When there is a lot of money in the country but few financial and investment technologies, there is little use for money.
The 7th “Economy real sector financing” business forum has taken place in the Moscow “Marriott Moscow Royal Aurora” hotel. One of the most discussed topics was the problem of construction industry financing sources. Heated disputes flared up among the participants, which showed that the market is actively searching for a new financial model – but it is a long way from finding it as yet.
According to the Japanese scenario
In the introduction to the discussion, the moderator, the Chair of the “Integration” international club and famous expert Irina Radchenko shared her opinion on communication with developers. According to them, the current economic crisis is the longest and most complicated that the realty market has faced in the post-Soviet period. This determines the necessity of searching for new ways of financing the industry, or otherwise its fall may be a catastrophe.
There are precedents. In 1991, there was a disastrous fall on the Japanese realty market. Though many years have passed since, the market has not risen higher than the level of 25 years ago.
A number of analysts hold to the idea that the current realty market in Russia may return to the prices from which it has moved away from. 1 square meter for $600 is not utopian; it is quite possible if new models of financing are not found.
Existing trends support the pessimistic prognosis.
An obedient market
However, the situation is not yet that dramatic. According to Ivan Grachev, Deputy of the State Duma of the 4th calling, the domestic realty market is quite primitive: it obediently follows oil prices. It is likely to grow in the near future, according to parliamentarians.
Lately, residential realty price changes have not surpassed 500 roubles for 1 m2, so the market is not threatened by any dramatic events, Andrei Shelkovy,the “Morton” GC President’s Councilor, says, agreeing with the ex-Deputy.
But there is another problem: the current demand is of a non-market character, as it is supported by the state program of mortgage loan subsidizing. More than 40% of all deals on the primary market are of this kind. But the state’s help is likely to finish in 2016 – what then?
If the demand for consumer goods falls, it is easy to decrease their output and even stop production for a short time, but how is the construction of a house to be stopped if part of the money for its construction has already been collected? Hoodwinked investors may not be forthcoming so when purchasing of housing decreases, panic envelops developers.
Close to exhaustion
Important processes are taking place now on the market, and one can’t but take them into consideration.
According to the Deputy Minister of Construction and Utilities of the RF, Oleg Betin, polls show that purchasers prefer buying finished housing, which demands new financial mechanisms and tools. The previous ones proved their efficiency in the past, but their growth potential is close to exhausted.
Thus, for the last nine years the total sum of mortgage loans lent has grown 99-fold. It is clear that mortgage loan crediting cannot go on at the same rate, and so new financial approaches are necessary.
And they exist. But not in Russia – in Czechia.
Looking at Czechia and Germany
The Chief Executive Officer & Managing Director of PPF Real Estate Russia, Martin Schaffer, spoke on how the Czech state helps people save money for buying houses.
A citizen transfers part of his money to a special bank account, and the state adds subsidies. People often start saving money after a baby is born and keep on saving while it is growing up. When the child is 18 he has tax-free startup capital. In Czechoslovakia, with a population of 10m people, about 1 m citizens are part of the scheme. Besides this, there are both mortgage loans and co-financed construction available.
In Russia the use of building-and-loan associations (BLA) may become a new option. Oleg Betin remarked that a building-and-loan association is a good idea, but when the priority financial mechanism was being chosen, it was considered to be an untimely measure.
Was the decision right? It is known that those whose monthly salary is equal to the cost of 1 m2 of housing can afford a mortgage loan. Those whose income is only half that may participate in a BLA scheme, and there are many more of them than there are current mortgage loan borrowers.
Today, mortgage loans exist due to the non-market measures of state support. And what will become of them when the program ends?
Meanwhile, Czech and German experiences with a mature BLA scheme shows that their use does not result in budget losses. Our mortgage loan model,copied from the American one, is threatened by great risks. We all remember the large-scale mortgage crisis of 2008 in the USA, which grew into a global financial crisis, but in Europe, since 1945 no BLA has gone bankrupt! According to some experts, the BLA can conscript up to $150 bln.
Housing construction in Russia may stop without cooperative housing schemes. At the same time, a number of experts think that this system has no future in the long term. Firstly, it involves great risks. Secondly, it courts controversy with the market trend of buying the finished housing with the necessary infrastructure.
What might co-funded construction be replaced with? Neither a banking system, nor mutual funds, nor securities issuers are ready to offer alternative ways of construction financing on the same scale as co-funding.
For example, in Moscow, “the population and co-funders have become the largest investors in the city in recent years: they have gathered and invested 569 bln roubles in housing construction”, claimed the Deputy Mayor of Moscow for construction and urban development, Marat Khusnullin, said at the end of 2015. “In Russia, few may boast of such investment volumes, including first level oil and gas companies.”
Of course, the BLA has proven its sustainability in Czechia and Germany, but it is dangerous to switch over to this system in crisis conditions. If the model is changed in current conditions, both the old and the new may fail. It is a difficult moment for the implementation of alternative variants.
1:0 to the banks
One of them is project financing.
Vladimir Gamza, Chair of the RF CCI Committee for financial markets and credit institutions, thinks that there was a strategic mistake made recently. Instead of introducing amendments to 214-FL, it should have been transformed into a law on project financing.
Though 214-FL is being changed and improved by introducing additional security mechanisms, co-funded construction, alas, retains some signs of being a pyramid.
With project financing, non-purpose use is impossiblea priori. Banks control financial money expenditure, strictly and gradually allotting it when necessary, after a definite stage of construction is completed.
Besides this, the appearance of escrow accounts provided by 214-FL as an alternative financial variant deprives developers of direct financing.
In this case all the co-funders’ money is kept in a bank, which spends it according to its own desires. The situation is quite advantageous for credit institutions, as they needn’t even charge interest on the savings.
Nevertheless, we may see an imbalance again. Besides this, if developers lose the co-funders’ money at the construction stage, they will have to replace it with banking credits, which will eventually increase the final cost of housing.
The eternal issue
Today, everybody is complaining about a lack of money: developers, financial institutions, buyers. In fact, there is a lot of money in the country. The state has 7.5 trn roubles, the population has saved 6 trn roubles, the banks have 1.5 trn roubles and as much as 20 trn roubles are owned by state corporations. Besides this, one should add the CB’s forex/gold holdings.
That is, we may speak not of the lack of finance but of the lack of clear mechanisms for efficiently attracting it to the economy, including the construction industry. Unfortunately, the authorities are not looking for ways to do it, but prefer investing large volumes of statefinance in US treasury bonds. For “our American partners”… joy.
The state has no clear and distinct policy as to Russian construction support, Kirill Kulakov, Professor of the NRU MSUCE, says. “Now it buys realty, then subsidizes mortgage loans. The state does not seem to analyze its activity or foresee its consequences but seems to take impulsive measures. As a result, money bypasses construction, due to the lack of investment mechanisms.
In highly developed countries, the volumes of mortgages in local central banks may be compared with the GDP volume. In Russia this sum should be about $650 bln, thinks the Vice-President of “Business Russia”, Nickolai Ostarkov. But this money is not real, as we cannot capitalize realty.
The Russian credit-linked market is badly developed, yet it determines the development of the economy. If Marx wrote his fundamental work now, he would have called it “Debt”, not “Capital”, Mr Ostarkov supposes… and we lack both.
The economy’s condition depends to a great extent on developed financial technologies, but Russia uses a very narrow and archaic set of financial tools. Though financiers know about the full range of instruments, they cannot introduce them to the full.
The discussion which took place proves it. By the way, nothing was said about such an important financial mechanism as the financing of rental housing construction, but the future of the Russian construction complex depends on it to a great extent. For now, it is the most complicated and the least explored issue. The construction industry is unlikely to grow without it.