Andrey Berezin: Apartment Buildings 2.0

A notable trend has emerged in St. Petersburg’s real estate sector in recent years: for the first time in modern Russia, there has been a swift expansion in the segment of serviced apartments. 

This trend marks the revival of a type of dwelling reminiscent of the apartment houses that were quite prevalent before the Revolution, albeit with certain distinctive features. Let’s delve deeper to understand why this phenomenon has reemerged and consider its potential prospects.

Not a Hotel, But Not a Long-Term Rental Apartment Either

In essence, today’s serviced apartments are a form of rental housing, fully prepared for residence, equipped with the necessary engineering infrastructure, and offering round-the-clock, hotel-like service.

A significant feature of such apartments is that tenants receive a room of a certain size along with access to various public spaces. Beyond the lobby, these may include bars and restaurants, office spaces, and rooms for sports and games, among others. This suite of services, including cleaning and concierge services, is considerably more affordable than in a traditional hotel.

Given these benefits, the growth in this segment is hardly surprising. Statistics reveal that in 2022 alone, the share of serviced apartments in the short-term rental market expanded by 15%. Today, guests have access to over nine thousand such units housed within about three dozen apart-hotels.

Serviced apartments are not just beneficial for tenants; they also attract investors due to their higher profitability compared to rental apartments. For instance, in St. Petersburg, the average income from a rented apartment stands at about 4% per annum. 

However, in the case of serviced apartments, this figure can reach 7% and even 10%. This higher return is because serviced apartments offer more rental flexibility. Unlike traditional apartments, which are typically rented long-term, serviced apartments can easily toggle between long-term and short-term leases, adapting to seasonal and market demands. This flexibility minimizes downtime and enhances the investor’s overall profit.

The New as the Well-Forgotten Old

St. Petersburg leads in the development of serviced apartments today, notably outpacing even Moscow, where only a few complexes of similar profile presently exist, and those predominantly belong to the expensive elite categories. In the Northern capital, most new apartment buildings are accessible to people with varying income levels, thereby broadening their potential audience.

Perhaps the popularity of this type of rental housing in St. Petersburg has historical roots. In the 19th century, following the emancipation of the peasants, many migrated to the city, especially to the then capital, seeking better life prospects and earnings. This influx created a demand for rental housing, resulting in the swift construction of tenement houses both in the city center and its outskirts. 

Although this housing format was abolished post-revolution, the buildings and, in some cases, the layouts, remained, underscoring the continued potential demand for such a housing format. Consequently, as a solvent audience emerged, the supply resurged. Notably, modern Russian apartment builders have drawn from the experience of countries where the apartment building industry has thrived over the past decades, such as Switzerland.

Beyond St. Petersburg, several other cities also exhibit growth in this segment. A prominent competitor is Sochi, witnessing a surge in the construction of serviced apartments. Additionally, this industry is burgeoning in Yekaterinburg, Kazan, Krasnoyarsk, Novosibirsk, and Nizhny Novgorod.

As serviced apartments gain popularity, their profile is concurrently evolving. While initially catering primarily to tourists and business travelers, a significant portion of the rental pool is now occupied by tenants with medium to long-term rental plans, presenting further opportunities for this burgeoning business.

To make it like in Switzerland

However, many participants in the construction market hold moderate views about the prospects of this new rental housing format. In particular, Andrey Berezin, the head of the Euroinvest investment company, who has been engaged in construction in St. Petersburg and the Leningrad region for nearly three decades, has pointed out factors that could influence the industry’s potential.

Among these factors is the absence of a legislative framework and relevant experience in law enforcement, which are practically nonexistent today. The government does not have a clear understanding of what serviced apartments are and how to regulate them. This absence of regulation limits the effective system of guarantees for investors and tenants, in turn limiting investment interest in such products; large capital owners simply will not risk investing their money into projects that may, at some point, be considered outside the law.

“While there is some existing legislation protecting the interests of citizen-lessees, there is yet no practice concerning investors and developers. Many questions arise here. For example, will the government regulate rental rates? Benefits and subsidies will not solve the problem. We need a balanced system of legislation, business relations between counterparties, and most importantly, a tested law enforcement practice to protect investments,” emphasizes Andrey Berezin.

Despite these concerns, many St. Petersburg developers, including Euroinvest, are already integrating certain features of apartment-housing into their projects. This includes an increased share of public spaces in the total area of residential complexes. 

Initially, Euroinvest simply expanded the area of green zones, children’s and sports grounds, and lounge spaces, even constructing these on the roofs of residential complexes. Subsequently, Euroinvest introduced a new standard of housing for sale called 3ID, wherein the public spaces within the residential complex will be as integral to the personal space of the buyers as their apartments.

Thus, whether intentionally or not, developers are already reshaping the preferences and perspectives of their buyers, extending them beyond the limits of personal dwellings to public spaces. This shift brings the lifestyle in ordinary residential complexes closer to the practice of apartment hotels, and concurrently, makes Russia’s real estate market more akin to Switzerland’s.

Forecasted Trends for the Further Development of the Serviced Apartments Segment

The Growing Importance of a Builder’s Reputation:

In light of the high investment capacity and lengthy construction cycle, companies with reputable standings will hold an advantage. Investors are likely to entrust their funds to these organizations for extended periods, ensuring stability and long-term planning for construction projects.

Development of the Management Companies System:

The quality of work from management companies will play a crucial role in providing a competitive edge for the apart-hotels they oversee. Effective management will ensure optimal operational efficiency, leading to enhanced financial results for investors and stakeholders.

Expansion of the Recreational Apartments Market:

With many popular outbound tourism destinations restricted, the demand for comfortable accommodations for short- and medium-term rentals is on the rise. This trend will likely spur growth in the recreational apartments market, providing travelers with more options for convenient and comfortable stays.

Spread to Other Regions of Russia and Neighboring Countries:

Developers specializing in the construction of serviced apartments are expanding their reach beyond metropolitan areas. Several regional and international projects for the construction of serviced apartments have already been launched, signaling a trend toward broader geographical distribution.