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Condo-format for developers

Alexander SHARAPOV, President of Becar Asset Management

Aparthotels have the added value, that traditional housing usually don’t. So why has the construction of apart hotels become as profitable as residential real estate?

I believe that only lazy person has not told yet about the rush in demand for housing and warehouses, which happened in Russia against the background of the general crisis and economic downturn. However, these two segments were not the only ones where developers received an unexpected, but quite logical benefit: the lockdown has provoked increased interest in apart-hotels, which were previously in the conditional second tier of the real estate market. And here's why.

Prices for apartments in Russian new buildings jumped in the "covid" in 2020 by 19.2%. These figures were given a few months ago by “World of apartments” portal experts. And JLL found out that investment in warehouses increased last year by 2.5 times. In the first case, a favorable mortgage, and in the second - the growth of e-commerce.

To be more accurate, the main price growth for new buildings occurred in the second half of the year: immediately after the lifting of the lock-up period people began to buy housing in droves, and not only in Moscow and St. Petersburg. Sochi was the leader in price growth among the major cities - the "square meter" rose in price by 39% during the year, according to the calculations of the company "Avito-Real Estate". Kaliningrad and Bryansk came next in dynamics, the Northern capital shared the fourth place with Nizhny Novgorod. As a result, it even came to the developers refusal from advertising: otherwise the demand was simply impossible to contain.

Of course, a record low mortgage rate was the main reason for the price growth, but if it had been the only reason, prices would have been growing only in Russia. However, we see an upward trend in many countries around the world. For example, in the United States, home prices rose by about 20% over the year. The second reason is the printing press and the trillions of dollars which spilled out on the market. Finally, the third reason is purely Russian. It is the transition of most construction projects to financing through escrow accounts, which automatically increased the cost of construction and the average price per square meter.

For this third reason, the average apartment price increase in Russia has been higher than in the world. It may seem that housing has become the "new gold" for developers, but, as they say, there are some nuances. Credit financing under the new scheme is available not for all developers, and permission to build an apartment building under the 214-federal low from 2018 can only get developers with relevant experience (at least three years) to build at least 10 thousand square meters. Therefore, to enter the housing market you need a reliable partner - with land or documents in hand and a clear business plan.

The last one is especially important, because competition in the real estate market is off the scale.
What's interesting, on the one hand, the market is overheated, but on the other hand, the price of rental housing has declined quite substantially - by 10, or even 15%. As a consequence, the yield from investing in housing with the aim of leasing is not even 5-6%, but 3-4% per annum. And this is already quite sad, at the fact that most of the money withdrawn from bank accounts, went just to invest in housing for the purpose of further renting it out. For the same reason, prices for apartments and condo-format apart-hotels, as well as for colivings, were rising strongly. According to the data of Becar, prices for apartments in Moscow grew by 19%, in St. Petersburg - by 10-16%. But while some yields are stagnating or falling, others are growing. For example, our condo-hotels already in the first year of operation show an annual rate of return of 8%, and on the whole in all our projects we expect to increase it to 17%.

The demand for traditional-format housing and apartments (in the latter case, we're talking about the so-called "pseudo-housing") will certainly remain within the next 2-3 years. Lifestyle hotels and colivings will "eat away" their share of the market. This is because a generation of young creatives and "digital nomads" have entered the arena. They weren't on the market 30 years ago. They are bloggers, IT people, web designers. They're not rich, but they make more money than engineers and mid-level managers in businesses. They want a service to make everything "one-click" on a digital platform, event managers for entertainment, and events to keep their minds off their leisure time.
Especially for this kind of people Russia don’t have necessary product, and their share in the total mass of those who form demand grows every year. That is, there is a niche, and it is constantly growing. We realized it in 2013, when we decided to enter the apartment hotel market. At that time there was no supply at all. These trends are just coming to Russia, but they will be in great demand in the coming years. They have the added value that traditional housing lacks.

If we take our latest hotel project as an example, then with average cost price of 90 thousand rubles per 1 sq.m. the average selling price of it for private investors is about 175 thousdand rubles. Such level of profitability became possible due to the fact that all our projects are sold as all-inclusive: they already include everything from furniture to hotel service. That is why if apartments sell 15-20% cheaper than apartments with the same area and size in the surrounding area, so hotel-type serviced apartments (officially they are called exactly that) sell 15-20% more expensive.

At the same time, the condo-format that we have chosen allows us to ignore the main problem of the Russian development market - the lack of "long money". For this purpose, any room becomes a separate real estate object and is sold at retail. In fact, this is an alternative to an investment apartment for rent, but cheaper (due to the area), with furnishing and management. This is a ready-made business, but with a yield two or three times higher than that of conventional apartments.