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Tax on future

 

Developers keep the high pace of residential construction on the border of St. Petersburg and Leningradskaya region. However, social infrastructure is developing much less actively than the housing. The program for repurchase of schools and kindergartens built by developers at the expense of taxes paid by them does not solve the problem. But despite this migration of developers from St. Petersburg to Leningradskaya region is increasing. 

 

New migrants

Leningradskaya region is experiencing a construction boom. In January 2016 551 thousand sq. m of housing was commissioned. This is 2.5 times more than in January 2015 and a quarter of the total volume of commissioned residential property in 2015 (2.3 million sq. m). 

According to Surveyor International Group, construction in the Leningradskaya region is now conducted at 600 locations. Developed territories are enormous. They are mainly located on the border of St. Petersburg and Leningradskaya region and are designed for dozens of thousands residents. The property here is cheaper and the accessibility is not much worse than in St. Petersburg suburbs. It is particularly attractive for young families with one or two children.

The budgets of regional municipalities, however, do not correlate with the pace of construction, and are not able to construct in time a sufficient number of social facilities at their own. Therefore, queues for kindergartens and schools appear in the areas of active development. For example, in Murino and Kudrovo of Vsevolozhskiy district of Leningradskaya region queue for kindergartens consists of about 3,000 people.

In order to solve the problem of social infrastructure provision the government of the region has launched the program “Social objects in exchange for taxes”, which involved the construction of kindergartens, schools and general hospitals at the expense of developers with the following buyout of these properties by Leningradskaya region government for an amount established by the Ministry of Industry and Trade that does not exceed 70% of taxes payed by the developer to the region’s budget. For the system to work, a developer or its affiliated companies should be registered in the Leningradskaya region.

‘As a rule, head offices are not being transferred to our region, but usually their subsidiaries are being registered. If one of subsidiaries belonging to a large holding is engaged in construction, they can participate in the program, and taxes are returned from the total amount payed by a holding,’ the press-service of Leningrad Region Administration says.

Competitive advantage of childhood

The first developer accredited by the government of Leningradskaya region under this program became Setl City. In 2013 the company signed 2 agreements on participation in the program “Social objects in exchange for taxes” for its projects: “Sem’ Stolits” (Kudrovo) and “GREENLandia” (Murino), and within this program transferred to municipalities one kindergarten (it is operating since the last year) and one school (it will start operation in September), and three kindergartens are ready for the transfer. ‘The program has shown its effectiveness and is effectual measure of the region’s government to attract investors,’ Ilya Eremenko CEO of SetlCity summarizes. ‘The terms of the program are reasonable and fair.’

RBI company will check the program in practice as it signed the agreement with Leningradskaya region on the construction of a kindergarten for 95 places in the second phase of the low-rise micro district Mistola Hills (is developed by “Severniy Gorod” company).

The cost of purchase is based on the price of one place in a kindergarten or school established by the Ministry of Construction and Housing and it is variable, but in general price is around 1 million Roubles for 1 place in the kindergarten and approximately the same for 1 place in school. ‘We can’t spend for the purchase more than 70% of payed taxes, so we save 30%. If developer doesn’t have enough taxes by the moment, we take a kindergarten in rent so the developer does not have the burden of its maintenance until the budget receives a sufficient amount of taxes,’ Administration of the region seeks for the solution. The availability of social infrastructure in project is a strong competitive advantage for developers.

‘Project which involves social infrastructure is more complicated for developer than simple development of residential property in terms of financial planning and realization. But these are operational difficulties which are acceptable for large companies,’ CEO of Polis Group Ivan Romanov says.

Although, according to the updated planning policy presented by the deputy chairman for the construction of the Leningradskaya Region Mikhail Moskvin, during the Congress of the builders on 16 February, the Program is being changed. Starting from March 2016 for properties being constructed in the so called red zone (10-15 km from the Ring Road to the road A120), not 70%, but only 50% of taxes will be spent for the purchase of the social object. In the other locations the terms of the program are not being changed.

Hard cash

A couple of years ago the region’s government has found good solution by offering the buyout of kindergartens and schools built by developers at the expense of paid taxes. Now it is obvious that tax revenues are not enough to pay for social objects according to the standards appropriate for growing population. The Government of Leningradskaya region offered developers to build less but better.

‘Because even growing amount of the tax revenue from developers can not compensate the cost of all objects declared to participate in the program,’ the Governor of the region Alexander Drozdenko says.

‘20 agreements with developers are signed under this scheme; according to them, 45 kindergartens for 6,599 places and 16 schools for 13,439 places are planned to be built by 2022,’ Head of the Sales and Acquisition Department of Surveyor International Group Maxim Ignatovich presents the data. During the last year under the program “Social objects in exchange for taxes” 5 kindergartens were built and bought out; 19 kindergartens were built on private money in total.

According to Mikhail Moskvin, in districts with intensive urbanization (Vsevolozhskiy, Lomonosovskiy, Tosnenskiy, Gatchinskiy and Kirovskiy) 650 thousand people live now, and by 2030 number of citizens will reach 1.4 million. Regional standard of kindergarten places number is no less than 60 places per 1 thousand of citizens for urban areas and no less than 40 for village areas, 91 and 61 for school places respectively. In order to meet these indicators and provide citizens with facilities of culture, health, sports, education, roads and fire protection facilities just in border areas is needed to spend almost twice more than entire investment program of Leningradskaya region targeted for 2016. And the region still will have no enough money to buyout these objects. However, new development projects are not approved if the standards are not being met. The Government asked developers to build less but better.

If to follow the new rules of the game it is not obvious anymore that cost of infrastructure won’t be passed on to the buyer.

‘Return on construction costs is a slow process. For business it is considered in fact as freezing of capital for quite a long period of time. Apart from this, developer companies should remain active and show high revenues even after the completion of the current project. But this is not always possible in the current construction business circumstances in the region,’ Maxim Ignatovich notes. Financing of objects’ construction directly by the budget (hard cash), moreover at the initial stages, according to his opinion, would significantly increase the interest of developers in the program.

‘Despite the reaction of developers on changes, they are still attracted by Leningradskaya region first of all due to the lower cost of land. Availability of huge land plots with perspective location (for example, not far from an underground station) and possibility of integrated development is meaningful, this is the market reality,’ Ivan Romanov notes.

Maxim Ignatovich adds that competition with St. Petersburg is going quite well: during the last year significant changes were made in terms of urban development regulation, which have made the process even more complicated. That’s why migration of developers to the region will only increase.

 

"Kommersant", № 35, 03/02/2016, p 16

Short address for the article: http://kommersant.ru/doc/2922755