildings. This is what we decided to do looking at the rental market, which literally "exploded" at the time of construction: about 8 thousand workers came to build our facility, and the rental price became absolutely prohibitive. We made the decision to construct the buildings, cooled down the market a little bit, solved our problem, but we have to realize that this is still a non-productive investment for us. And if there had been a reasonable rental market at the time, we certainly would have gone for it,” Sergey Komyshan, Member of the Board, Executive Director, SIBUR.

SOLUTIONS

Government’s decision on rental market development will be supported

“We all hear a lot about the fact that a lot of attention at the highest level is being paid to the accelerated socioeconomic development of the Far East. Certainly, this would not be possible without the support of the housing sector. So, if the government decides to implement a large-scale programme of rental housing construction in the Far East, we (DOM.RF – Ed.) will be glad to participate in this programme because we have the necessary experience, the skills, and the competences,” Veronica Janushkevich, Director for Rental Housing Development, DOM.RF.

Developers can get attractive benefits when entering the Far East

“A decision has been made to expand the ASEZ conditions for developers. Now developers can become residents and get all the preferences: a free land plot from the corporation, an infrastructure to the site, and the opportunity to build comfortable neighborhood development projects by reducing the cost of entry. They will also have a chance to transfer part of the housing to regions at the cost of the Ministry of Construction, involving this fund for social needs,” Elvira Nurgalieva, First Deputy General Director for Social Development, Corporation for the Development of the Far East and the Arctic.

“Before entering a new region with a rental housing project, we always start the dialogue with the government on the 0% property tax rate <...> this allows us to reduce the rental rate for the end tenant by 25–30%, all other conditions being equal. This is really very important. Without such tax incentive it is simply impossible to create a competitive project in the region,” Veronica Janushkevich, Director for Rental Housing Development, DOM.RF.

Families need privileges

“The President has set an ambitious task for the country and for the Far East. Not only we must reduce the outflow of the population, but we need to ensure its growth. And seeing the population structure of the Far East, it is obvious that we will have to act in three directions. Direction number one is to reduce the outflow of young people from the region <...> The second direction <...> is, of course, the inflow of specialists to new points of investment growth <...> The third direction: if we do not ensure that those who have already chosen the Far East as their permanent residence will have a higher birth rate in the Far East, we will also have difficulty achieving the president's goal,” Olga Batalina, First Deputy Minister of Labor and Social Protection of the Russian Federation.

“Obviously, a family living in rental housing should be able to move to a larger apartment in the event of the birth of a child while maintaining the cost of rent per square meter. In this case the total payment will increase, but it will be the same for one square meter in any case,” Olga Batalina, First Deputy Minister of Labor and Social Protection of the Russian Federation.

Rental market can become official through the use of discounts

“What do we think should be done? First thing is to legislate such a concept as rental housing and rental house. It is mandatory to fix in the law that such facilities enjoy preferential approaches <...> such as 0% VAT, 0% land and property tax, plus a special preferential rate for the construction of such facilities. In our opinion, all these things will be able to launch a large layer of the economy and make it absolutely legal and civilized. With this approach, a large number of private investors should go there,” Vladimir Koshelev, First Deputy Chairman of the Committee of the State Duma of the Federal Assembly of the Russian Federation for Construction, Housing and Communal Services.

Rental Housing – Development Opportunities

Read more