Expensive housing ghost of Russia

03.08.2011 — Analysis

Housing is still among the most pressing issues for Russian people. The government spends billions of budget rubles on such programs as Affordable Housing and Dwelling; however, only 15% of the country's population can become owners of their own apartments or houses today. This number includes not only those who are able to pay immediately a few million rubles for an apartment, but also those who took high-interest mortgage loans. On the eve of the presidential election of 2012, experts anticipate a leap in prices. The "RusBusinessNews" reporter has found it out that the conflict between manufacturers of building materials and railway companies can contribute to this situation.

Dmitry Medvedev and Vladimir Putin promise in unison that by 2015 housing will be affordable to one third of the population. However, the information from construction sites does not support the above statement. The financial crisis that raged in 2008-2009 put a temporary hold on soaring prices for square meters of space. Then the consumer demand started to recover and, consequently, the price for apartments surged upward. In summer of 2011, the presidential "affordable housing" stumbled across the policy opted by manufacturers of building materials, who embarked on boosting prices for their products. The Builders' Association of Russia announced that in August-September cement will go up by 70% - its price will reach 10,000 rubles per ton.

Roman Kuprin, PR and GR director of SMPro LLC, told "RusBusinessNews" that in May the price for cement "according to official channels" increased by 4.3% - to 2,343 rubles per ton (net of VAT). However, some consumers state that the actual increase was 60%. "Most likely, they talk about packaged cement - its retail price can be 1.5 times as high as the price on the wholesale market", notes R. Kuprin.

Yuri Chumerin, executive director of the Union of Enterprises of Building Industry of the Sverdlovsk Region, anticipates that in August, cement prices in the region can reach 4,000 rubles per ton. "The level of 10,000 has very vague chances. During the crisis prices went down to the lowest notch, and now they are coming back to the former level", he points out.

Due to this, the cost of the residential "square meter" can increase approximately by 1,000 rubles. The 60-square meter apartment will become more expensive by 60 thousand rubles only through cement "jumps".

In the meantime, following the rend set by cement, other building materials go up in prices. At the beginning of 2011, the price for concrete increased by 12.3 % - to 3,061 rubles per one cubic meter. Since January prices for reinforced concrete structures and elements have increased by 4.9% - to 7,506 rubles per one cubic meter.

Manufacturers tend to blame railway companies for increased prices. The Sverdlovsk Regional Union of Industrialists and Entrepreneurs informed "RusBusinessNews" that manufacturers are not able to ship products due to railcars shortage. Hard hit are Sukholozhskcement, OJSC, Uralasbest, OJSC, the Nevyansk Factory of Reinforced Concrete Products, LLC, which have to switch to road haulage or refuse from contracts. According to analysts, over one year in the Sverdlovsk Region at enterprises of the building sector, the output has increased by 30% as compared to a 12% increase in product shipments.

Today, about 20% of the products cannot be shipped because of the railcar shortage. Sukholozhskcement has at its site 120 railcars loaded with cement and 90 empty cars, as the nearest railway station, Kunara, has already 360 cars standing idle. Furthermore, the turnaround time has become substantially longer, both for company-own and rented railcars. Instead of 4-5 days, it takes 11-12 days for cars to get to the terminal.

The Nevyansk Factory of Reinforced Concrete Products had to lay off one third of its personnel due to the problems with product shipment and is on the brink of shutdown. Uralasbest OJSC, the largest crushed stone supplier in the Sverdlovsk Region, was not able to deliver 41% of its commodities in May. The situation did not improve in June and July.

Desperate manufacturers are ready to go to extremes. For example, Sukholozhskcement having a share of foreign investors in its authorized capital intends to request its German shareholders to influence the solution of the problem at the level of the RF government.

Railway companies, in their turn, complain about excessive seasonal spikes in operations of building materials manufacturers and summer-time repair work on railway tracks. "During the recent decade, both production and sales of cement have followed a pronounced seasonal pattern. With the year-round production, the existing fleet of cement railcars would meet all the needs of cargo owners in full (and even 20% above). Seasonality is typical of most freight shipments, but it does not exceed 15%, while the summer output of cement doubles as compared with the winter period. As a result, in winter more than 6,000 cement railcars stand idle", the agency was informed by the Press Service of the Ekaterinburg Branch of the First Freight Company (FFC), which is one of the leading cement transportation operators.

On numerous occasions, the company has offered cargo owners to discuss an investment program aimed at re-equipment of the cement railcar fleet, but the idea found no support. "The FFC is ready to re-equip the fleet provided that the railcar operations bring the required return. The existing annual average rate (about 550 rubles a day) is too low not only to invest funds in purchasing of a new rolling stock, but also to maintain the existing park in proper operating condition", point out representatives of the press service.

Manufacturers are not willing to pay higher rental rates - they have to loosen their purse strings to pay for transportation. According to Alexander Ivanov, managing director of the Ural Branch of EUROCEMENT trade, rates for cement transportation are increasing rapidly. "They go up approximately every two months. Today, the transportation of cement from Nevyansk to Ekaterinburg (100 kilometers) costs 340 rubles per ton", he points out.

One of the representatives of the sector, who asked not to disclose his name, has informed that the situation has been aggravated by the winter Olympic Games that are scheduled for 2014. The Russian government has hurled all effort into construction in Sochi; therefore, a lot of railcars were assigned to the construction sites there. "It takes longer time to unload them, thus resulting in increased time of use and subsequent demurrage. We have here a logistic blunder of authorities", notes the source.

In the near future, the Sverdlovsk Railway is going to conduct a meeting with participation of Vladimir Yakunin, president of the Russian Railways, OJSC, however, it is not clear whether the regional transportation flow will be recovered. Meanwhile, the conflict situation results in shortage of building materials, a subsequent increase in construction costs and higher prices for residential space.

Trying not to scare away customers, developers' agents take no haste to announce increased prices. Nova-stroy, CJSC (a company of the LSR Group) does not intend to increase prices - the work is performed in accordance with the estimates that were approved and agreed upon with partner companies well in advance. Besides, real estate prices are formed following the market principle. Therefore, it cannot go up without market drivers", said Kliment Falaleyev, managing director of the Ural branch.

Nevertheless, other experts do not agree with him. "Increased prices for building materials sooner or later affect the final cost of housing", asserts Anatoly Vasiliev, deputy director of the Builders' Union of the Sverdlovsk Region.

His opinion is shared by Yaroslav Zamashnoy, General Director of the EkaDom Center of Quality Housing: "Certainly, the ultimate cost of the property is composed of numerous components, but increased prices for building materials tend to result in higher prices for construction work and other constituent elements. Thus, it will cause an increase in prices on the secondary market that is very sensitive to all the changes that take place on the new housing market".

The presidential election is going to be the second factor that will contribute to higher prices for the "square meter space". Russian people who got used to holding the government authorizes in distrust are afraid of ruble devaluation. For this reason, many of them will try to make their investment in real property before the beginning of the spring presidential race. Sellers, in their turn, will be quick to respond the demand upswing by increasing prices. Ya. Zamashnoy expects that in autumn the price for one square meter of residential space in the Middle Urals will go up by 15%.

Guram Tukhashvili, analyst of the Ural Real Estate Chamber, shares his opinion. "Since the beginning of 2011, prices on the secondary market have increased by 5%; prices for new residential space have demonstrated even more dramatic gain. At the end of the year, the gain can amount to 15%, reaching 20% for some residential space", he thinks.

In addition to the aforesaid reasons, higher prices will be supported by shortage of land in Ekaterinburg. A year ago the Prosecutor's Office appropriated more than 200 allotments from developers, explaining their actions by the fact that the land was given by the Ekaterinburg administration with violation of regulations - in 2006-2008 land auctions that are required by law were not conducted. In the meantime, many developers have already invested dozens of millions rubles in project documentation to be prepared. In order to return the allotments companies have to take part in auctions, but not all of them are able to incur such expenses.

According to the Ural Real Estate Chamber, today the secondary housing in Ekaterinburg costs on average 58,164 rubles per one square meter, while the price of primary housing is 51,800 rubles. It is quite possible that by 2015, in spite of the promises of the Kremlin celestials, residential space will become even more expensive and phantom.

Maria Truskova