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Real Estate

The post-crisis future
Interview with Georgy Dzagurov, General Director of Penny Lane
Interview by Vladimir kozlev

eorgy Dzagurov, general director of Penny Lane Realty, talked to me about what the situation in the Moscow’ real estate market today, two years after the overall economic downturn hit the sector.

Two years have passed since the lowest point of the crisis in the real estate industry, which was, in turn, triggered by the overall economic downturn of late 2008—early 2009. Is it possible to say today that the market has completely bounced back to precrisis levels?

I wouldn’t even expect a situation in which the market would completely bounce back. [Back then], the market transformed into a completely new state in just a few days: demand sharply declined, prices went down but not enough to immediately trigger interest from investors. The maximum decline in prices occurred only in April 2009, which was seven months after the beginning of the crisis. At the same time, some irreversible changes occurred: a number of investors and developers left the market for good, some buidlings became “illiquid”, and up to a half of all realtors and other specialists in the industry left the market, while some of them even left the country, waiting out for better times.

The loan process stalled, while interest rates went up even on loans that were provided earlier, and the attraction of [financial] resources turned into an increasingly difficult task. Large development companies completely or partially changed hands. And in a number of cases they subdued to state-controlled banks, having changed their policy from aggressive growth to conservative decisionmaking with long-term sale prospects in sight. The main competitive advantages of that kind of approach are access to long-term credit resources, availability of a strong “administrative resource”, prospects of obtaining governmental orders to maintain operability of a company in general. Some management companies took over the operation of buildings earlier credited by banks [they were now affiliated with].

So, some developers, even though under a new management, have a notable upper hand, and over the next few years will be able to actively squeeze out competitors. In addition, this is a very interesting time for development: the demand, delayed by crisis-related spooks, [is coming back], there is a shortage of new residential construction, some projects have been suspended, new Moscow mayor [Sergei Sobyanin] has a firm stand [on several issues related to real estate]. All that creates the conditions for increased real estate prices. At the same time, [apartments] ready for moving in in the secondary market are being sold out quickly.

What is the situation in different segments of the real estate market, compared with that before the crisis? In what segments have prices reached pre-crisis figures and in what segments are they still far behind what they were, say, three years ago?

Since April 2009, real estate prices have been constantly on the rise, and in some segments they have indeed surpassed the pre-crisis levels. For instance, in the segment of A-class warehouse facilities, there are basically no vacancy. Moreover, there is a waiting list and collection of requests from potential leaseholders.

At the same time, [prices in the segments of] land and properties located far away from Moscow are further from pre-crisis figures than in any other segment. And, in the current situation, it makes more sense to discuss what demand individual properties attract, rather than entire segments.

Overall, we at Penny Lane are not dreaming about the return to the August 2008 status quo but looking at the situation as it is, trying to be maximally precise about guessing the directions in which the situation develops, as well as trends and events that have an impact on demand and supply.

You mentioned the firm stand that the new city mayor on some issues. Could you tell us more about what decisions made since Mayor Sobyanin took office last October have had the most substantial impact on the city’s real estate market?

The majority of his decisions, the new mayor has shown that he is closely following the tasks set up by the federal government. That means that, unlike under previous mayor [Yuri] Luzhkov, only “giants” like [Sberbank’s head German] Gref, [VTB’s chairman of the board Andrei] Kostin or [Vneshekonombank’s chief Vladimir] Dmitriyev are able to have a real dialog on that level.

By all his statements, the mayor indicates that he would like to see in the city strong developers with immaculate financing. On some issues, Sobyanin takes a populist stand, which I personally don’t always share. But this has to do with the fact that elections are approaching.

Thus, I should note that although Sobyanin doesn’t have such blatant negative qualities of Luzhkov as, for instance, a developer spouse, he is overall much less friendly to developers, which they have to take as a serious signal. Personally, I wouldn’t want to build anything in a situation when every day promises are being made to suspend some projects or terminate contracts. And even though I may be upset about it, that doesn’t really mean that the city won’t benefit in the long run. For instance, in projects developed by Sberbank, there won’t be “deceived individual co-investors” and, similarly, there will be no underfinancing that results in construction lasting for years.

What kind of lesson could the market’s participants learn from the crisis?

The crisis once again showed who is worth what, cleaned the market out, taught people to be conservative and attentive to recommendations from professionals and helped consolidate worthy operators in the market. End users realized that they should buy what they really need rather than what seems to be cheap at first sight. The number of deals in when property was bought for investment purposes declined drastically, which by itself makes the market more stable. At the same time, the crisis showed that we are constantly developing. I once again realized that the development of science and technology has a bigger impact on the future than individual crises. I am sure that at our company, the crisis became a good vaccination against stagnation and complacency.

What factors have the biggest impact on the real estate market in the present situation?

The main factors are the shortage of good-quality offers in city and countryside residential property, production and warehouse facilities, and street retail.

What is the reason for the shortage?

In just two decades, it is simply impossible to build enough properties that comply with contemporary standards. Residential property in Russia and in the Soviet Union was always in high demand. Currently, the shortage of residential property is explained by a decline in construction volumes. Among other reasons are the consolidation of developers and a shift of influence from private companies to those which are supported by government orders or government funding. At the same time, good-quality offers in the secondary market are quickly taken up.

What is the current situation in the mortgage loan segment? What impact does it have on the residential property market?

Conditions for mortgage loans are currently similar to those at the pre-crisis times, but the economic downturn has made people more skeptical about the prospects of taking a mortgage loan at a rip-off rate. This is to say that under the same conditions, a much smaller proportion of Russians opt for a mortgage loan. Mortgage loans were popular before the crisis because a lot of people took them in a hope for constant and substantial price increases. But many [who thought that way] were hit hard in 2008. I believe that mortgage loans in principle correspond with the development model of our society, but this instrument is going to be widely used only if interest rates are substantially lowered.

Can you make any forecast in this situation?

By the end of this year, we expect an increase in banks’ activity as far as financing of those developments which survived the crisis, goes. We also expect an exodus of commercial developers to the Moscow Oblast and other regions, and stable prices in the market, which would trigger potential buyers to make decisions, eventually contributing to the recovery of demand, which today is still far from pre-crisis figures.

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