Quadrant: A compromise of "step accessibility"

The question of converting residential property into non-residential property has been brought up by the Moscow government for an electronic referendum. The residents of Moscow will determine whether or not to change the conversion procedure through the "Active Citizen" project. They must decide what is more important to them. On one hand, due to the difficulty in obtaining permits, the number of shops and pharmacies within walking distance will decrease. On the other hand, converting to non-residential property will protect the interests of the residents of the building. It is important for the city to maintain a balance between the interests of small businesses and property owners, so the opinions of both sides need to be taken into account. The "business on the ground floor" is a complex matter that Kvadrum has examined. The infrastructure on the ground floors is a saving grace for many neighborhoods where it was either underdeveloped or not developed at all. In some cases, these spaces were planned to be converted from residential to non-residential due to the emergence of metro stations or other attractions in the area. After the removal of street stalls, non-residential spaces became the only option for retailers to establish their businesses. In many residential areas, especially older ones, the ground floors provide the only opportunity to open a commercial space and provide residents with necessary infrastructure. "Moreover, a greater choice of operators creates competition among them, which positively affects prices. For example, imagine a district where all ground floors are residential and there is only one shopping center: typically, only one pharmacy and one grocery store are allowed in the shopping center. It is clear that there will be a fight for such a space, the tenant will sign a contract at a high rate, and prices for residents will be high," explains Anton Belyh, a managing partner at consulting company DNA Realty. The demand determines the supply, and until recently, converting ground floor spaces to non-residential and placing businesses there was mutually beneficial. Districts obtained the necessary infrastructure, and residents of ground floor apartments moved from their less desirable apartments to better conditions. The profit from such deals for new owners reached up to hundreds of percentages. "Previously, when many owners did not understand the value of their ground floor apartments with windows facing the metro, the business of buying and converting such apartments was very profitable. Dreaming of moving out of a ground floor apartment, people were willing to sell their apartments for the same price as an equivalent apartment on a higher floor or in a new building. The companies that bought such properties could earn 200-400% from such a deal," says Anton Belyh. Now the situation has changed, and ground floor apartment owners have realized that it is a "golden asset," which is why the prices for such properties can be 3-4 times higher than the price of a ground floor apartment without windows facing the metro or an apartment on a higher floor, warns the expert. For example, near the "Novokosino" metro station, apartments in old buildings in the inner courtyards are sold for 4.5-7 million rubles, while those on the first line in the same building are sold for 11-15 million rubles, depending on the area and proximity to the metro, Anton Belyh gives an example. Near the "Medvedkovo" metro station, regular apartments cost 5-8 million rubles, while apartments with a view of the metro are offered for 12-16 million rubles. Despite this, converting them into non-residential property is still profitable for investors. The calculations are as follows: when purchasing a 35 sq.m. apartment, for example, for 14 million rubles near the metro, with conversion costs of an additional 2-4 million rubles, such a space can be rented out for approximately 300-400 thousand rubles per month. It can also be sold for 27-35 million rubles as a rental business, depending on the lease agreement conditions and demand in the specific area, as well as the readiness of the new owner to wait for a buyer at the maximum price. In this case, the profit would range from 60 to 100% within a maximum project implementation period of 1-1.5 years. If the goal is to rent it out instead of selling, the investment can be recouped in 4.5-6 years. "Buying commercial real estate in Moscow with such profitability is practically impossible," sums up Anton Belyh. However, these calculations are only for

Examples of "ideal" trading corridors are given by the owner of GK "EKOOFFICE" Andrey Kovalev. These are Leninsky, Lomonosovsky, and Kutuzovsky avenues. "In Soviet times, apartments on the ground floors with such a location were cheaper than all others in the building, but now the situation has completely changed. After being transferred to non-residential status, the square meter of such an area can cost 20 to 30 thousand dollars," the expert returns to the topic of profitability.

A pharmacy against a bank

Of course, former housing on the ground floors is not ideal premises for tenants, and when buying a particular apartment, one should at least have an approximate idea of what can be done here and what cannot. "Each business has its own nuances regarding the configuration of premises, lighting, the number of "wet" areas, and so on," notes Andrey Kovalev. "For example, a dental clinic requires completely different premises than a grocery store."

In premises with an area of less than 51 sq.m., it is not allowed, for example, to sell strong alcoholic beverages, Anton Belykh reminds. There are difficulties in opening a cafe in a converted premises, as a separate ventilation system needs to be installed and additional kilowatts need to be purchased. At the same time, the areas for a full-fledged cafe are too small, which will not allow for the recovery of all investments in a timely manner.

"The most profitable are small grocery stores, communication salons, beauty salons, pharmacies, and banks. They are willing to pay good rental rates, so it is advantageous for the owner, they themselves earn well in such formats, and they provide residents with the necessary infrastructure and an alternative to large supermarkets. If the owner wants to start his own business, he should rely on the sphere in which he is most knowledgeable and experienced. You can earn on everything if you know how to do it," gives recommendations Anton Belykh.

The market decides

It is worth noting that today's market situation also affects the profitability of the business. "Currently, the main demand for premises in the street retail format is for grocery stores, cafes/restaurants. If we talk about buying premises for subsequent rental, it is important to understand that the profitability of the rental business has decreased: the exposure period has increased, tenants negotiate preferential conditions (reducing the indexation rate, increasing rent holidays, etc). At the same time, there is no expected increase in rental rates in the near future," shares market details Svetlana Shorina, Director of the Valuation Department at CBRE.

Svetlana Yarova, Head of the Street Retail Department at JLL, disagrees with her colleague: "Today, the share of vacant premises in this market is about 10%, and it will gradually decrease. Given the impossibility of converting new premises into non-residential properties, the existing supply will be absorbed, and the rent rate supported by demand will remain high. According to our forecasts, rental rates for these premises will not decrease, but any increase in rates can be expected only in the perspective of two to three years."

The more profitable, the more difficult

In the current times, the unanimous forecast that rental rates will not decrease is already an incentive to engage in this business. However, the gradual complication of the conversion procedure reduces interest. Moreover, experts are afraid that with the introduction of new restrictions, the conversion of housing on the ground floors into non-residential premises may stop altogether.

"The massive offensive" on businesses on the ground floors was started by the city authorities in May of this year, by prohibiting by the Moscow Government Decree No. 276-PP attaching a separate entrance to residential buildings. However, as Egor Levchenko, Head of the Commercial Real Estate Department at Kalinka Group, reminds, the presence of such an entrance is in fact a prerequisite for converting housing into non-residential status. In other words, by not legally banning the conversion process, the city administration has actually made it impossible. Now entrepreneurs can start the conversion process only for premises that already have a separate entrance, and such premises are already virtually all converted.

"After the decree on the redevelopment of premises in apartment buildings, it became impossible to convert even those premises that had already been approved by the authorized bodies. The fate of these premises is still unclear," shares the expert.

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