Interview with Kaido Kaarma
Kaido Kaarma, General Director of the real estate company Est-a-tet, spoke to PASSPORT about prospects of investment in residential real estate in the Moscow market
Q: Before the economic downturn, investment in residential real estate in Russia, and especially in Moscow, yielded high returns and was quite popular. Then, due to the economic crisis, investors basically fled from the market. What is the situation now?
A: The segment of newly constructed property is still popular. But previously an investor could enter just about any project, without giving it much consideration, and a 20% a year return on investment was pretty much guaranteed. Now, the average return on investment is about 25% for the entire construction period – from the beginning to completion. And the most attractive objects for investment are individual projects rather than larger-scale developments. As far as larger-scale projects go, very often sales go down at a certain point because price expectations hit the maximum.
Q: If we look back at the economic crisis, what was the immediate impact on the real estate market as far as investors are concerned?
A: As a result of the crisis, both demand and supply shrank. At first sight, one balanced the other, but what also changed was the investor’s mentality. Today’s consumers understand that such high demand as we used to have, is no longer there, and take their time making decisions. Consequently, in largescale projects, prices don’t go up significantly, making investment uneconomical. But as for individual projects, supply is smaller, and it is possible to find a good investment opportunity by carefully studying apartments for views, layouts and so on. But a potential investor needs to very carefully choose a project as well as a particular apartment in it. It happens that some apartments are noticeably underrated, especially in the first stages of construction.
Q: How has the proportion of so-called “investment apartments”— those bought by individuals as an investment rather than to live in —changed in the wake of the crisis?
A: When speaking about “investment apartments”, we should rather look at individual development projects rather than the market as a whole. There were projects, in which up to 50% of apartments were bought either as investments. But these days, in the economy and business-class segments, this figure is no higher than 20%. Even when it comes to more expensive property, it is more important for a customer to purchase an apartment. And then they will be able to see whether they would move in or resell it with a profit. But what is important is that the price should be lower than a market average, so that the capital [invested in a property] would be working.
Q: Is it possible to make an investment decision without having any specific expertise in the field and knowledge of the market?
A: An investor will need professional assistance in any case. It’s very important to understand the overall situation in the market and also have a good idea what exactly is going on in a particular neighborhood and in a particular project. For instance, last year, we had a project, the ninth neighborhood in Reutov, where prices went up by 45% in just one year. The most important factor that had an impact on that growth was the opening of a Metro station close by. I have repeatedly pointed that out: if the Metro comes to any of Moscow’s satellite towns, that has a serious impact on real estate prices there.
Q: What other factors can have an impact on the price of a residential property, making it a potentially profitable investment?
A: Sometimes properties are sold at a deliberately discounted price, which could also be a good investment opportunity. One example is The English Quarter. It has been under development since 2006, and has gone through different stages, including suspension. And although that’s a business-premium class project, when sales started in August 2010, the price was around 150,000 roubles to 160,000 roubles, [per square metre] attracting a substantial proportion of investors. But by December, the price went up to over 200,000 roubles, and since then, growth has slowed down.
One important criterion for choosing an investment project is the reliability of the developer. Risks of a project not being completed are still there. So, it is vital that a realtor, through which an investor purchases a property, deals only with reliable developers. An investor needs to know who the developer is and where the financing for the project is coming from—whether a loan is involved or the project is financed exclusively by proceeds from pre-selling apartments. There is an idea around that construction of a building can be financed exclusively from pre-sales of apartments in it, and prices are thus lower because the developer doesn’t have to pay interest on loans. However, if sales don’t pick up quickly, a project can be suspended. So, this is something to watch out for.
Q: What projects should potential investors with different budgets, say, 2 million roubles, 5 million roubles, 10 million roubles and up, look at in the market of Moscow and the region?
A: If we are talking about an investment between 1.5 million roubles to 2 million roubles, the returns won’t be significant. We have sold apartments in the project Marusino, in which apartments ready to move in sold for under 2 million roubles and we are currently selling apartments in Zelenogradsky near Pushkino, which retail between 1.5 million roubles and 2.5 million roubles. But getting a 25% return on investment won’t be easy there because that kind of property, being really affordable, is primarily bought by young families to move in. The share of investors in such projects is under 10%. If an investor looks at a building within a range of 5 million roubles, they should look at Moscow Oblast towns where supply of new residential property isn’t extensive, like, for instance, Shcherbinka. And an investment should be made at an early stage of construction. For 10 million roubles, one could consider options within city limits, like on Michurinsky Prospekt. And, talking about more expensive properties, I would still suggest The English Quarter, even though prices there are unlikely to go up there as substantially as they did in the past. Once the construction is completed, the average price of an apartment there is likely to be around $10,000 per square meter, and at this point it’s still possible to buy at $7,500 per square meter. There is also the residential building Shatyor, which could bring investors a good return, as in that area, around Krasnoselskaya metro station, nothing much is being built at this point. And the building is also good in terms of quality.
Q: Would it make sense to take a mortgage loan on a residential property, expecting to eventually make a profit from price growth surpassing the interest rate?
A: I’m rather negative about this. Even if you can take a mortgage loan from Sberbank at 8% a year, which is hardly possible when it comes to newly-built properties and primarily applies to secondary-market options, the interest will kill all your potential profits. The mortgage might be worth looking at if someone just wants to buy an apartment that could be later rented out. But again, profits from renting out an apartment are not that great, around 5% a year. In my opinion, the mortgage is a good solution in a situation when someone lives in an old, poor-quality apartment, like a “Khrushchevka” building, and wants to move to a better one, but not for investment.