Construction Market Overview: St. Petersburg and
Northwest Russia Regions
October 2006
Author: Julia Vlasova, Bisnis
Representative in St. Petersburg, Russia
INTERNATIONAL COPYRIGHT, U.S. DEPARTMENT OF COMMERCE AND
U.S. DEPARTMENT OF STATE, 2006. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED
STATES.
This report provides an overview of the construction market
focusing on residential and commercial construction. It also contains statistical data and expert forecasts of the
market development trends. The report
identifies large industrial projects of potential interest to American
manufacturers and suppliers of construction materials. The last section contains information about
the construction materials market.
American companies that specialize in mining and processing of raw
materials used for construction materials manufacturing, as well as those
providing construction equipment-leasing services, may find a niche in the
Northwest Russia market.
END SUMMARY
St.
Petersburg, the second largest city in Russia with a population over 5 million
people, experiences high demand for residential housing and commercial
premises. The Northwest region holds a
13.8% share of investment in capital assets in Russia, behind only the Central,
Volga and Ural regions. The Northwest
region share is distributed between St. Petersburg, holding 32% of the region’s
share and the Leningrad region and Vologda region, each with 14.5% with the
remaining eight regions accounting for the remaining 39%.
According
to the Association for Economic Cooperation, the volume of construction works
in the Northwest region in 2005 increased by 99.9% over the previous year,
totaling 218,5 billion rubles (about $8 billion). Volume of construction in
most of the Northwest regions increased: the Nenetsky region increased by
37.4%, Arkhangelsk by 32,5%, the Komi republic by 31,5%, Murmansk by 22.7%, the
Kaliningrad region by 17.2%, the Novgorod region by 14.2%, the Karelia republic
by 10.5%, and the Leningrad oblast by 7.9%. A few regions, however, such as St.
Petersburg, Pskov and Vologda, experienced a decrease in volume of
construction.
More than
8,000 buildings were erected in 2005 in the Northwest region, 3,000 of them in
the Leningrad region and St. Petersburg. The volume of residential construction
amounted to 3.9 million sq. meters, 6.2% more than the previous year.
In the
last five to six years the construction material production has experienced
massive changes. Especially as regards
production of dry mixtures, roller-compacted concrete, roofing materials and
other common construction materials.
In 2005 a
number of new manufacturing facilities were put into operation. For example,
production of ceramic tiles with the annual capacity of 2,16 million sq. m. has
been initiated in the Leningrad region; facilities for producing metal-plastic
window and door frames with the annual capacity of 55 thousand sq. m in the
Kaliningrad region; a new plant with the annual capacity of 42 thousand sq. m.
in Karelia started production of doors and windows based on polyvinylchloride
extrusion technology.
In 2006,
Danish company Rockwool is planning to open a plant producing heat-insulation
materials. There are several other new
production facilities in the Northwest region that are currently under
construction. However, many of
currently existing production facilities in the region are underutilized.
The rate
of Construction market growth is very high in St. Petersburg and the Northwest
region, notwithstanding signs of stagnation in the residential construction
sector. One of the main reasons for
growth is the recent adoption of the City General Construction Plan, and a
number of important laws and resolutions regulating activities on the
construction market. Among them are:
-
Law that sets the price of land in
St Petersburg.
-
Law on Privatization of the Property
owned by the city of St Petersburg, which allows for the selling of property
formerly owned by the State to a private investor.
-
Law N 282–43 of
17.06.2004 (with amendments on 22.12.2004) On the Allotment Procedures for the Real Estate
Objects Owned by St. Petersburg for Construction and Reconstruction This law offers investors an easier way to acquire real estate assets.
-
In June 2004, the St. Petersburg
city administration conducted the first open tender for land plots.
-
Private mortgage became available in
Russia (this topic will be discussed under “Residential Construction” section
of this report).
There are many construction investments opportunities in St. Petersburg,
namely the following:
-
infrustucture development around
Pulkovo airport;
-
construction and development of
seaport terminals in St. Petersburg;
-
construction of hotels in the center
of the city;
-
construction of sewage
(purification) facilities;
-
construction of home appliances
manufacturing plants;
-
relocation of industrial facilities
away from the city center.
Detailed
information about current and upcoming construction projects in St. Petersburg
is available at the specialized section of the St. Petersburg city
administration official Web site at www.st-petersburg.ru
Other
Northwest regions, especially those with significant manufacturing base, also
have many potential investment opportunities in construction sector.
Currently,
many foreign companies are active on the Northwest Russia construction market.
Finnish companies are among the most active in that arena. According to Terho
Salo, CEO of the Finnish Union of Construction Industry, 9% of all Finnish
construction production and services are exported to Russia. The value of
construction projects, construction materials and construction services
exported from Finland to Russia in 2003 exceeded 1.5 billion Euro. According to Mr. Salo, there is an
opportunity to increase this amount five times by the year 2013. Among Finnish
construction companies actively operating in St. Petersburg are YIT, Lemcon,
and SRV. YIT, for example, has been working in Russia for more than 40 years,
and currently, around 35% (or 94.3 million euros) of the company’s overall
construction turnover is from work in Russia.
Finnish
company KONE, the world’s fourth largest elevator and escalator company, is
also planning on expanding its operations in Russia and St. Petersburg in
particular. Antti Herlin, CEO of KONE, speaking at a news conference in
Helsinki, said that currently KONE occupies 21% of Russia’s import market for
their type of equipment.
The
example of Finnish companies’ successful on the Northwest Russia construction
market is a good indicator for other foreign companies, including those from
the U.S.
RESIDENTIAL CONSTRUCTION
St.
Petersburg has always been among the largest cities in Russia, with a
population of 2 million people before the World War II, and about 5 million
people currently. Total demand in
Russia for the residential premises is over 1.6 billion sq. meters. To meet
this demand, the supply of residential premises has to be increased by
46%. More than 61% of Russian population
needs to improve their living conditions, but only 12.4 % of them can afford to
buy an apartment using personal savings or bank mortgage.
Soviet-legacy
construction has left an abundance of poor-quality “Khrushevka”-type buildings
and panelized housing. During the Soviet Union days, the have been a monopoly
of Housing Construction Enterprises (DSK), that produced serial multi-unit
residential buildings providing 120 million sq.m. per year. After the fall of the Soviet union and
disintegration of many industry sectors, including residential construction,
the annual output has fallen dramatically, however, it has been slowly
recovering, and the current target is to achieve at least 80 million sq. m. per
year in residential construction volume.
While the
construction market in Russia is booming, St. Petersburg and Northwest regions
are experiencing shortage of affordable housing due to several factors. Currently, construction firms have the
opportunity to set a price for a sq. m. as they wish with the only limit being
the market demand, which was very high until 2004. The high housing demand resulted in the following prices:
Review of Average Cost* of Residential
Property in St. Petersburg and Other Northwest Regions as of August 2006
Northwest
Region |
Average
cost of 1 sq. m. (new premise) $ |
Average
cost of 1 sq. m. (previously
inhabited premise) $ |
St. Petersburg |
1,861 |
2,194 |
Nenetsky Region |
1,488 |
1,488 |
Karelia Republic |
777 |
1,237 |
Leningrad region |
867 |
1,187 |
Komi Republic |
1,181 |
1,181 |
Kaliningrad region |
806 |
1007 |
Novgorod region |
733 |
872 |
Arkhangelsk region |
926 |
796 |
Murmansk region |
1,130 |
781 |
Pskov region |
667 |
725 |
Vologda region |
604 |
665 |
Source: www.spbpromstroy.ru
* Note: exchange rate used
is $1=27 rubles
As evident
from the above table, the highest prices are in St. Petersburg, and the lowest
are in the Vologda region. The price range is from $600 to $1,900 per sq.m. for
new construction and from $680 to $2,200 for the previously inhabited housing.
Construction
Regulations and Permits
Construction
is a capital-intensive sector. Cost optimization is one of the factors in
Western countries, where construction firms fight for every 5% profit on the
highly competitive market. In Russia,
the construction market is still volatile primarily because of lack of
construction norms and inadequate construction legislation. However it would be wrong to say that there
is no legislation at all. Russian
Federal government and regional governments have adopted a number of laws and
regulations and established governmental bodies that regulate construction
sector activities. The problem is, however, that these laws and regulations
provide opportunities for misinterpretation and, oftentimes, are not effective.
The
government of St. Petersburg announced its commitment to introduce clear and
transparent procedures as regards construction project coordination and
issuance of permits. The city administration developed a procedure regulating
the order of preparation of project documentation. This, according to
forecasts,will shorten the entire construction cycle (beginning with the
investment phase) for up to half of a year.
Another initiative of the city administration is to simplify document
preparation by streamlining the process and having fewer governmental agencies
involved in order to complete necessary steps and start the construction
process. Presently, a given
construction company needs 16-18 months for preparation of project
documentation, eleven months of which
are spent acquiring permissions, and the next six months, scrambling to finish
the actual construction. The most
difficult stage is receiving permissions from the ecological service, power
supply companies, the Russian Technical Control Service (ROSTECHNADZOR) and the
Russian Consumer Service (ROSPOTREBNADZOR).
Complications with getting permissions lead to downtime, which -- in
turn -- leads to an increase in construction costs.
City
administration is also going to make the land plots, sold through the open
tenders, interest-free. Right now interest is charged at the refunding rate of
the Central bank of the Russian Federation. The builders also hope that St.
Petersburg government will establish a “single window” approach for gaining all
necessary permissions, akin to the Single Center established by the Federal Tax
Inspection, using the same “single window” approach for entrepreneurs wishing
to register their companies. This new
approach will result in having one governmental body designated to provide
assistance and necessary documentation for construction projects.
Another
considerable project cost category for a builder is utility networks (power,
water and gas supply, etc.), which builders have to conduct themselves. Though
St. Petersburg administration declared its intentions to build necessary
infrastructure, it would apply to larger-scale industrial and “strategic”
projects.
Expensive
construction materials
Another
reason explaining the high cost of residential premises in St. Petersburg and
some Northwest regions is relatively high cost of constriction materials. St. Petersburg and the regions, though
trying to revive construction material production by modernizing old facilities
and opening new factories, still do not have a competitive environment that
would allow a decrease in the average cost of construction materials. See section “Construction Materials” for
additional information.
Mortgage
In light
of the factors mentioned above, the future of the Federal Affordable Housing
(Dostupnoye Zhil’yo) program is not optimistic. The mortgage system in Russia has existed for about 9 years, but
still differs from a traditional mortgage system in Western countries. The
interest rates set by the banks are very high: 11-14% in dollar terms and
13-16% in ruble terms, which makes the final cost of property (accounting
additional expenses such as obligatory insurance, lump-sum payments for
preparation of documents, etc.) 2-3 times higher. The average annual income of a St. Petersburg family consisting
of 2 adults and 1 or 2 children is about US $1.5 thousand. The average income of a family living in one
of the Northwest regions is even lower.
Such income is not sufficient to procure a 2-room apartment, which
costs, one average, US $100 thousand. Therefore, the Russian mortgage scheme is
available only to wealthy citizens whom already own property and want to
improve their living conditions.
Another disadvantage of the Russian mortgage system is that it works
only for the secondary market (previously inhabited property) and thus it is
impossible to buy an apartment in a new building even though prices on the new
apartments are less.
Several construction companies and local banks are
making attempts at offering financing for primary market residential
properties. Such banks as Impex Bank and Delta bank announced that they are
ready to give mortgage loans for primary housing market. However, this is not a classic mortgage
format because the Delta bank, for example, grants loans only against currently
owned property that must be located in either Moscow, Saint Petersburg or
Nizhny Novgorod. Thus, if a borrower has an apartment in another Russian city,
that property can not be used as a collateral for a loan. Similarly, if a borrower has sufficient
income to cover mortgage payments, but does not have existing property that can
qualify as a collateral, the loan will not be granted.
Another hidden obstacle for getting mortgage loan for
primary housing market is that most banks (Impex bank, for example) need to
have an agreement with a construction company and set of documentation on those
apartment buildings, which can be sold on mortgage terms. There are other requirements that make the
process of mortgage financing for primary market properties very
problematic.
Real estate market analysts consider the situation on
the mortgage loan market as an impediment to residential construction sector
growth. It is also said that most
construction companies build juts enough units as buyers can afford to buy at
the current high prices. Meanwhile, the
construction companies blame federal and local authorities that are unable to
adopt adequate legislation for construction sector, while the banks blame
authorities for not implementing effective mortgage legislation for banking
sector.
Some experts predict that residential property rental will
continue to be the primary form of housing in the near future. The reason is in significant cost difference
between average monthly rent vs. mortgage payment. For example, the monthly mortgage payment for a one-room
apartment (with the loan duration of 15-20 years) is about $1,000 and for a
two-room apartment is about $1,500. Monthly rental fee for a one or two-room
apartment is around $400-500. In
addition, in the case of rental property, there is no need to put up a down
payment (usually, 10% of the property value) as in the case of buying property
using mortgage financing. To illustrate
this trend, in St. Petersburg only 2 thousand out of over 5 million residents
have bought property using mortgage in the last 9 years.
As the result of the
aforementioned factors (low inventory of affordable residential properties;
cumbersome regulations and paperwork procedures; expensive construction
materials and ineffective mortgage programs) the volume of residential
construction
in Saint Petersburg in 2005 fell by 25%. Number of construction workers employed by large
and
medium-sized construction companies, which constitute about
20% of the market, decreased by 5,000 people. Production of steel-reinforced concrete materials fell down by
12% and of construction brick -- by 20%.
COMMERCIAL CONSTRUCTION
Commercial
construction is a steadily developing market. The members of the Russian
Guild of Realtors estimate that prices for commercial property in St.
Petersburg and Northwest regions will continue to grow during the next 15 years
due to the fact that this market is still at the initial stage of development.
Unlike
residential premises, demand for commercial premises remains steady. Average returns on commercial real estate
investments are 7.5- 8%, which is higher by 1.5% than in most European
countries. By contrast, Moscow
commercial real estate returns are decreasing which leads to St. Petersburg
becoming a more attractive market in this regard.
Because
of the sector’s good investment potential, foreign companies have become very
active in the commercial construction segment of the market. However, the points of caution are:
potentially low quality of construction work performed by some local contractors,
unreliable partners and imperfections of current Russian construction
legislation.
Government
Incentives
The city
of St. Petersburg won a federal competition to organize two Special Economic
Zones (SEZ) that give special tax and customs benefits to companies who decide
to establish offices or production facilities in these zones. For more details
on SEZ, please see reports posted at: http://www.bisnis.doc.gov/bisnis/bisdoc/0611rusezs.pdf and http://www.bisnis.doc.gov/bisnis/bisdoc/0604RFFedLaw_SEZ.htm.
Other important legislation by the St. Petersburg city
administration that lowers tax burdens on investors in capital assets include:
·
St. Petersburg Law N 81–11 of 14.07.1995 (with amendments on
01.01.2006) On Tax Benefits: allows for a decrease in income tax and property
tax.
·
City conducts engineering works at the areas to be offered
to businesses (for big industrial and strategic projects);
·
General construction plan finally approved and adopted.
Pskov Regional Administration has also made steps to attract
investors in the region by introducing the following benefits: income tax --
13.5% (vs. 24% in other regions of Russia) and property tax -- 0.01% (vs. 2.2
in other regions of Russia).
Arkhangelsk, Murnmank, Kaliningrad as well as other
Northwest regions have also adopted a number of resolutions directed at
improvement of the investment climate. As a result, in Novgorod region, for
example, 136 large investment projects have been implemented in the course of
the last 11 years. More than 30 countries have invested in construction of
production facilities in Novgorod region such as Dirol Cadbury, Amkor Rumch
Novgorod, Chudovo RWS, Madok, Ursa
Chudovo, Novtruck, Pestovo Novo, Setnovo and the Novgorod Metallurgic
Factory.
Relocation
of production facilities from St. Petersburg center
Industrial manufacturing has
historically been located in the city of St. Petersburg. As the city expanded
its perimeters, such previously established industrial zones ended up being in
the center of the rapidly growing city.
This situation is economically disadvantageous and results in
unfavorable ecological situation in the city. Thus, the St. Petersburg City
Administration has decided to move the industrial and manufacturing facilities
away from the city center.
Relocation
is a very costly process, however, and not all enterprises can afford such a
move. The St. Petersburg administration
introduced tax incentives for industrial investors. Those companies who invest
up to 300 million rubles (US $11.2 million), will have a reduced profit tax of
22% and those who invest more than 300 million rubles will have a profit tax of
20% (vs. the average profit tax of 24%).
The administration is going to support all projects
dealing with the relocation, and will entice manufacturing companies to
relocate from the city center. At
present, there are more than 100 industrial objects (20% of the total city
area), which need to be relocated. More
information about relocation projects in St. Petersburg can be found at www.bisnis.doc.gov in the
report called “Investment Projects Supported by St. Petersburg
Administration”.
Development of Hospitality
Infrastructure
St. Petersburg is becoming one of the prominent tourist
destinations in Europe. Last year, more
than 1.8 million tourists visited the city. Realizing benefits associated with
tourism industry, the city of St. Petersburg is developing hospitality
infrastructure that will support the high volume of visitors. The website “Investments in the City Hotel
Infrastructure” (www.hotelinvest.ru)
is designed to provide potential investors with the information about current
opportunities in this sector. At
present, there are more than 200 sites (building and land) suitable for
hospitality infrastructure development offered for sale in the city. Most these
sites are purchased through the open tender organized by the St. Petersburg
City Administration.
All interested companies can contact St. Petersburg
Committee for Investments and Strategic Projects to get
full information about the sites.
E-mail: contact@cisp.gov.spb.ru; Tel: +7 (812) 576 6988; Fax: +7 (812) 576 6067
Sector Opportunities for American Companies
In 2006
more than 1 million sq. m. of shopping center premises will be commissioned.
Several large international companies came to St. Petersburg and have launched
development of grand-scale trade and logistics centers. Among these companies are: Vinci (France),
Promocentro (Italy), Ikea (Sweden) and Stockmann (Finland). In 2005 the following trade centers were
open: “Grand Canyon” (73,000 sq.m.), Ramstor (41,000 sq.m.), “O’Key” (38,000
sq.m.) and others totaling 152,000 sq. m.
In 2006, a considerable increase in construction of trade centers is
planned with the anticipated total size of premises equaling 660,000 sq.
m.
All these
trade centers will need utility infrastructure, security and analytical
detection systems. Specifically, the following sub-sectors represent
opportunities for U.S. equipment and technology:
-
water, heat and power saving devices;
-
information systems (TV, cable TV, advertisement
broadcasting)
-
system counting visitors
-
sound and odor analyzing systems
-
security systems
Analyzing
tendencies of the construction market development, the following 3 directions
can be selected:
1. Entrance of
new developing companies on St. Petersburg market, which would search for,
prepare the documentation and implement construction projects in different
segments of the construction market.
2.
Companies, which are currently engaged in mass construction,
will transform into financial-industrial complexes with broad geographic
diversification.
3.
Specialized companies accomplishing customized
services on the small segments of construction market will appear.
In these
conditions, the role of management companies will be important. At the present
moment there are only few companies on the St. Petersburg market, which
integrate all these functions, such as LenSpetsSMU and LCP.
In the beginning of 2006, there was noticeable growth in the
volume of production of main construction materials and structures. In
comparison with 2005, cement production increased by 4.6%, production of
cement-asbestos boards by 6%, construction glass by 40.8%, heat-strengthened
glass by 0.9%, linoleum by 19.5%, ceramics by 6%, mineral cotton and items made
of it by 10%, non-ore construction materials by 6.8% and ballast and gravel by
7.8%. Production of wood materials used
in construction, except wood and brick, has also increased.
Production of wood and
construction materials in the Northwest regions
|
2005 |
% against 2004 |
Wood, mln m3 (Делoвая
древесина) |
33 |
97 |
Sawn timber, mln m3
(Пилoматериалы) |
6 |
101 |
Plywood, thsd m3
(Клееная
фанера) |
940 |
110 |
Wood-fibre plates, mln m3 (Древеснo-вoлoкнистые плиты твердые) |
77 |
110 |
Wood-shaving plates, thds m3 (Древеснo-стружечные плиты) |
995 |
101 |
Cement, thsd tons |
2,985 |
103 |
Brick, mln |
754 |
96 |
Ceramic tiles, mln m2 (Плитки керамические oблицoвoчные) |
13.5 |
146 |
Linoleum, mln m2 |
9 |
103 |
Source: www.spbpromstroy.ru
Concrete -- another very important
construction material – has not been produced in sufficient quantities due to
the fact that most production facilities became very old and do not meet
increasing demand. Recently, five
Finnish companies, manufacturers of concrete equipment, such as Laite-Saraka Oy
(concrete pumps and mixers), Mecmetal Oy (concrete production lines),
Polarmatic Oy (heating systems), Turbomatic Sal-product Oy (pallets for
sandwich-elements) and Tecwill Oy (concrete-mixer plants Cobra) have
established an association to work on the Russian market. General Director of Finnish Concrete
Association believes that this step will allow the companies to enhance their
presence in St. Petersburg, and enter the markets of the Northwest regions
where construction volumes are also growing. Direct competitors of Finnish companies
on the St. Petersburg market are German and Italian companies.
According to Russian construction
experts, each year, there are 5-10 new concrete manufacturing plants opening up
in St. Petersburg. In 2005, companies spent about 120 million rubles (over $4
million) to establish new concrete manufacturing facilities. Several large Russian companies, such as СОЭЗ and
RzhevMash, produce concrete manufacturing equipment, however, the equipment
quality is significantly lower than that of imported equipment, whereas, the
cost is approximately the same (about 30 million rubles per one plant).
Therefore, the demand for foreign-made concrete manufacturing equipment is much
higher than Russian-made equipment.
Speaking of construction equipment
in general, the foreign-made equipment is almost always preferred over the
Russian-made versions; therefore, this entire sector represents potential
export opportunities for U.S. construction equipment and machinery
manufacturers.
Construction materials based on nanotechnology
also represents an opportunity category for U.S. companies. Usage of
nanotechnology in production of construction materials will allow not only for
improvement of the characteristics of a specific material, but also will lead
to decrease production costs and – therefore – greater profit margins.
In Russia nanotechnology is
developing, but at a slow pace. According to some experts, Russia is 10-15
years behind the USA and other European countries and, therefore, it would be
difficult for Russian companies to compete with their American and European
counterparts in this sector.
Specific interest is in
nanotechnologies used in cement production.
For example, Portland cement with admixtures
(concrete performance-enhancing additives) and nanoparticulates,
such as microsilica could be of great interest to Russian construction
companies. Also becoming popular are construction materials utilizing
fullerenes and – specifically -- shungit.
A Novgorod company Dekor-1 has started tong and groove panel manufacturing
using shungit; and a St. Petersburg Alpha-Pol is utilizing nanotechnology in
production of dry construction mixers used for construction plaster and certain
floor covering materials. Seventeen
types of intumescent paints and coatings are now produced in Russia utilizing
nanotechnologies, however, the market demand is for greater volume and variety
of such materials. The local production
of construction materials utilizing nanotechnology does not meet rapidly
growing demand, therefore, this market segment represents good opportunities
for U.S. exports and investments into local manufacturing.
Trade exhibitions and fairs are becoming increasingly
popular in St. Petersburg. They may be helpful for U.S. manufacturers of construction
materials in finding potential buyers or distributors.
Another good venue to market a company or a product line are
industry publications. There are a
number of trade magazines specializing in the topics related to construction
and building materials industry. Also, many general industry publications
compile specialized editions, focusing on various industrial sectors, including
construction. U.S. companies interested in marketing products in Northwest
Russia should consider advertising in these publications.
For more information on this
report, please contact:
Julia Vlasova, BISNIS
Representative in Northwest Russia
U.S. Department of Commerce
U.S. Consulate General in St.
Petersburg, Russia
Ph.: 7 (812) 326-2585
Fax: 7 (812) 326-2561
E-mail: julia.vlasova@mail.doc.gov
For more information on Northwest Russia, visit BISNIS
online at http://www.bisnis.doc.gov/bisnis/country/nw.cfm
BISNIS (www.bisnis.doc.gov)
is part of the U.S. Commercial Service (www.export.gov).