OREANDA-NEWS. May 29, 2009. Russian market prospects for 2009 How are real estate companies coping with the crisis?  To find out the answer, Deloitte CIS interviewed senior executives at major Russian and international real estate firms, reported the press-centre of Deloitte.

"The results of our research mostly confirm what we have already heard from our clients: real estate companies are considering ways to optimize operations. The management at these companies is reconsidering costs on headcount, consulting services, marketing and advertizing, rental payments and suppliers of construction materials, and is also reviewing pricing policies.

A drastic decline in demand for construction materials forced manufacturers to reduce their sale prices, which consequently resulted in a significant decrease in the cost of real estate units. Construction firms and developers are prepared to reduce prices for commercial and residential real estate by 15-25%. However, variations in prices may be even more significant. The boom in the construction industry contributed to an increase in production, which in turn made the domestic market less dependent on imported construction materials, and currency fluctuations had no serious impact on the final price of construction materials.

Short-term business development is the top priority for real estate companies. Efficient capital management and the search for alternative sources of financing will be crucial in surviving the crisis.”

Graham Povey
Managing Partner, Clients & Industries
Results of the survey indicate that:

Real estate companies are looking for possible ways to optimize operations. The survey identified the following measures for adapting to the economic crisis and trends in this sector:

84% of respondents noted a decline in the growth rate in the last quarter of 2008 as compared with the previous three quarters of the year; 68% of respondents noted lower performance indicators as compared with the last quarter of 2007, while 16% of respondents noted no growth.
Respondents from the real estate sector experienced a sharp decline in demand over the last three months. 74% of respondents noted a decline in demand over the last three months.

Management is prepared to change the price range of both commercial and residential real estate. 21% of respondents are ready to reduce prices for residential real estate by 25-50%. According to 21% of respondents, prices for hotel and warehouse real estate will drop by 15-25%. As for retail real estate, 36% of respondents believe the price will drop by 15-25%. 26% of respondents believe the decline in prices for office real estate will likely be within the range of 15-25%, while 21% of respondents believe it to be within the 25-50% range.

Construction companies have to reduce their staffing costs; 74% of respondents have already reduced headcount, 57% have cut expenses on consulting and 47% have cut marketing and advertising costs and expenses on rental payments.

52% of respondents have already implemented personnel cuts. The majority of respondents (21%) indicated minor headcount cuts (5-10%), 15% indicated 10-25% cuts and 11% indicated 25-40% cuts. 16% of respondents are planning to reduce headcount within the next 3 months. Only 11% of respondents have not made staff cuts and do not plan to do so in the future. 21% of respondents were undecided.

37% of companies have implemented salary reductions, with 23% of respondent companies reducing employee salaries by 10-25%. 16% of respondents are planning salary reductions within the next 3 months, and the same percentage of respondents were undecided. Surprisingly, 31% of respondents have not cut salaries and have no plans to do so.

Social benefits are not commonplace in the construction sector. 42% of respondents indicated that they offered no social benefits to their employees even before the crisis. 42% offered medical coverage before the crisis, but half of these companies have now cancelled this benefit as a result of the economic downturn. 52% of respondents paid mobile phone expenses and 16% have now reduced such benefits. 32% of respondents indicated that they paid transport expenses and 11% have cancelled or plan to cancel such benefits.

52% of respondents had planned investment projects (mostly acquisition of assets) before the crisis. However, 32% have cancelled such projects as a result of the crisis, while 32% are continuing to implement their projects with necessary adjustments made with due regard for the crisis.

According to the respondents, the search for alternative sources of financing remains the most efficient financial instrument for coping with the crisis (42% of respondents have already implemented and 26% plan to do so). The second most preferred option is working capital management (37% have already implemented and 16% plan to implement in the near future).

During a crisis, banks are very conservative when it comes to extending loans for construction purposes. Accordingly, 32% of respondents noted an increase in interest rates of more than 10% in RUB and 11% indicated an increase by more than 10% in USD.  Only 11% of respondents indicated that interest rates on loans remained unchanged.

21% of real estate companies are planning to raise shareholder equity to restructure their current liabilities, whereas 26% have no plans to restructure their current liabilities.

The majority of respondents (68%) from the real estate sector are pessimistic and share the opinion that the worst is yet to come. 21% were undecided.