The construction sector is gradually recovering from the crisis, albeit only up to a point. PERI has analyzed the current developments in the housing and commercial construction industries.
In early 2022, the construction sector, just like many other sectors of the Russian economy, faced serious challenges. The forecasts were not too optimistic from the very beginning, but fortunately, most of them did not hold up. In the summer 2022, the sector showed growth after a significant decline, and this trend persists. The number of new housing projects on the Russian market keeps increasing.
Thus, in May 2023, developers brought 27% more buildings to the market than a year before. At the same time, the share of unsold apartments exceeds the share of sold properties. The share of unsold housing and housing that has not been on sale yet increased by 14% in the period between 2021 and 2023 (55% in 2021, 60% in 2022 and 69% in 2023). The Krasnodar Territory ranks last in terms of the share of sold property. As of May 2023, only 21% of housing was sold in the region; 79% of apartments have either not yet found buyers, or sales have not opened yet.
This decline in demand has been recorded since last year. It is partly due to the reduced purchasing power and people’s desire to avoid significant expenses amid a global destabilization. The massive relocation wave has also contributed to the trend. However, these trends are playing a less important role than they did a year before.
The developments on the mortgage market are also affecting the construction sector. The mortgage rate in the first quarter of 2023 showed a usual seasonal dynamic, but there is still a decline in the number of provided loans as compared to the same period in 2021-2022. To some extent, it can be explained by a slightly increased concessional mortgage rate. Among other factors is the Central Bank’s toughening of regulations: in May 2023, more strict requirements have been introduced for providing mortgage loans.
It is worth mentioning that the number of project endorsements is getting lower. If it does not increase, the gradual reduction in the number of new projects will become noticeable in the second half of 2023. The negative peak will happen in 2024 and will be 30% as compared to 2021.
According to the Integrated Developers’ Portal, in April 2023, project documentation for 106 facilities from 83 developers received endorsement, which is 48.3% lower than in the same period last year. As compared to March 2023, the number of endorsed projects dropped by 13.8%.
As can be seen from the data above, there is a positive trend in the amount of constructed housing facilities. However, the mass launch of numerous construction projects that had been developed between 2020 and 2022 will be followed by a gradual decrease in 2023. The maximum decline is expected in 2024 after the mass launch of projects that had been drawn up before February 2022 takes place. In 2024, the amount of launched projects will reduce by 30% as compared to 2021. This is evidenced by the decrease in the issued endorsements for the fourth month in a row, a trend that was observed in August-December 2022 as well.
Commercial real estate
The warehousing is still witnessing demand over supply, with developer activity persisting in the market. By estimations from CORE.XP, the annual new construction volume will amount to 1.2 million square meters. Currently, as little as 36% (or 323,000 square meters) of the facilities in buildings under construction remain available for rent or purchase.
In 2023, we still see foreign companies leaving the Russian market, which may result in a new record as regards investments in commercial real estate due to the sale of vacant retail space. Currently, the amount of such space in shopping malls is the highest in the last five years. The situation will stabilize upon termination of lease agreements with foreign companies that have opted to withdraw from the Russian market, with part of the space to be used by new foreign brands as well as Russian companies.
The hotel segment is witnessing a sort of recovery: with traveling abroad having become more difficult, we see an increase in Russia’s domestic tourism. This has led to the increasing demand for hotel real estate, and developers are making efforts not to miss out on this trend.
Logistic chains and warehouse property in CIS countries
Rebuilding supply chains towards Asia and China has become one of major challenges for the Russian business last year. According to the Asian Development Bank, the exports by countries in the Caucasus and Central Asia (CCA) region to Russia increased by 50% in the third quarter of 2022 as compared to average indicators of 2018-2019 . NF Group has estimated that last year’s demand from top Russian companies and logistics operators for open storage facilities in the mentioned CIS countries doubled, and continues to grow. Kazakhstan ranks first as regards warehousing put into operation and planned for construction, with its share of about 41%.
Uzbekistan and Kazakhstan remain the most advanced markets for logistics services in Central Asia, where logistics operators account for 14% and 20% of the total amount, respectively – while in Russia, this indicator was about 11.8% in the third quarter of 2022.
The announcement of major projects and cooperation agreements between neighboring countries in transport infrastructure and logistics was a positive sign in the CIS market. To boost the coordination between warehousing and industrial infrastructure facilities, Central Asian countries are taking efforts to build Uzbekistan-Kyrgyzstan-China railway route, and develop Uzbekistan-Turkmenistan-Iran-India transport corridor. Kazakhstan’s initiatives to create logistics centers on the borders with neighboring countries – Kyrgyzstan, Uzbekistan, Russia, and China – have proved essential.
Further development of warehouse property markets in Central Asia, South Caucasus and the Republic of Belarus will depend on the emergence of institutional investors who can offer a quality product.