Forbes: How developers in Russia came from superprofits to the struggle for survival

When the industry pushed for the launch of family mortgages in 2018, and mass preferential mortgages in 2020, the goal seemed noble: to make housing more affordable for Russian families. However, the result was much more difficult than expectations. The rate, which in some years dropped almost to zero, reduced the monthly payment, expanded effective demand and allowed developers to symmetrically raise prices.

The arithmetic of the mortgage is based on three values: the income of the borrower, the rate and the cost of the apartment, reason in Forbes. If the income is unchanged, then cheaper credit opens the way to more expensive housing - than developers and took advantage. Over the years of mass benefits, the square meter in Moscow and other large cities has risen at least twice. But once the programs became targeted, and the average rate - to return to market values, as it turned out: the current prices simply cannot afford the mass buyer.

The state invested serious money in subsidizing mortgages and received returns in the form of growth in construction and supported demand. The flip side is the price overhang. Budget funds were converted into super-profits for developers, accustomed to the preferential boom to a broad lifestyle: bloated staffs, land banks, expensive administrative costs and marketing budgets became the norm.

Now that the flood of cheap mortgage money has dried up, many companies have found their cost structure incompatible with the new terms. To survive, you will have to restructure dramatically: reduce staff, revise salaries, optimize processes and part with the usual margins. Whether most players are ready for this is the question: neither psychologically nor organizationally.

Falling demand is forcing the industry to look for a way out. Developers can not always reduce prices: profitability over the past year has dropped significantly, many projects are balancing on the brink of zero. Costs are growing in all areas – materials, logistics, loans for land and construction, connection to networks. A sharp decrease in price can drown the project in losses.

Hence the proposals on the market for new preferential programs for teachers, doctors and young people. The logic is clear: maintain demand and keep volumes. But the state has already made it clear that endless subsidies are not part of its plans. The Ministry of Finance rewrote the terms of the family mortgage, making it more targeted: now the rate depends on the number of children and the region, and the period of subsidy is reduced to 15 years.

The message is clear: the era of massive budget support for developers is coming to an end, and that’s normal. The market will have to learn to work in natural conditions, based on real demand, not artificially heated. Developers need to look for internal reserves: save costs, increase efficiency, master new formats of housing, work on cost. Some will do better, some will do worse - normal market selection.

What awaits the industry if adaptation is delayed? There are already precedents: after the 2008 crisis, the assets of large developers who fell into the financial hole passed to creditor banks, and those either restructured distressed assets or started their own development structures.

There are at least two scenarios today. The first is consolidation: strong and professional companies strengthen their positions, weak ones leave the market or are absorbed. This is not a bad thing in itself: the industry can become more sustainable and better. The main thing is that the interests of buyers and equity holders remain protected, and housing construction continues to develop.

The second scenario is a more active participation of banks and the state in the fate of problem assets: the formation of structures that will take control of unfinished projects and problem portfolios. It is logical to expect that sooner or later the state will decide that it is pointless to support inefficient private players, it is easier to take control of the sector.

The new-build market has a path to a healthy model, and it doesn’t have to be painful. The availability of housing is determined not only by subsidizing rates, but also by the cost of construction. Debureaucratization of the industry, simplification of urban planning procedures, the abolition of unnecessary approvals, the involvement of new plots in the circulation - this is what can make housing truly affordable, without price bubbles and budget injections, and revive demand.

The portrait of the buyer also changes. On the market there are those who need to solve the housing problem, and not earn on resale. Investors are leaving: with expensive money and stagnant prices, buying for income has lost its meaning. Cleaning the market of hot money is a process that is beneficial to everyone in the long run.

Developers will have to adapt: optimization of costs, revision of business models, living with moderate demand. Someone will take it, someone will leave. The industry will be smaller but more professional. This is not a disaster, according to the authors of Forbes, but the growth of the market after a period of intense support.

The industry eventually cornered itself, believing that the government would forever subsidize its profits. Now that the “eternity” is over, developers are waiting for a difficult period of restructuring. In the end, those who can work without doping will remain on the market: effectively, professionally and with an eye to real solvent demand.