Installment programs in the segment of mass new buildings: pros and cons

Developers, faced with declining sales due to high mortgage rates, began to look for other ways to stimulate demand. Today, developers are actively introducing installment plans in the segment of mass new buildings, although previously this tool was typical primarily for the premium real estate market. Kommersant looked into what risks such a scheme might pose.

From elite to economy

In 2023, the share of transactions using installment plans when purchasing real estate in luxury new buildings in Moscow amounted to 62%, analysts from the OpenCity service calculated. They clarified that the figure has tripled since 2021, when the share of such transactions did not exceed 20%.

The reason for the increased interest of buyers in such an instrument is the increase in base mortgage rates, which has now become uninteresting to the vast majority of buyers of premium and deluxe real estate, explains OpenCity founder Evgeniy Druzhinin. The higher the price segment of real estate, the more popular installment plans are, confirms VSN Group CEO Yana Glazunova.

However, recently this tool has become more widespread in the market of mass new buildings. Today, about 80% of Moscow developers offer installment plans, although previously the share of offers with installment plans was no more than 50%, notes Whitewill top broker Ekaterina Levina. Previously, projects newly entering the market did not immediately offer installment plans, agreeing on such conditions individually, but now the practice has become normal when such a program is immediately available in a project at the start of sales, she says.

The installment plan is interest-free, that is, in fact, taking into account inflation, it implies a discount for the buyer, notes Managing Director of Metrium Ruslan Syrtsov.

Many clients buy an apartment or apartment, choosing interest-free installments, and at the same time put part of the money on a deposit, making money on it, adds Evgeny Druzhinin. According to Mr. Syrtsov, in general, in the Moscow market of new buildings of all segments, the share of transactions using installment plans exceeds 10% of the total number of equity participation agreements.

Additional incentive

Installment plans can create additional demand capacity in the primary real estate market during a period of high mortgage rates, says Legenda Sales Director Ksenia Sadkova. In addition, under the preferential mortgage program at 8% due to the limit of the amount of 6 million rubles. most lots in Moscow are not included. According to Dataflat.ru, in February 2024, the average cost of an apartment in houses under construction in the capital increased by 51% year-on-year, to 24.6 million rubles.

Some developers have even specifically begun to develop programs in which the buyer can now take out an installment plan with the goal of later, when rates become lower, switching to a mortgage, notes Yana Glazunova.

This is similar to a trench mortgage, only in this case it is not the buyer directly, but the bank that transfers the money to the developer in installments. Interest for a buyer with a tranche mortgage is calculated only on the issued part of the loan, due to which the payment in the first months of the loan is greatly reduced.

However, it will not be possible to completely replace buyers relying on a mortgage using installments. Glavstroy says that the installment plan is not aimed at a client who is initially considering a purchase subject to full payment or a mortgage. This option is aimed more at those who do not want to invest the entire amount in purchasing real estate right now, but also want to receive income from deposits, the company added. It could also be a buyer who owns a business and prefers not to extract a large amount from turnover, suggests the CEO of Ricci | Residential real estate” Ekaterina Lomteva.

The down payment under the installment plan can reach 50% of the total cost of the apartment, notes Yana Glazunova. Of course, she continues, such conditions are not suitable for all buyers: installment plans can be provided for a period of three months to two years, so the monthly payments on it are quite large. The tool is convenient for those who count on a stable high income or plan to purchase an apartment through the sale of existing real estate, adds Ms. Glazunova. Therefore, installment plans will never replace the nearly defunct state program of preferential mortgages, explains Yulia Arkhangelskaya, head of the Mangazeya mortgage lending department.

Unprofitable for the developer

In the current realities, installment plans are unlikely to become widespread, because developers today are very dependent on the speed of filling escrow accounts, recalls Ilya Koltunov, Deputy General Director for Commercial Affairs and Public Relations of the Garden Ring Group of Companies. Unlike a mortgage or all-cash payment, installments fill the equity holder’s account not immediately, but as payments are made, he says.

A decrease in occupancy, in turn, leads to an increase in project financing rates, notes Ekaterina Lomteva. All these expenses are included in the price of the lot for the buyer with installments, says Stanislav Sagiryan, General Director of RKS Development Group.

All purchase instruments that do not fill escrow accounts are difficult for the developer to implement and are not welcomed by the bank providing project financing, says Yulia Arkhangelskaya. Therefore, when calculating the financial model of a project, developers allocate only a small part of the planned revenue to such programs, adds Mr. Koltunov.

It is also impossible to eliminate the risk of late payment or non-payment of the entire amount and, as a consequence, termination of the contract, notes Ekaterina Levina. In addition to the accumulation of receivables, the developer is in no way insured against non-payment or an accident, as a result of which he will face a lengthy termination procedure, continues Yulia Arkhangelskaya. Installment plans are the riskiest product for a developer, since they bind the client into a contractual relationship only with the developer, without the presence of a bank, she adds.

Regulator vs.

Installment plans are treated with skepticism not only by credit institutions that provide project financing to developers, but also by the Central Bank. At the end of March, according to the head of the center for analysis of the real estate market of the department of banking regulation and analytics of the Bank of Russia, Alexander Kopylov, the regulator recorded new schemes that banks and developers began to increasingly use when issuing mortgages – they involve incomplete or delayed transfer of money from apartment buyers to new buildings into special escrow accounts. And installment plans just fall into such schemes.

Mr. Kopylov describes one of the mechanisms that worries the Central Bank as follows. Conventionally, the apartment costs 10 million rubles. and the buyer pays 2 million of them from his own funds as a down payment – the mortgage loan is taken not for the entire remaining amount, but in parts. For example, the first part is 1 million rubles, and the second is 7 million rubles, and it arrives at the very end, before the actual commissioning of the house. All mortgage amounts that the borrower receives are transferred to the escrow account, and there are no violations here, but such a distributed loan over time has its own risks, a representative of the regulator is sure.

For example, such a mechanism makes it possible to involve in demand those people who currently do not have sufficient funds to purchase real estate, but expect to have them in the future. However, if their calculations do not coincide with reality, there will be an increased risk of default, warns Alexander Kopylov.

To combat these schemes, the Central Bank has already sent a letter to credit institutions with recommendations not to use risky instruments when issuing mortgages, RBC previously wrote.

The Bank of Russia, according to Mr. Kopylov, intends to further explain to organizations that the acquisition of rights under a share participation agreement in construction in the event of a lack of funds in escrow accounts should be considered as an unsecured loan, and require greater reserves from them.

It is impossible to talk about completely banning any non-standard tools for stimulating demand in the new buildings market, because construction is one of the drivers of the economy that the authorities will not allow to be “strangled,” hopes the CEO of Expert Business Solutions Pavel Mitrofanov. But based on the experience of fighting “near-zero mortgages” at extremely low rates, which the Central Bank actively opposed, we can say that after the ban on one instrument, inventive developers and financiers will come up with new schemes, the expert summarizes.

Daria Andrianova