1 October 2010
Commercial Real Estate publishes Igor Serebryakov commentary on Russia's Government support housing program

Mortgage in the Sky

Lyudmila Bokina

Mortgage deals are coming back to the residential real estate market. Now they account for up to 10% in the economy class. The government program of developing mortgage loans implies that the share of such transactions should rise to 60% by 2030. Experts are confident, however, that the 35% threshold will hardly ever be exceeded.

Mortgage is gradually recovering and coming back to the housing market. But while in the pre-crisis period the share of mortgage transactions in the economy class segment of Russia's residential real estate amounted to 35%, now they barely hit the 10% mark. In 2009, the number of mortgage transactions went down almost to zero. Today, the mortgage is coming back to life: a positive trend began at the beginning of 2010. The volume of transactions in the economy and comfort classes reached 9-12%. With regard to elite and business class housing, this tool is used in 5-8% of deals. The Russian government lays very ambitious plans planning to bring the share of mortgage deals in the housing market to 60%; yet the expert community is doubtful and argues that they will never exceed one third of all deals. "As for the elite residential real estate, mortgage is rather an additional option. Nevertheless, given the experience of foreign countries, we can assume that the popularity of mortgage transactions will have time to grow, especially in the elite segment. Both sellers and banks will have to develop this tool, " believes Konstantin Kovalyov, Managing Partner of Blackwood.

Capital attraction tool According to the latest research conducted by the Public Opinion foundation, about 22% of those in need of new houses would like to use mortgage loans. Based on other related reports, 56 million Russians are in need of housing. This means that 18.9 million households should be built. Of these, 1.3-1.5 million people in Moscow and the Moscow region want to purchase houses or apartments through mortgage. This translates to 400,000 households. Given the official data on the weighted average living space per household (which was 52.4 sqm in 2009), we can assume that a total

of 21 million sqm should be constructed for 400,000 households. According to GVA Sawyer, in HI 2010 only 0.5 million sqm entered the housing market in Moscow. In the Moscow region, this figure amounted to 2.89 million sqm, or 29,600 new apartments, based on data from Peresvet-Invest. The reasons why supply and demand do not overlap are the lack of available land, funds to proceed with residential projects, and finally the lack of mortgage tools. Residential construction in general is hard to finance through mortgage loans. "Currently, we see an increasing number of customers that apply to our company with the intention to purchase a new apartment with a bank leverage. The truth is that the banks offer loans on the security of existing real estate. They also have restrictions concerning the stage of the project, - the houses should be up to 70% finished. So it is really difficult to purchase a house or an apartment in Russia," explains Natalia Parfenova, Senior Specialist of the Sales Department at Peresvet Invest.

Experts see a strong demand for apartments in the economy class segment of the Moscow primary housing market. Based on MIEL estimates, economy and comfort class apartments amount to only 25%, business class - 58.6%, an elite class - 16.3%. This means that the city does not have enough economy class housing. According to CRE, in this particular real estate segment the demand far exceeds supply, and prices rise accordingly.

Smooth approach

In the current difficult economic environment that exists in Russia's housing market, the buyer is trying to minimize the cost of housing. An option that existed before the crisis was to invest money in a house under construction using a mortgage leverage. When the crisis started, nearly all bank mortgage programs were put on hold. As a result, the demand dropped considerably and the whole market shrank. In H2 2010, some banks restarted to finance construction projects. Given that the projects under construction are risky for both the borrower and the lending bank, these banks now have strict requirements. "The relationship between the lender and the builder should be based on the principles of transparency at all stages of cooperation," explains Georgy Ter-Aristokesyants, Vice President, Head of Credit and Mortgage at VTB 24 bank. Vozrozhdenie bank requires that a construction company should not use 100% of its available resources for just one project. On the other hand, the bank would not finance developers engaged in several projects. "In addition, it is important for us to clearly understand the business of the company. We consider both the mortgage and the way our finance is used," says the bank representative. "In general, banks are now willing to issue mortgages to finance the construction projects that are at least 70% ready. However, there are exceptions. VTB 24 provides mortgage loans for the purchase of projects at various development stages. In some cases, they would even lend money to proceed with residential projects at the initial construction stage. However, all these projects, regardless of the degree of their readiness, should meet certain requirements and pass a corresponding accreditation procedure.

According to market experts, the positive changes in mortgage procedures that relate to unfinished construction happened due to the latest changes in the Russian legislation. Especially after the Federal Law .214 was issued to increase transparency of the housing market. According to Alexey Konevsky, Head of land, real estate and construction practice at Pepeliaev Group, before the said amendments were adopted, both banks and developers were accountable to those who intended to buy apartments. That obligation prevented many banks from financing residential real estate projects. Now the banks' liability is replaced with subsidized liability that has reduced their risks. The banks now have the right to take into account only those projects that they finance, holding land plots as collateral. According to the law, other banks are not allowed to participate in the same project as lenders. However, banks need to provide a wide range of mortgage products.

Governmental delays It is obvious that the Government has to support all groups of stakeholders taking part in the housing program in the country, namely the people in need of new apartments and houses, the developers who implement housing projects and are in need of financing, and the banks that need to develop financial products. The State support is needed both for the general economic issues and for particular legislation that regulates the construction business. Alexey Konevsky in this regard notes that there are cases when developers in fact receive all needed construction permits when the house is already built. According to him, many construction projects are realized illegally while developers have no right to raise funds from the population. The only way to solve this problem is to simplify and accelerate procedures for obtaining a construction permit, the expert believes.

One of the recent actions of Russia's Government to support the housing program was to make VneshEconomBank issue a 40-billion-ruble credit for the Agency for Housing Mortgage Lending (AHML). According to the Stimulus Program, 2 million sq m of economy class residential real estate will be built. The program mainly targets projects in Russia's regions, as well as some projects near Moscow. The AHML press service reports that only the banks that really take part in the projects will participate in the Stimulus Program. The Agency will not select projects directly, although it may bring banks and developers together to proceed with the selected projects. The AHML considers economy class residential projects only. The Agency will offer participating banks the opportunity to access the target loan of 8% per annum during the construction project that should not exceed two years. A very attractive point is that the Agency guarantees to buy out a part of new apartments from the project developer at fixed prices.

The idea is that this program should help developers finish projects, help the banks get their credits repaid in time, and finally help individual homebuyers to purchase housing at affordable prices. However, a set of corresponding legal problems should be solved first. Igor Serebryakov, Senior Lawyer at EPAM, notes that some provisions of the Stimulus program are not quite clear.

For example, who will pay for ownership registration of unsold apartments, who will bear the expenses relating to land registration, and finally who will estimate the market value of collateral assets. These are the questions that the program participants will have to answer during their projects.

What do borrowers want? The key reason why we can see a growing number of mortgage transactions is reduced mortgage rates (the rates have been down 1.5-2% since January 2010 depending on the class of residential facilities). In addition, many banks have significantly expanded their financial product line: some restarted to issue credit programs with only 10% initial payments etc, although these are rare cases. Marina Melkonyan, Director of private and corporate lending at Penny Lane Realty, says that mortgage in Russia started to recover in early 2010. Since then, the number of people interested in mortgage has increased by 35%.

Vladimir Tribrat, Marketing Director at Pioneer Group, also thinks that mortgage transactions are gaining momentum, even if in the cheapest price niches. Since January to date, the share of mortgage transactions in Lazarevskoye residential complex amounted to 10% of total sales. Everything looks like today we are having the most opportune time for mortgage borrowers. On the one hand, ruble-based interest rates have already reached pre-crisis levels while the banks are becoming more flexible with payment periods and initial contributions. On the other hand, borrowers are now paying more attention to mortgage lending than in the crisis, as the unemployment rate has stabilized and the general economic situation is getting better. Finally, the housing prices have restarted growing. Experts believe that a real breakthrough in the mortgage process will start no sooner than in 2012, as the current lending terms are not the best for everyone to use.

The banks, in turn, say that the interest rates fully correspond to the current inflation rates. "The interest rates on mortgages are quite affordable, and the program itself is very flexible. The only problem is the housing prices that are reaching the sky," comments Artem Bochkarev, Press Secretary at VTB 24. Other bankers share the same point of view. AndreyStepanenko Board member of Raiffeisenbank, comments in this respect: "The main and the most distinctive feature that prevents Russia's mortgage business from rapid expansion relates to crazy hosing prices in Russia compared to both developed and underdeveloped countries."

On July 19, 2010 the Government of Russia adopted a new strategy of mortgage development up to 2030. The key issue of the new strategy concerns the housing prices. According to the document, the purchasing power of the Russian population should be in line with the housing prices (and visa versa) for at least 60% of the population to be able to use mortgage tools. "This strategy requires development of the whole market infrastructure, including state institutions," says Georgy Ter-Aristokesyants. However, experts doubt that the attempt of the Government to make 60% of the population use mortgage is realistic. "To achieve such a goal it is necessary to introduce fundamental changes to the procedure of obtaining bank loans," emphasizes Maria Litinetskaya, Managing Director of MIEL-Novostroyki. "In my opinion, the share of mortgage transactions in the total amount will not exceed 20-30%." More optimistic experts may talk about 35%, but the Governmental plans are unrealistic. Russia has too large gaps between housing prices, wages, and mortgage rates.

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