Guiding Lines: Land: Sell for more expensive, buy for cheaper

There is a lot of land in Nizhny Novgorod, but very few attractive sites. The land market is limited by internal conflicts between national and local authorities, high prices, and other deficiencies of the land. Developers find sites in the secondary market, using at times complex schemes of purchase of the land.

Conflicting Investment councils

"In the majority of the administrative centers in the regions, the local councils manage the land that belongs to the state. The Nizhny Novgorod region is one of 30 regions where a subject of the Federation has passed its own law, giving the exclusive right to the government of the region to solve agricultural questions," says Leonid Bandorin, deputy director of Reforms in the sphere of real estate at the Nizhny Novgorod Institute of Economy. The functions of defining the use of land plots and their preparation for provision remain the responsibility of the municipalities. This contradiction in legislation is not significant if the institutions of local government agree with the subject of the Federation, considers Bandorin. But in Nizhny Novgorod there is a different situation.

Currently in the city there are two ways of allocating land for construction – through an investment commission and through an auction, says Oleg Sorokin, general director of Stolitsa Nizhny. Through auctions, as a rule, land plots are allocated for the construction of housing. Since 2006 to obtain land for construction in the city or any area in the region it has been necessary to address the investment commission of the governor. In 2007, according to official information of the government of the Nizhny Novgorod region, the investment commission has considered more than 1,100 applications, and approved more than 754 applications. But this does not mean that the land plot will actually be allocated. "The permitting documentation for construction is given out by institutions of the local government. And they have a whole host of possibilities to lengthen the process. Furthermore, decisions made by the investment commission in the past have been successfully challenged in court by companies that consider their interests have been restricted," says Yulia Kruze, general director of ТМ Servis law firm.

"To put forward a project to the investment commission does not require such deep and long preparation as is necessary for a land plot in an auction. There are both advantages and disadvantages," says Sorokin. The advantages of this scheme are that the procedure is easier and there is no starting price for the land. Subsequently, mutual relations between the investor and the regional government are formed through the investment agreement, which is also more favourable to the builder. A disadvantage of this procedure is that it opens up ample opportunities for participation in the distribution of land plots to companies that are not builders. These are the usual speculators, the expert emphasizes, that simply register the land plot to themselves and then offer it to already professional market participants. "Unfortunately, the procedure for selecting applications that are considered by the investment commission is poorly formed. This is also, in part due to restrictions in national legislation. As the head of a construction company, I think that the procedure for allocating significant land plots, sites that will form the subsequent face of the city, should be more serious," Sorokin is assured.

According to Kruze, all stages of approval pass quickly when large projects, especially with the participation of foreign investors, are concerned. But for small and medium sized companies, to realize a project approved by the investment commission, is extremely difficult.

Competition without competition

For the construction of housing, land is allocated through auction. According to Bandorin, auctions are a more transparent form of selecting investors with clear criteria, or more precisely, with one criterion: he who will pay the most obtains the land for construction. The procedure of tendering is rather precisely prescribed by the law. To sell a land plot by tender, it is necessary to at least define its borders, put it on the cadastral regster and release any rights of third parties, the expert says. In the Nizhny Novgorod region, tenders are carried out by the ministry of property relations of the government of the Nizhny Novgorod region. The mayoralty of Nizhny Novgorod also holds land tenders for a number of land plots that remain under its command, the ownership of which the municipality has successfully registered within the limits of the procedure of the division of the rights to land.

But there is a rather strange situation with auctions in the city.

The first auction for the sale of the rights of rent to land for construction was held in Nizhny Novgorod in 1997. The city was a participant in a pilot project of the World Bank and received credit for the development of a large land plot on Ulitsa Delovoi in the Nizhnyy Novgorod area, which at the time was just a suburb. The first stage of the tender was to select a contractor for the construction of communications. Then the plot was divided into lots which were put up for auction. There were many plots and there were few wanting to buy them. The administration of the city had to carry out more work in order for builders to submit applications for participation in the tenders. To begin with each plot only received one application, and the auction was considered void. Under the conditions of the creditor it was not possible to transfer the land where there was only one applicant. Therefore the auctions were held repeatedly. As participants of that memorable auction have anonymously told, the mayoralty once again “explained” the conditions of competition. Then each plot had 2-3 applications submitted with a small difference from the starting price. As a result everyone got what they wanted: the builders got plots a the smallest possible price, the World bank got an auction model, and the administration of the city received credit for the construction of communications and the image of a "reform ground."

Real tenders with competition and with a growth in price in several times in comparison with the initial one took place in the city only 10 years later. One of the most recent lots is on Ulitsa Delovaya, which many construction companies rejected after the 1998 financial crisis because the price had increased by five times (the loan was in dollars), - a small plot for under construction on Ulitsa Rodionova was sold by the city administration in 2007 for a price exceeding the starting price by several times.

The regional authorities can also brag about successfully holding an auction. In 2006, it sold the territories of a former bus park. The right to rent and construiction on the land plot measuring 2.4 hectares was bought by Moscow company Stal-Set for 150 million rubles (62.5 million rubles per hectare); more than 3 times more than the starting price (47 million rubles).

All other auctions have not raised such interest among constructers. Auctions for the sale of a 9.5-hectare plot in the mountainous part of Kyznechikha and a 20.5-hectare plot in a not very prestigious riverside area of Avtozavodskaya area were sold without competition. The first plot was bought by Nizhegorodkapstroi (an affiliate of SU-155 and the government of the Nizhny Novgorod region) at the starting price of 650 million rubles (68.5 million rubles per hectare), and the second one was bought by PIK-Region for 1.75 billion rubles (85.3 million rubles per hectare).

In 2008 the Ministry of Property Relations of the government of the Nizhny Novgorod region held 24 auctions. Of them, only one was recognised as having taken place, five received only one bid, and the lots, according to the rules of the tenders, were sold to any applicants who made the only bid. The other 18 received no applications.

Builders consider the prices for these plots as too high. For example a 0.6-hectare plot in the Moscow region (in an unprestigious riverside part of the city) is appointed a starting price of 39 million rubles (65 million rubles per hectare).

"By our calculations, the auction costs alone for each square meter of future housing will be more than 7,000 rubles, plus the cost of internal communications. Furthermore the conditions of payment are rather strict. It is necessary to put forward a large sum staright away. And it’s necessary to have this money from turnover, or obtain credit," explains Olga Sazhina, director of marketing at Zhilstroi-NN, about th lack of participation in auctions.

Tatyana Romancheva, deputy director of the Nizhny Novgorod Center of Scientific Examination, also considers the prices offered by the Ministry of Property Relations in the region, overestimated. The expert believes that by establishing such a high price, officials pursue two purposes: to replenish the regional budget and to exclude the participation of intermediaries that buy up land for speculative purposes.

Unlike the national authorities, the local authorities sell land more cheaply. In July 2008 Bazel obtained a 30-hectare ploy in the Prioksky area for 1.1 billion rubles (36 million rubles per hectare). Only 5% more than the starting price. Along with Bazel, Nizhegorodkapstroi and municipal establishment Central Administrative Board for Capital Construction in Nizhny Novgorod, took part in the auction.

Experts think that if other builders had taken part in the competition, the price could have been higher. "Our client had prepared to participate in this auction, but dropped out at the last minute: it seemed to the client that the results of the auction were predetermined," Kruze says.

The plot in the Prioksky area was the most attractive in the city reserve. The majority of other land plots intend a demolition of the old buildings on the plots and the relocation of tenants. And investors are extremely cautious – the expenses can appear too high, and the conflicts in relocating tenants can delay the realization of a project for an unspecified period. "We have considered the possibility of participating in tenders which are carried out by the city administration. But some plots had too complex specifications, and the relocation of tenants on other plots would be too expensive," says company Vybor.

The price of a land plot is formed on the basis of a report by an independent appraiser. It is not clear why two appraisers gave similar sites two different prices, one almost double the other: the local authorities sold land in the Prioksky area for 36 million rubles per hectare, and the Ministry of Property Relations sold land in the less prestigious Avtozavodsky area for 85 million rubles per hectare. But, perhaps, the crisis will force authorities to reduce the price of land.

How to resell land

The secondary market of land for construction has existed for a long time, but in a rather chaotic way. Neither the buyer nor the seller declare themselves openly, and a large number of intermediaries end up paying the price the owner wants, which very strongly differs from the price the buyer offers.

There are schemes of obtaining land for construction from the administration under rental rights. It is not possible to sell such land plots as it is not considered under ownership. You can not sell it because you do not own it. The value of such land has already been approved by the investment commission, and it’s valuable because of this. If the tenant is changed in the contract, then the new tenant must go to the investment commission again. The sense in purchasing the rights to such land is lost. More often a whole company is on sale. So, for example, the proprietors of Iskom changed even prior to the beginning of construction of the residential complex on Sennaya ploshchad.

Large companies in Nizhny Novgorod buy such land if the location and the price suits them. For example, Vybor says that the company has bought such plots.

Yet in the market there are no plots for sale, which were bought initially at an auction, but such offers may appear soon, assumes Romancheva.

Since the beginning of the crisis the number of land plots on sale has risen. "In November-December we were receiving offers to buy a land plot almost every day. But they were mainly small plots," says Sazhina. However, experts do not attempt to estimate the increase in the volume of supply as such sites do not come on the open market. Sellers negotiate directly with buyers - large builders.

Land, being private property, is rarely put on sale, simply because there is little of it. More often, sites are redeemed by privatized enterprises.

Purchasing the ownership rights to a land plot does not mean that the owner can construct anything he wants on it. The category of purpose of the land essentially limits the imagination. It is possible to change the purpose first, for example, to transfer it from industrial purpose land to land for housing.

According to NTsNE, in Nizhny Novgorod there are currently 10 sites openly advertised: four in the Nizhegorodsky area, two in the Sovietsky area, and one in each of the Moskovsky, Kanavinsky, Leninsky and Avtozavodsky areas. For example, in the Avtozavodsky area a small plot measuring 0.28 hectares for a shopping and office building project is on sale for 28 million rubles (100 million rubles per hectare). In the Leninsky area a site with permission for construction (in ownership) measuring 0.34 hectares is on sale for 40 million rubles (117 million rubles per hectare).

Prices in the secondary market depend on, according to Romancheva, location, size and the package of documents: approval from the investment commission, a ready project, approved technical specifications - in each case there is a different list. In her opinion, sellers overestimate the land. In setting a price, owners include in it their expenses and estimate the potential profitability of a premises. "Because of the crisis profitability is falling, times of recovery of outlay are growing, but sellers do not consider this," complains Romancheva.

For cottages and warehouses

Land plots on the outskirts of a city are mostly owned. "In 2008 we ascertained significant growth in registered rights on land plots – by 79.3%. This was mainly in the suburbs - in Bogorodsky, Kstovsky, Borksy," says Irina Berdnikova, head of a department at the Federal Registration Service of the Nizhny Novgorod region. According to her, the occurrence of the large number of new proprietors was promoted by the buying of land of agricultural production and the simplified registration of ou-of-town sites.

The buying of land has become more active even in areas far from the regional center. In the suburbs there is already a process of changing the category of agricultural land into land for settlements or industrial purposes.

Currently a few land plots along the M7 highway are advertised for warehouses, says Romancheva. For example, in the Kstovsky area 39 hectares are on sale for 390 million rubles. But the majority of land plots on sale are for the construction of cottages or country houses. For example, near the popular Khabarskoye holiday base there is a land plot with an area of 131 hectares, which is being sold for 90 million rubles (0.7 million rubles per hectare).

According to the manager of Monolit, Irina Sergeyeva, demand for out-of-town land has fallen. "If a seller needs to sell now, he will have to give up to a 20% discount," the expert says. Andrey Kostin who is co-founder of Lendon group and who has been selling one of his sites for a long time already, considers that demand is not high: "Local companies do not have enough money to buy large land plots. And Moscow developers want to obtain land in the regions for next to nothing".

Romancheva thinks that supply will be replenished with new premises, generally due to investors who have bought too many plots.