Rental housing: a potential growth spot in the Russian market

Written by Andrey Vakulenko – MACON Realty Group, EECFA Russia

The residential rental market in Russia is now at the initial stage of development: professional* projects are just beginning to appear, and almost the whole supply is made up of private units in the unorganized* market. However, the active participation of the state and the expected set of measures to stimulate developers and support demand for rental housing should contribute to the active development of the segment: by 2030 at least 45 million sqm of rental houses are planned to be built. At the same time, the longer-term potential is estimated by market experts at the level of at least 20% of the total housing stock in Russia, with the current value of 6% (in absolute terms, about 520 million sqm). Even with the partial realization of the indicated potential, rental housing will certainly play a major part in the Russian construction market in the coming years.

*In this article, by ‘organized/formal/professional, we mean rental objects under professional management such as apart-hotels, rental houses with professional operators, co-living and so on, while by ‘unorganized/informal’ segment we mean individuals renting out their own apartments.

source: DOM.RF

Current rental market

Total rental supply in Russia is estimated at 240 billion sqm (DOM.RF) with about 97% rented by private individuals and most of them not being officially registered with no taxes paid. Yet, professional rental properties (apart-hotels, apartment buildings, co-living, etc.) throughout Russia total at about 60 units, with 45 located in Moscow and St. Petersburg. The segment, despite the current relatively low supply, is developing quite actively, though: over the past 3 years, the market increased 1.6 times in project number, and will likely continue to grow rapidly in mid-term since 31 new projects are under construction with 18.2 thousand dwellings (now the volume of supply in the market is about 10.4 thousand dwellings and about 3.3 thousand beds in co-living).

Plans for regulation

The active development of professional rental homes, the need to regulate the shadow rental market, as well as the current state policy to improve living conditions in Russia in general, have led to new legislative initiatives with three main goals: 1) creating conditions for the further development of the formal market; 2) tightening the regulation of the informal segment; 3) creating a large block of social rental housing on preferential terms for citizens with below-average wages who cannot afford to take out mortgage.

In August 2021, the Ministry of Construction proposed a number of amendments to the current state program dubbed ‘Provision of affordable and comfortable housing and utilities for citizens of the Russian Federation’. Although the planned changes have not yet been adopted and are being examined by anti-corruption experts, it is highly probable that they will come into force. The main measures of the state program for the rental segment are: 1) tax incentives, including building or creating 1buying out apartments (a separate section) in a building under construction and making it a rental object rental homes through collective investment mechanism, 2) tax deduction in the amount equal to rent payments, 3) building or creating rental homes through PPP schemes, 4) subsidizing rent and 5) the provision of land plots on preferential terms.

These measures will ensure the annual volume of rental housing construction of about 5 million sqm by 2030. The stages of implementation are as follows:

  • By end 2021: tax incentives, preferential terms for the provision of land and connection to engineering networks will be developed,
  • By 2024: a fully transparent and legal rental market must be created,
  • By 2030: 45 million sqm of rental housing built (between 2022 and 2030).

Social rental housing

The planned changes are to create the social rental housing segment mainly through the state-owned company DOM.RF, which is currently one of the main financial institutions for the development of the housing sector in Russia. They intend to provide preferential rent for people in need of better housing conditions and for citizens with below-average incomes who cannot afford to take out a mortgage loan to purchase own housing. It will subsidize up to 80% of the rental rate for these categories of citizens. In 2021–2024 about RUB 650 billion will be allocated for this purpose. It is planned to attract private investors and developers to implement social housing projects to build such facilities on preferential terms and are guaranteed to receive the required demand. The difference between the reduced preferential rate and the market rental value will be covered by the state budget, so developers’ lost profit will be compensated for. This should stimulate the construction of new rental homes and increase the attractiveness of the segment for developers previously not interested in such projects due to the long payback periods and the high level of market risks.

Whitening the segment

Another important area of ​​the regulation to contribute to the development of formal rental housing in professional projects is the measures to increase the transparency of the informal market. According to expert estimates, over 90% of housing in Russia is rented out by landlords not paying taxes. Even though the situation slightly improved after the law on the self-employed came into force which lowered the tax rate for renting out housing from 13% to 4% (under several conditions), but most of the market remains in the shadows. Authorities intend to resolve this issue through the introduction of measures in 2021-2024. As of September 2021, the real steps are still under discussion and specific decisions have not yet been made, but, in general, the following steps are planned:

  • a unified electronic system for all residential lease transactions with data from the register being transferred directly to the tax office,
  • a standard lease agreement to protect the rights of tenants,
  • a unified online register of owners renting out housing,
  • to regulate relations between tenants and landlords, a special state-owned company will be created as an intermediary between the parties,
  • penalties for failure to provide data on renting out residential property, and
  • a publicly available ‘blacklist’ of homeowners evading tax liability.

Although this will likely increase the security of rental transactions for tenants, the main difficulty of the transition to the new system will be that it is voluntary for homeowners to register, transfer their data and start paying taxes. Thus, it is planned to provide tax incentives for landlords complying with the new rules in good faith, and to develop additional support measures such as the possibility of introducing a system of guarantees on the part of an intermediary company against non-payments for landlords, as well as insurance against early termination of the contract unilaterally by the tenant, among others. It is also assumed that penalties will gradually be introduced with a long transition period.

Despite all the advantages, the regulation of the informal rental market will lead to increased rental charges: additional taxes and other costs that landlords will have when switching to the new system will be passed on to tenants. This will raise the competition of the informal market with formal rental properties that on average are significantly more expensive than renting homes from individuals, limiting demand for them.

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Fundamental factors determining the segment:

  • Insufficient level of living space and low availability of housing. At the moment, the former indicator is at the level of about 26 sqm/person, less than the values ​​in most European countries and less than the level of comfortable living conditions (30 sqm/person). The construction of at least 600 million sqm would be required, which, with the current volume of completion, would take at least 8 to 10 years. The level of affordability of own housing for the wide range of the population is low. According to the estimates of DOM.RF and the Ministry of Construction, mortgage loans – the key means to buy housing in Russia – are currently unaffordable for 35% of the population who needs to improve living conditions. Such families will not be able to take out a mortgage even with a zero loan rate as their income will be insufficient for monthly repayments. Housing rental is a potential solution, so social rental projects are of key importance.
  • Low level of development of the rental housing market. As of end 2020, only about 6% of the Russian population (about 8.8 million people or about 5.5 million families) lived in rental housing, while this figure in developed countries can reach 50%-60%. Even in the largest Russian cities with the most developed rental markets, the share of rental housing in the total stock does not exceed 10%, which can also be assessed very low.
  • High potential for development. DOM.RF (by far the biggest rental housing operator in Russia) estimates a realistic achievable share of rental housing in the total stock at about 20% long-term. With the current volume of the housing stock (about 3.9 billion sqm), this is potentially about 750 million sqm of rental housing, (about 240 million sqm already built and about 520 million sqm still to be built). The current version of the state program plans to build about 45 million sqm of rental housing until 2030. The market potential will surely not be exhausted in the coming years, making the overall prospects favorable for the segment in the long run.
  • Pandemic effects. The pandemic has had two main consequences. First, a sharp deterioration in the macroeconomic climate last year and a long-expected economic recovery after the recent shocks. Against the backdrop of falling real incomes, own housing has become even more inaccessible for many people, and for some, renting can become a permanent replacement. Second, although less significant to the rental market, the growing popularity of remote work and new sources of demand for rental housing. With many companies shifting to a fully or partially decentralized work format, employees have more opportunity to choose where to work. This raises the number of digital nomads, i.e. employees not tied to an office and having the opportunity to work from any Russian city. The number of transactions in the rental market in mid-term will to some extent grow due to this category. One of the trends in the rental housing is the workspitality format focusing on the needs of such nomads (separate work areas, co-working spaces, meeting rooms).
  • The absence of major growth in real incomes and the lack of macroeconomic prerequisites for this on the horizon. Real disposable income was in the negative between 2014 and 2017 (the decline varying from 0.5% to 4.5% per year), followed by a short period of positive correction (+0.1% in 2018 and +1% in 2019), and then by another decline at end 2020 (-3.5%). Thus, purchasing power has actually been declining for 7 years. At the same time, the Ministry of Economic Development forecasts a rather moderate dynamics of this indicator in 2021-2023: +1.6%-1.9% per year in a conservative scenario and +2.4%-3% per year in the baseline scenario. But even in the best case, by 2023 purchasing power will not return to the level of 2013, which should not contribute to more home purchases, but should grow demand for the rental market.

Factors stimulating residential rental market development:

  • A sharp rise in home prices in 2020–2021, the depletion of the effectiveness of measures to support demand and an increase in mortgage rates. Macroeconomic instability, the pandemic, and the unprecedented state support for housing all had a huge impact on the housing market in 2020. The multiplier effect of last year's events led to a colossal increase in home prices and a pronounced dependence of the whole segment on preferential mortgage programs and direct government participation. The preferential mortgage loan scheme and the record low values ​​of the key rate of the Central Bank of Russia contributed to historically low average mortgage rates. In 2020, after the launch of preferential mortgages without restrictions on borrowers, transaction numbers began to grow rapidly amid fears caused by the pandemic and due to the general uncertainty. Both buyers (those who planned to buy earlier but accelerated their decision) and investors purchased homes. An unstable exchange rate, a considerable drop in the profitability of traditional financial instruments (a decrease in deposit rates) and a pronounced rise in home prices that began in 2020, reoriented some investors to real estate. Mortgage has also become the main instrument for buying homes: DOM.RF estimates that last year the share of mortgaged transactions for new homes doubled (from 40% to 80%). At the same time, as prices rose, the effectiveness of the state subsidy was gradually depleted. The rise in the cost per square meter neutralized the positive effect of reduced mortgage rates. The price rise also made socio-demographic incentive tools ineffective (maternity 2one-time payment at childbirth paid to the mother, state support for Russian families raising children. It is targeted and can be used for improving housing conditions, obtaining an education by the child's mother, retirement savings for the mother, etc. and other payments for the birth of children), whose amount was not significantly indexed in 2020 and, in the context of sharply increased home prices, ceased to provide a major assistance in buying own housing. Additionally, in July 2021, conditions for the subsidized mortgage program were revised (credit limits were reduced, requirements for borrowers and down payment were tightened, the interest rate increased). The situation is aggravated by the gradual transition of the Central Bank to a moderate monetary policy. From March to September 2021, the regulator raised the key rate from a historically low value of 4.25% to 6.75% (prior to this, for more than two years, there was a gradual decline). This will contribute to a smooth increase in mortgage rates outside the still operating preferential program, which will further limit the pool of potential borrowers. All the above makes home purchases even less affordable for citizens and rental homes can become a way out under the current conditions.
  • Emergence of institutions for the development of the segment and professional operators. DOM.RF is gradually becoming a key player in the rental market, and in the coming years, it will determine the development of the professional segment. In addition to direct participation in the market and the construction of its own rental projects, the company sets trends and carries out regulatory functions, developing methodological documents and standards for the market. Apart from DOM.RF, private companies also appear in the market such as YE'S group, Becar Asset Management, and YURSK, among others, and the emergence of such large players will likely lead to a more intensive development of the rental segment in the future.
  • Active government participation in the segment will increase its attractiveness for investors. The expected regulatory changes will stimulate the emergence of new rental homes and, on the other hand, will create a new category of demand through subsidizing rental rates for individuals who cannot take out a mortgage loan. This will make it possible and interesting for investors to participate in such projects. The Ministry of Construction plans to create new investment instruments in rental homes, for example, financing projects through closed-end mutual funds to attract private investment. Another approach may be DOM.RF selling land plots for housing construction for a share in the project, which the company will then receive in the form of apartments, at the expense of which a new rental supply will be created.
  • Reducing market risks of rental home projects against the backdrop of the planned legalization of the informal rental market. The unified online platform for the residential rental market, toughening penalties for non-payment of taxes and other actions to make grey leases legal will lead to an increase in rental rates from private individuals. This will gradually reduce the existing difference in price between professional projects and proposals in the unorganized market and make the former more attractive.
  • Sharing economy trends in housing and a general rise in the inclination of the population to long-term rent in the future. A PWC survey suggests that the younger generation (20-35 age group) is increasingly embracing the sharing economy trend. This trend in housing is just emerging in Russia, but many young people already prefer to rent living space to ensure mobility and because of the unwillingness to save up funds for too long to buy a property. In the long term (on the horizon of 15-20 years or more) there is a high probability that the Russian mentality will gradually move away from the old paradigm of the necessity of owning a home. These assumptions are also confirmed by the research conducted by the Russian Public Opinion Research Center (VCIOM). It says that out of 56.5 million Russian families, about 26.6 million need to improve their living conditions. Of these, 6.9 million are ready to live in rented homes and about 4.7 million Russian families are ready to consider rent as a tool for long-term housing solution. It is young people who are most inclined to rent a home: 23% of respondents under 25 are ready to consider renting as the main way to improve their living conditions. (The indicator drops to 10% in the 25-35 age group, and to 9% in the 35-44 age group). As high-quality and professional rental projects appear, the share of the population inclined to long-term rent will grow, mainly among the younger generation.
source: DOM.RF

Factors restraining the development of the residential rental market:

  • Long-term return on investment. Until the new legislative changes come into effect, the segment will remain unattractive for most developers who find it more profitable to build and sell classic residential projects than invest in rental homes where the return on investment may exceed 10-12 years. In the future, this should change, but only if the measures are implemented, which should be no earlier than after 3 to 5 years.
  • Strong competition from the informal rental market. As said, the total volume of rental supply is around 240 billion sqm, of which about 97% is rented out by private individuals not paying taxes. On average, only about 5,000 lease agreements per year are officially registered in Russia. Since most rental homeowners do not incur tax costs, rental charges in the informal market are considerably lower than comparable formal ones. The latter also provide services (cleaning, repairs, modern furniture, household appliances), but even with this, they mostly lose competition to the unofficial market in terms of price - a factor decisive for many potential tenants. In Moscow, for instance, the average rental charge in the official market in early 2021 was 15%-25% higher than in the comparable unofficial one. The boom in demand for housing in 2020–2021 will also increase this competition as most housing during this period was bought for investment purposes and, most likely, will soon appear on the informal rental market.
  • Decrease in the number of economically active population. The next years will likely see a steady decline in the number of citizens of working age, especially in the 25–45 age group who are mostly the buyers or tenants of residential real estate.


In mid-term, the rental housing market in Russia should undergo a considerable change on the back of state participation, stimulating supply and demand in this market, as well as regulating its informal segment. The emergence of new rental homes and apart-hotels will depend on a number of different factors, but in general, expectations for the further dynamics of the rental market are positive, making it one of the potential growth spots of the construction market in Russia.

  • 1
    buying out apartments (a separate section) in a building under construction and making it a rental object
  • 2
    one-time payment at childbirth paid to the mother, state support for Russian families raising children. It is targeted and can be used for improving housing conditions, obtaining an education by the child's mother, retirement savings for the mother, etc.

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