Shared construction: you may be disadvantaged

As simple calculations show, paying money for housing that has not yet been built is unprofitable for consumers. Moreover, by paying the construction company money in advance, we not only do not gain any additional benefits, but also suffer losses. And the recent bankruptcy of the Moszhilstroy company, which became the latest in a series of similar bankruptcies, reminds us that prepayment for housing is also dangerous.
But our money brings great benefits to construction companies.

Unfinished construction is profitable
The sale of apartments that have not yet been built is called “shared construction” and begins at the earliest stage - preparing the project for the future home. To make it more convincing, you can fence the site with a fence, install a board with the name of the company and launch a lone excavator at the site of the future pit.
However, this is not necessary. It is useless, for example, to look for any signs of the construction of a house at 34 Federative Avenue by the Nakhodka company. For now, only exploration work is underway. However, the house has been actively advertised for a year now, and funds from private investors are being attracted.
The flow of client funds, as a rule, is established even before the foundation pit is dug. Construction of a typical house usually lasts two to three seasons. In other words, the developer has at his disposal, including the winter months, 2.5-3 years (30-36 months). Investments in construction are made fairly evenly; monthly developers use only 2.7-3.3% of investments. At the same time, getting the opportunity to put temporarily free funds into circulation.
This is exactly what development companies do. The entire first season is occupied by zero-cycle work (the most expensive part of construction). The second is assembling the house, connecting communications and starting finishing. The third is the completion of work and lengthy paperwork.
All this time, client funds not involved in construction are in circulation in the financial markets. And these markets, as you know, allow you to receive about 30% per annum in foreign currency without much effort. Question: what prevents us from receiving this money ourselves during the same period? Answer: only that we gave them to the construction company. Details follow.

Don't invest money, gentlemen.
Pricing in the primary market for standard housing depends on the stated construction time frame and the quality of the house.
The Domostroy company sells apartments in a building on Novocheremushkinskaya Street (finishing work is underway) at prices starting from $1,200 per sq. m. m. "Unisstroy" offers apartments in a building on Kravchenko Street (construction is at the stage of the zero cycle) for $1060 per sq. m. m. The same pattern can be seen in the proposals of developers working in less attractive areas. Since there are more construction projects in non-prestigious areas, the average price level at the early stage of construction is $700-900 per sq. m. m.
By comparing the real cost of construction and the declared prices, we can draw a simple conclusion: in order for the buyer to fully pay for the construction, it is enough to take a maximum of 60-70% of the price of the apartment as a down payment (or several payments) - this is usually done. Moreover, this not only provides guarantees for financing the house, but also allows you to fix prices.
All further receipts - subsequent payments from the buyer and the percentage of their placement in a bank or somewhere else - form the profit of the development company.
As a rule, the forward price (that is, simply the price of an apartment on an advance payment basis) differs from the price in a ready-made house by 20 percent. Considering that construction lasts at least two years, you receive a conditional income of 10 percent per annum. But two things must be taken into account. Firstly, the stated construction completion dates are extremely rarely met, and secondly, housing prices are gradually but steadily decreasing.
Let's imagine a completely real-life situation. A year ago, two gentlemen decided to buy a two-room apartment with an area of 75 square meters in some decent area of Moscow. Finished housing in this area cost $1,000 per square meter, and our gentlemen only had $63,000 at their disposal. And they decided to go their own ways.
Mr. A invested money in shared construction - the said amount was just enough to pay for the deal, and now he has to wait another year for the apartment.
And Mr. B went to the office of the Capital Savings Bank and deposited money at 20% per annum, taking into account that the interest on the deposit will not change during the deposit period. Exactly a year later (that is, now), Mr. A received his $74,400 and purchased a ready-made apartment with this money.
Naturally, equity investing is attractive primarily because you can pay only part of the amount to begin with, and pay the rest in installments.
The New World company, for example, considers one of its advantages to be that the down payment can be limited to 3 percent of the cost of the apartment. However, the amount underpaid by the client to the full cost increases by 5% every month, which, of course, is not mentioned in the advertising.
It is a common practice for a company to reserve the ability to change the cost of a meter. So, according to the terms of the installment plan offered by the Unisstroy company, the first payment is 40%, and then the buyer pays the rest in equal installments. At the same time, Unisstroy, in accordance with the agreement, has the right to monthly increase the price of the apartment by $30-100 per sq. m. m.
At the Priboi company, the down payment is 60%. But on installment terms, the buyer pays per meter not its current price - $980, but $1,100. However, the price per meter is not fixed.

Pyramid queue
It is worth talking separately about the financial scheme based on the ineradicable trust of Muscovites in socially oriented companies.
Two years ago, the Housing Initiative company announced its intention to build 13 houses in the North-Eastern District as part of the Kombiinvest program. The event was advertised as an attempt to solve the problem of waiting lists using their own funds.
The company’s calculations showed that at least 3-4 thousand residents of NEAD are actually able to invest money in the program. Under the Housing Initiative scheme, the investor accumulated money in a so-called savings account with an interest rate of 6% per annum. After paying 50% of the apartment (at “commercial cost” - $600 per sq. m.), the program participant could choose his future address and then had to pay the remaining amount in a fairly short time.
When the construction of the first house was completed (in Anadyrsky Proezd), it turned out that only a small number of investors were able to cross the 50% threshold (perhaps this development of events was foreseen initially).
However, the Housing Initiative fulfilled its main task. She managed to collect a large amount of funds and use these funds for two years. Recently, an imperceptible end was put in this financial epic (the construction itself is still ongoing). The “savings” investments of the residents of North-East Administrative District were transferred to the account of the local off-budget housing construction fund.
Thus, the company relieved itself of responsibility for implementing the program, shifting it to the prefecture. Someday, all 13 houses for the waiting list will obviously be built. But by a different developer.
Note that so far we have only talked about relatively honest ways of taking money from gullible investors. As a rule, developers still complete the construction of houses, albeit with a great delay, and, as a rule, return money to clients if they want to terminate the contract (after all, they have already used this money at a preferential interest rate).
But there is also outright crime in this area. The recent bankruptcy of Moszhilstroy is the most high-profile, although not the first case of this kind.

CJSC "Moszhilstroy" - founded in early 1996. Participated as a co-investor in the construction of five residential buildings in different areas of Moscow, attracting up to 60 billion rubles of private investment. Unauthorized use of the Moscow coat of arms in advertising.
At the beginning of May 1997, all publications publishing advertisements for Moszhilstroy received letters from the Office of Extra-Budgetary Development of the Moscow Government with a recommendation not to publish advertisements for the company until the situation around it was clarified. Not a single publication heeded this recommendation. On June 10, the management of Moszhilstroy disappeared. The Moscow GUEP is conducting an investigation.
The real Moszhilstroy is the oldest construction organization conducting housing construction under the auspices of the Moscow government. Has no relation to JSC Moszhilstroy.

In the actions of the fake Moszhilstroy one can see clear signs of pyramidism. For example, Moszhilstroy concluded 49 contracts for apartments in a building on Marshal Zhukov Street, but in reality it, as a co-investor, owns only nine apartments in this building (they are now under arrest until the end of the investigation). Thus, investors will receive at best a fifth of their funds.
Unfortunately, Moszhilstroy investors, who bought apartments for $1,090 per square meter, were not alarmed by the fact that another company, Asticom CJSC, was offering apartments in the same building, but at a much higher price—$1,300. As it turned out, Moszhilstroy itself bought apartments from Astikom at this price. Whether this was a pre-planned fraud remains to be determined by the investigation. But naturally, at the same time, Moszhilstroy could not provide apartments for its investors.
It is quite obvious that saving money in a bank account is a more reliable and profitable way to buy an apartment than equity investment. You can say it another way: buying “square meters” is the same investment, but on less favorable terms and with much less guarantees. There is only one explanation for citizens’ passion for futures transactions during a period of falling real estate prices - a purely psychological one: people invest money in construction because they want to feel like the owners of their own “meters”, albeit mythical ones, of their own apartment, albeit a future one.
As you can see, in this situation it is quite possible to find yourself a homeowner for an hour.

Evgeniy LEONOV

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How much does housing cost?
Developers often argue that building standard housing is unprofitable. The cost, they say, approaches the market value of housing, and sometimes exceeds it. Well, what kind of profit can we talk about?
The price of construction is a delicate issue. There are no single figures reflecting its cost. The officially accepted value is 4150 million rubles. ($720) is the commercial price per meter at which the Moscow government began paying construction organizations for housing a year ago. It can only be called cost due to a misunderstanding.
Another value is slightly closer to the cost - 3.5 million rubles. ($600), or the nominal price of a meter of housing sold under the second issue of a municipal housing loan. According to statements by Moscow officials, this housing is sold at cost. However, the price of the bonds includes not only the cost of construction itself, but also the maintenance of the entire Moscow construction complex.
Apparently there is one more figure. During the discussion of the loan project, the deputy chairman of the municipal housing committee, Eduard Yakushenko, said that “for those on the waiting list, an exception can be made: build housing at a reduced cost” (!). The responsible official did not say what its value was. But it became obvious that 3.5 million rubles. — “commercial” cost.
And finally, there is the real cost. According to a number of representatives of the Moscow construction complex, a meter of housing in a house of the mass P-44 series costs house-building factories 200-250 dollars, and in a house of the expensive KOPE series - up to 400 dollars.
Indirectly, it is possible to estimate the real cost per square meter in a different way. In the provinces, where the volume of commercial construction, of course, is not comparable with Moscow, but housing is still being built, the market price of typical housing on the primary market is $350-400 per meter. If we subtract the developer's profit, we get approximately the same money - $250-300.
Now let’s try to estimate the developer’s costs taking into account the city’s share, which, according to the terms of investment contracts, ranges from 20 to 35%. It turns out $300-380 per square meter. If we take into account the costs of approving the project and maintaining the company, a meter of commercial housing costs a developer a maximum of $500.
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Signatures
Already in September last year, a 17-story building built by the Nakhodka company was supposed to stand on this site. The deadline has been moved to the second quarter of 1998.
NPP "Tema" promised to rent out this house on 1st Novokuzminskaya Street in the first quarter of 1997. Now he promises to deliver in the fourth.

Magazine "Kommersant Money" No. 26 dated 07/09/1997, page 9