You can earn income from investments in different ways: stocks and bonds, participation in a mutual fund, a venture project or a startup. However, the events of early 2022 made changes to the classic investment portfolio of the investor: many foreign shares were banned, it will no longer be possible to open a foreign currency deposit, and most Russian blue chips refused dividend payments for 2021.
Against the backdrop of such changes, real estate looks like one of the most reliable investment instruments, especially since this asset has been in demand at all times. And one of the first investment earnings, even before the advent of commodity exchanges, was considered the purchase of real estate for subsequent leasing. We understand the nuances of investing in real estate, their pros and cons, as well as the prospects for this market in Russia.
Pros and cons of investing in real estate
Creating passive income from real estate is considered one of the first types of investments in history. For example, in tsarist Russia there were tenement houses – real estate that the owners rented out and made money on it. For many homeowners, this type of income was considered not only the main one, but also the only one.
According to a study conducted by DOM.RF and VTsIOM, housing is considered one of the most popular types of investment among Russians – 49% of respondents said so. More than 72% of Russians consider real estate a more profitable and reliable investment tool compared to bank deposits. Back in 2021, 66% shared this opinion.
The main advantages of investing in real estate
- Stable Monthly Income – Real estate makes a profit when rented every month, while stocks or other assets can be at a loss for a long time and do not create such income.
- An increase in the cost of capital due to an increase in apartment prices.
- Direct control over investments – the owner of the apartment can always check the asset and influence the situation, for example, terminate the contract if there are difficulties with paying rent, and when investing in the stock market, we give money to an intermediary – a broker who buys shares for us.
- Protection of investments from volatility — there are no such sharp fluctuations in prices in the real estate market, as, for example, in the stock market, when during periods of tension (crisis or release of important news), the price can change by 50% or more in a few hours.
- Real estate can be purchased with borrowed funds – get a mortgage: now the state subsidizes the development of the real estate market and offers preferential mortgages at the lowest rates in history. Developers also help clients and create promotional conditions – mortgages at 0.1% or 2-3%, due to which the overpayment on the loan is minimal. It is impossible to invest in other projects with borrowed funds from the bank – except to buy short shares or use leverage, but provided that the broker allows it. In doing so, there is a risk of loss.
- Purchase tax deduction – 13% for a maximum amount of up to 2 million rubles, or 260,000 rubles, and for mortgage interest – a calculation amount of up to 3 million rubles, or 390,000 rubles.
- Inflation Protection – Real estate prices rise faster than inflation and overtake it. Over the past five years, the growth rate of the consumer price index in the country amounted to about 36.41% , and real estate prices over the same period increased by an average of 50%.
The main disadvantages of investing in real estate
- Investments in the purchase of an apartment are among the most expensive, large investments will be required to start, unlike the stock market, where 10–30 thousand rubles is enough to start.
- A long payback period under the standard scheme is the purchase of an apartment on the open market. The investor will return the invested money no earlier than seven to ten years. But if you use alternative markets to buy an apartment, for example, trading in arrested or bankrupt property, then the payback period is reduced.
- Real estate maintenance costs.
- The risks of losing the apartment associated with force majeure situations – fire or flood.
- Not the most liquid asset. Real estate cannot be sold as quickly and easily as, for example, shares. It will take time to sell – from several days to a month or more.
- Dishonest tenants. If the property is used for renting out, there is always a risk of getting into unscrupulous tenants who will not make monthly payments on time or in full.
Real estate, like any investment tool, has not only pluses, but also minuses, which are offset by a competent business model. For example, in order not to waste time looking for reliable tenants, you can buy an apartment, not an apartment. In this case, the management company will take care of all the arrangements for the lease.
How did the price of apartments in the central regions change?
In recent years, rising home prices have attracted increased attention. The reason for this growth is the programs of concessional lending launched by the state: state support at 7% and family mortgages at a rate of up to 5%. Low rates attracted a large flow of borrowers, which caused an increase in the number of mortgage transactions in the primary housing market. Most preferential programs apply to the purchase of real estate from a legal entity – a developer. And following the increased demand for preferential mortgages, there was a sharp increase in prices in a short period of time.
If back in 2014-2015. the secondary housing market offered higher prices in comparison with the primary one, but now housing in the primary market is more expensive. Now the “secondary” is rising in price after the primary market.
Moscow and St. Petersburg remained the unchanging leaders in terms of price growth. Other leaders have changed places, but the general trend has continued – prices have increased by an average of 13-15 times.
What factors affect the price of an apartment
In investments, it is important to invest your savings in a liquid asset, which, if necessary, is quickly converted into money. For real estate, liquidity is one of the key points that an investor takes into account when choosing an object. And in order for the apartment to turn out to be a profitable investment project, it is necessary to take into account the key factors that determine how profitable and promising the investments turned out to be. These options are:
- the condition of the building in which the apartment is located: number of storeys, year of construction and the presence or absence of a major overhaul and an elevator;
- developed infrastructure – shops, pharmacies, schools, kindergartens, public transport stops;
- crime level;
- the general condition of the apartment – the presence of high-quality repairs;
- redevelopment: if they are not agreed upon or legalized, this can reduce the cost of the apartment, and if they are carried out according to the norms of the law and improve the general appearance, then, on the contrary, they can increase the price among similar objects where there are no such changes;
- general view of the apartment: interior, area or view from the window.
The general state of the real estate market has an additional impact on prices. And it is influenced by factors such as interest rates – with a decrease in mortgage rates, the demand for apartments also grows; the general state of the economy and the availability of subsidies and other government assistance.
What do analysts say about apartment prices in 2022?
Currently, investors are worried about what will happen to housing prices in the near future and whether it is worth investing now or waiting.
Despite the pandemic and the geopolitical situation, the active price growth that began after the introduction of preferential mortgages in April 2020 continues. If in May 2020 1 m 2 on average in Russia cost 77,007 rubles, then in May 2022 – 126,979 rubles.
The indicator of the general state of the real estate market is the primary one. And according to the results of the first quarter of 2022, despite the sanctions of the West, the number of housing under construction and commissioning has increased.
Rosreestr provides similar data: in terms of the total volume of registered equity participation agreements (DDU) for the first five months of 2022, the industry shows an increase.
The development of the construction industry is one of the priorities in the work of the government. This is also evidenced by preferential mortgage programs, which the state launches and extends for a new period. For example, state support, which will work according to the new rules until the end of 2022.
Igor Maidanov, head of the Rosreestr Office for Moscow, agrees with this opinion: “The state has developed and sent for implementation a large package of anti-crisis measures. Subsidizing mortgage rates for the purchase of real estate in new buildings helps citizens improve their living conditions and supports the construction industry as a whole.”
Mortgage programs of developers for the purchase of real estate at rates
Mortgages are the most common way to buy real estate. So, Sberbank, through the DomClick service, analyzed all ongoing transactions – with and without mortgage funds – for cash. Only about 3-12% of transactions in the Moscow region, St. Petersburg and other places are carried out at the clients’ own expense and are not considered mortgages.
Developers understand this and, in order to attract customers, they develop special promotions in partnership with banks – mortgage programs at minimum rates (0.1-5%).
- GK ” PIK ” (PIKK). Mortgage at a rate of 0.1% in St. Petersburg and Moscow. The loan amount is up to 12 million rubles. The program requires a down payment of 15%. The option is available at DOM.RF Bank, and with another lender, Alfa-Bank, the rate is 1.99%.
- GK “A101”. Mortgage at 0.1%. In partnership with banks such as VTB (VTBR) or Rosselkhozbank, the developer offers the lowest possible rate.
- Aircraft Group of Companies (SMLT). Mortgage for all – 0.1%. The developer offers such a rate under various programs: family mortgage, standard, IT.
For all programs with a reduced rate, the developer compensates for the minimum rate by increasing the price of the apartment. On average, by 10-20% – depends on the program and the object. But the general rule is that the lower the rate, the higher the price increase. For example, if under a standard family mortgage at a rate of up to 5% an apartment costs 5 million rubles, then at a promotional rate of 0.1% the price of the object rises and the apartment will cost 20% more – 6 million rubles.
Alternative real estate investment vehicles
- ZPIF “PARUS-OZN” and ZPIF “PARUS-Sberlog”
The units of these closed-end mutual funds are freely traded on the stock exchange in the public domain. These funds include two assets of leading e-commerce companies, SberLogistika and Ozon (OZON) logistics centers. The receipt of potential income for investors is based on the growth of the fund’s market value.
You can read more about this and other profitable real estate funds here .
- Fund “Tinkoff ZhK Republic-REDS”
The strategy of this fund is based on the potential growth in the cost of housing from the start of construction to its completion. After the delivery of houses, the property will be sold, and the money will be paid to the shareholders.
What awaits the Russian real estate market?
In 2022, the growth in real estate prices, especially in the primary market, received additional factors – now it is associated not only with high demand due to preferential mortgage programs, but also with rising prices for building materials and rising inflation. The last two factors are the result of the sanctions imposed against Russia. Statistics showed that, despite the crisis, the volume of sales of apartments under the DDU for the five months of 2022 did not decrease compared to the same period last year.
Analysts of the National Rating Agency (NRA) predict continued price growth, for example, in the Moscow region they expect an increase of 20-30% by the end of the year. This is confirmed by the statistics of the last 20 years: no matter what events take place in the world and the country, real estate prices are slowly but surely growing.
For direct investment in the purchase of an apartment, there are now many profitable offers from banks and developers: preferential mortgage programs subsidized by the state or a developer, installment plans for one or two years without appreciation – for clients who cannot afford a mortgage. Or you can buy shares of construction companies – the largest developers, which will also reflect the general mood of the market – rising prices for apartments.