University of Economics, Prague
Master’s Thesis
University of Economics, Prague
Faculty of Business Administration Masters field: Management
Title of the master’s thesis:
Analysis of Russian real estate market
Author: Bc. Sofia Zimonina
Supervisor: doc. Ing. Václav Stříteský, Ph.D.
Declaration of Authenticity
I hereby declare that the master’s thesis presented herein is my own work, or fully and specifically acknowledged wherever adapted from other sources. This
work has not been published or submitted elsewhere for the requirement of a degree program.
Acknowledgements:
I would like to hereby thank my supervisor doc. Ing. Václav Stříteský, Ph.D. for his guidance, insightful comments, devoted time and considerable encouragements to complete this thesis.
Title of the Master’s Thesis:
Analysis of Russian real estate market
Abstract:
The following Master’s thesis is devoted to the analysis of the real estate market in Russia, with a focus on the residential real estate. The main goals of the thesis are to assess the situation on the Russian market, to determine consumer behaviour and identify the main aspects of the activities of realtors and their methods for building trust. To achieve these goals, secondary research data from Statista, Yandex, Google, Nielsen were used, and a qualitative research was conducted. The theoretical part describes the main characteristics of the real estate market and includes a description of consumer behaviour in this industry. The practical part of the thesis focuses on the analysis of the Russian real estate market, together with the legislative framework, and also includes a description of the behaviour of buyers and realtors. As a result of the study, it was revealed that the real estate market in Russia is highly saturated and is strictly regulated by the legislative framework. It was also concluded that communication and the establishment of interpersonal relationships is the basis of trust between market participants. The methods and tools for increasing the credibility of realtors considered in the thesis can be used both to improve their work and as part of recommendations for real estate agencies.
Table of contents
Introduction ... 3
1. The concept of the real estate market and its types ... 5
1.1. Definition ... 5
1.2. Types of real estate ... 5
1.3. Classification of real estate ... 6
1.4. The life cycle of real estate objects ... 7
1.5. Market size estimate change ... 8
2. The specifics of the real estate market ... 10
2.1. Functions ... 10
2.2. Real estate market entities ... 10
2.3. Features of the real estate market ... 11
2.4. Cyclical development of the real estate market ... 12
2.5. Valuation of real estate objects ... 13
2.6. Benefits of real estate investing ... 14
2.7. Real estate risks ... 14
3. Consumer behaviour in the real estate market ... 16
3.1. Determinants of consumer behaviour in the real estate market ... 16
3.2. Characteristics of home buyers in the USA and Europe ... 18
3.3. Steps of home buying process ... 24
3.4. Information channels used for a house to purchase ... 30
4. Methods ... 37
4.1. Secondary research ... 37
4.2. Primary research ... 38
5. Characteristics of the real estate in the Russian market ... 40
5.1. Features of the Russian real estate market ... 40
5.2. Legal framework governing relations in the real estate market in Russia ... 41
5.3. Forms of sales in the real estate market ... 43
5.4. Real estate transactions ... 45
5.5. Mortgage loan ... 48
6. Environmental analyses of the real estate market ... 50
6.1. PESTEL Analysis ... 50
6.2. Porter's Five Forces analysis ... 58
7. Consumer behaviour in the Russian real estate market ... 64
7.1. Demographic factors of Russian consumers ... 64
7.2. Characteristics of housing ... 67
7.3. Channels used for looking housing to purchase ... 73
8. Realtors interview analysis ... 87
8.1. Responsibilities ... 87
8.2. Conditions ... 88
8.3. Problems ... 89
8.4. Trust issues ... 91
8.5. Methods and tools ... 92
8.6. Development prospects ... 93
9. Prospects for the development of the real estate market ... 95
10. Summary ... 97
Conclusion ... 100
Bibliography ... 102
List of Figures ... 115
List of Tables ... 117
Introduction
Real estate is the core of the entire system of market relations. It has played an important role in society for many years. Real estate ownership is the primary foundation of freedom and independence. Real estate objects are considered not only as the most important commodity that satisfies the various personal needs of people, but also as an investment that generates income.
The main goals of this master’s thesis are to assess the situation of the Russian real estate market with a main focus on the residential real estate, to determine consumer behaviour and identify the main aspects of the activities of realtors and their methods for building trust. At the moment there is an active formation and development of the Russian real estate market, in which a large number of stakeholders participate. The real estate market in Russia is becoming more civilized every year. This is facilitated by the legislative infrastructure, which regulates it clearly, as well as the constantly growing number of market participants, ordinary individuals, legal entities, and intermediaries, such as realtors. Trust between them and mutually beneficial cooperation is a determining factor in building a modern real estate market.
However, until now, the functioning of the real estate market remains incomprehensible to many people. This fact determines the relevance of the chosen topic.
To achieve the main goals of the thesis, it is necessary to solve the following tasks:
1. Conduct literature research to determine the main characteristics, functions and features of the real estate market.
2. Evaluate the consumer behaviour in the residential real estate market.
3. To determine the main features of the real estate market in Russia.
4. Identify external and internal economic factors in order to determine what degree of influence they have on the environment of the real estate market.
5. Conduct an analysis of Russian consumers and determine the characteristics of their behaviour.
6. Carry out qualitative research to determine the main aspects of the activities of realtors and their approach to build trust.
The thesis is divided into five parts. The first part Introduction describes the main goal of the thesis, the ways to achieve it and general structure. The theoretical part describes the general concepts of the real estate market, its functions, types of real estate and market characteristics, as well as a detailed description of consumer behaviour in the residential real estate market in Europe and the United States. The third part Methods provides a detailed information about
the primary and secondary research methods that were used to analyse the real estate market in Russia and limitations of the research. The practical part presents a description of the Russian real estate market, which includes its features, legal aspects, analysis of the economic environment and consumers’ decision-making process and development prospects. Also, this part includes the results of a qualitative research that was conducted among realtors in Russia and summary chapter that presents results and recommendations. Conclusion part includes the most important and relevant results based on all the analyses carried out in the theoretical and practical parts.
In the course of writing the thesis, statistical reports that are presented on the websites Statista, Trading Economics, RusBase, Rosstat and others were used. The results of public opinion polls on consumers preferences and perceptions of real estate in the Russian market, conducted by such companies as Nielsen, Google, Mail.ru Group and Yandex were studied.
1. The concept of the real estate market and its types 1.1. Definition
Real estate could be defined as a property made up in the form of land or buildings (Chen, 2019).
Real estate market is a sphere of capital investment in real estate and the system of economic relations arising from real estate transactions. These relations appear between investors in the purchase and sale of real estate, mortgages or the transfer of real estate for rent (Balabanov, 2000, p. 133).
1.2. Types of real estate
There are two main types of real estate market: the primary (new homes and buildings) and the secondary real estate market.
In the primary market real estate as a commodity operates in the market for the first time.
In this case, the main sellers of real estate are regional and local authorities, as well as construction companies, such as suppliers of residential and non-residential real estate (Balabanov, 2000, pp. 146-147).
Primary real estate provides an opportunity for new equipment of the buildings, a modern layout, comfort and reliable security systems. Among the advantages, the term of operation and lack of mistakes in official documents. The main disadvantages of primary real estate include a long period between the payment of the purchase and real settlement. Typically, buyers buy housing at the construction stage, and settlement begins only after commissioning (Victor Invest, 2020).
In the secondary market, real estate is a product that was previously in use and owned by a particular owner, an individual or legal entity. The secondary real estate objects are operated on the market for a long time (Balabanov, 2000, p. 147).
Secondary real estate has two objective advantages. Firstly, the lack of risks associated with the activities of developers. Since buyers of primary real estate invest in a product that does not yet exist, buyers of secondary real estate have lower risk of losing money. The second advantage is the absence of additional costs that are associated with repairment of apartments.
Moreover, buyers have a possibility to visit and view house, flat or apartments before purchase.
Among the disadvantages is high depreciation. Different components of the house are wearing out very fast (Victor Invest, 2020).
1.3. Classification of real estate
The classification of real estate is carried out on the basis of various criteria. However, the structure of the real estate market has two important components. See Figure 1 below.
Figure 1: Classification of real estate
Source: Asaul & Karasev (2001)
Natural objects that consist of land market or a market in which the object of sale is land that includes vacant land, working farms, and ranches leased by landowners to firms, forest and perennial plantations, isolated water bodies and subsoil plots (Amadeo, 2020).
Man-made objects can be fully built and ready for operation, may require reconstruction or overhaul, and also refers to unfinished construction objects. Man-made objects consist of three segments:
1. The residential market, which is a segment of the market that specializes in transactions
Real estate objects
Natural
Land Forests and
permanent crops
Subsoil and water objects
Man-made
Residential
Condominium
House
Apartment
Room
Secondary residences
Commercial
Offices, restaurants,
stores
Building
Hotels
Industrial
Storehouses, factories
premises, land for their construction and everything that is intended for use by individuals or legal entities in order to get profit (Amadeo, 2020).
3. Industrial real estate market, which consists of manufacturing buildings, property and storehouses. It also includes factories, both operating and understaffed factories. This real estate proposed for research, production, storage, and distribution of goods (Amadeo, 2020).
1.4. The life cycle of real estate objects
The life cycle of a real estate object as a physical object is a sequence of processes of existence of a real estate object from pre-design to liquidation or disposal. The stages of the life cycle of an object consists of the following stages:
1. pre-design, 2. design, 3. construction, 4. operation,
5. liquidation (Asaul, Ivanov, & Starovojtov, 2009);
The pre-design or initial stage includes the analysis of the real estate market, the selection of a real estate object, the formation of a project strategy, investment analysis, paperwork and attracting credit investment funds (Asaul, Ivanov, & Starovojtov, 2009).
The design stage includes the development of a financial scheme, the organization of financing, the choice of an architectural and engineering group, and design management. The main tasks of this period are reducing the duration of stages, improving the consumer qualities of real estate, and most importantly, minimizing operating costs at all stages of the life cycle (Asaul, Ivanov, & Starovojtov, 2009).
The construction stage consists in the selection of a contractor, coordination of construction work and quality control of construction, estimation of costs and expenses. At this stage, there is real evidence of compliance of the facility under construction with the requirements of the real estate market segment. During this period, the goal of increasing the share of investments of potential consumers is being addressed, since the growth in the volume of offers and profits indicates a broad market recognition (Asaul, Ivanov, & Starovojtov, 2009).
The stage of operation of the property involves the maintenance and repair of objects and their reconstruction. The operation of real estate includes maintenance and repair of equipment and facilities, material records, fire protection and safety, waste management and recycling,
changes and rebuilding, emergency management and security. Reconstruction of real estate is a fundamental reorganization, alteration in order to improve the complex of organizational and technical measures aimed at eliminating the physical deterioration of real estate as a whole or their individual elements and systems. Maintenance is the work performed to ensure the life of real estate. It does not lead to an increase in its value but prevent the decay and failure of individual elements. The purpose of the service is to ensure that the facility is used for its intended purpose. Repair is the work to eliminate damage or deterioration of the property in order to restore its normal operating condition. Repair work is divided into minor and major.
Minor repairs lasting 1-2 days do not extend the life of the facility and does not increase its value. Major repairs more than 2 days extend the life of the property, but do not increase its value. Replacement is the process of replacing unusable or outdated components of fixed assets that are part of a property with a similar unit (Asaul, Ivanov, & Starovojtov, 2009).
The stage of liquidation of an object is the complete elimination of its initial and acquired functions, the result is either demolition or a new development. At this stage, significant liquidation costs are required. If the property receives a new development, the costs of the change relate to the costs of ownership, depending on the new function (Asaul, Ivanov, &
Starovojtov, 2009).
1.5. Market size estimate change
In 2019, the size of the professionally managed global real estate investment market significantly increased. The growth was 7.8 percent from $8.9 trillion in 2018 to $9.6 trillion.
The increase was higher than in the previous year 2018 when the real estate market growth was 4.1 percent (Teuben & Neshat, 2020).
The Figure 2 below shows the growth of the largest real estate markets in the world. As can be seen, United States continued to be the biggest market in the world. Japan and United Kingdom remained at the second and third place respectively. China is at the fourth position, while Germany takes the fifth position (Teuben & Neshat, 2020).
Figure 2: Change in Global Market Size Estimate and for 5 largest countries, in $
Source: MSCI (2020)
As shown in the Figure 3, the relative weights of individual countries in the MSCI Global Annual Property Index have slightly changed over time. These changes were the result of a combination of asset value increase, foreign exchange exposure and a residual component (Teuben & Neshat, 2020).
Figure 3: Weight of the six largest countries in the MSCI Global Annual Property Index
Source: MSCI (2020)
2. The specifics of the real estate market 2.1. Functions
The main functions of the real estate market include:
1. The establishment of equilibrium prices, at which solvent demand corresponds to the volume of real estate supply.
2. The regulatory function, by which resources are allocated to the different sectors of the economy and entrepreneurship; its effective structure is formed, and thus public interests are satisfied.
3. The commercial function, that organizes the movement of capital and making a profit on invested capital.
4. The reorganization function, that expresses in the eliminating of the economy from weak, uncompetitive and ineffective market participants.
5. The incentive function, which consists in the development of competition and the use of scientific, technical and managerial innovations in the pursuit of profit when building and using real estate.
6. The investment function, that states the real estate market is an attractive way of storing and increasing the cost of capital. It helps to transfer the savings and accumulations of the population from a passive form of stocks into real productive capital, which brings income to the owner of real estate.
7. A social function, manifested in an increase in the activity and performance of the population and an increase in the intensity of labour of citizens seeking to become owners of apartments, land plots, as well as other capital and prestigious objects (The Economy, 2011).
2.2. Real estate market entities
Buyers and investor-buyers, such as legal entities and individuals are one of the most important market entities that have formed on the real estate market. The second important part of the real estate market is sellers, that are represented by property owners, property funds, bankruptcy trustees. Sellers and buyers can be enterprises of all forms of ownership, households, mortgage banks. Among the sellers of real estate, an important role is played by
Participants in the real estate market are also professional intermediaries that ensure the sale of real estate, among which are:
1. Real estate agencies or realtors, which are specialists who act as consultants in real estate transactions: purchase and sale, leasing, mortgage operations.
2. Brokers, which are agents or intermediaries representing the interests of the seller or buyer of real estate in the transaction.
3. Real estate companies that are professional participants in the real estate market and offer a range of services in the market.
4. Appraisers, with the help of which the market price of real estate is determined.
5. A developer who transforms the land to new uses. The developer organizes the building of the property in such a way that the resources invested in the property pay off and sufficient profit is obtained from the sale of the property.
6. Banks whose main activity in the real estate market is participation in investment and development projects, mortgage lending for home purchases.
7. Real estate managers who make effective use of the property during its operation.
8. Mass media that provides selling promotions and other operations with various types of real estate (Balabanov, 2000, p. 146).
2.3. Features of the real estate market
The real estate market has a number of specific features. Features of the real estate market include:
1. Locality which is the inability to change the location of property.
2. Low interchangeability of objects. The demand for real estate significantly depends on the location of the property, infrastructure in the area where the property is located.
3. Inconsistency of the value of real estate with the financial capabilities. The majority of the population could not easily afford real estate since prices are extremely high and, in most cases, they require a loan.
4. The need for state registration of transactions and confidentiality of these transactions.
Any transactions require to attract legal institutions, which indicates a low liquidity of real estate in comparison with other goods.
5. Low elasticity of supply of real estate. Since construction takes a fairly long time, and buildings are relatively durable, the elasticity of supply is low.
6. Investment in real estate. The real estate assumes continuous costs of maintaining the property in a functional condition, the annual tax on property ownership and high transaction costs in real estate transactions (Goremykin, 2012).
2.4. Cyclical development of the real estate market
Figure 4: Cyclical development of the real estate market
Source: Asaul & Karasev (2001)
According to Asaul and Karasev (2001), real estate market has four phases of development, that could be observed in the Figure 4.
The first phase could be characterised as a decrease in demand for real estate. A glut of buildings of various types in the real estate market leads to a decline in purchasing power.
When the number of vacant buildings increases rapidly it is difficult for the owner of the property to sell it and prices drop.
In the second phase, the demand for the constructed objects increases and there is practically no supply of new objects. This cycle is determined by the growth of pre-investment research for the creation of new real estate objects.
At the third stage, new construction reaches its peak as a result of increased demand for newly built objects and is characterized by rising prices.
In the last fourth phase, there is surplus construction capacities and overproduction of construction products that leads to a saturation of the real estate market and construction
2.5. Valuation of real estate objects
Any real estate abject has a price value. The price of the real estate is the price of a specific completed sale transaction of the property.
The transaction price may vary significantly from market value. Market value of the property is the estimated amount of money by which the seller, having full information about the value of the property and not obliged to sell it, would agree to sell it, and the buyer, having full information about the value of the property and not obligated to purchase it, would agree to buy it. Thus, this is the most likely price at which real estate object can be sold on the open market in a competitive environment. It is assumed that the parties, having all the necessary information, act reasonably, without coercion, and any extraordinary circumstances are not reflected in the transaction. The market value determined in this way is subject to bargaining and contains a range of fluctuations both upward and downward (Ross, 2020).
The value of real estate depends on different factors that could be divided in four groups.
The first group is objective factors that are economic factors that determine the average price level of specific transactions by real estate entities. These factors are divided in two group.
The first group of macroeconomic factors related to the general market environment (taxes, duties, rate dynamics, inflation, unemployment, the need for real estate, the development of foreign economic activity, etc.). The second group is represented by microeconomic factors characterizing the objective parameters of specific transactions (Asaul & Karasev, 2001).
The second group is factors associated with the phenomenon of mass consciousness and factors of a psychological nature, such as massive advertising, inflationary expectations, preferences, awareness, etc (Asaul & Karasev, 2001).
The third group is physical factors, such as location or the distance from the centre, the development of infrastructure and transport links (especially the proximity of the public transport) that directly affects the value of the property. Also, physical factors include architectural and constructive solutions, condition of the property, the availability of utilities (electricity, water, heating, etc.), as well as environmental and seismic factors (Asaul &
Karasev, 2001).
For residential real estate, sanitary-ecological expertise data can significantly reduce the cost of housing, and the presence of a forest park, ponds, parks can increase the cost of apartments (Asaul & Karasev, 2001).
The last group is represented by factors affecting the price and time sale, such as the number of similar offers, their ratio with demand for particular type of apartment in the same part of
the city, defects of the object (extreme floors, courtyard windows, poor layout, etc.), prestige of the area, ecological situation in the area, transport communications and the development of infrastructure of the district or social uniformity at home (Asaul & Karasev, 2001).
2.6. Benefits of real estate investing
Methods of investing in the real estate market can be direct and indirect. Investments in real estate, as well as investments in corporate securities, are long-term.
Direct method is the purchase of real estate at auction in accordance with a private contract, the purchase of a leaseback. Indirect method is the purchase of securities of companies specializing in real estate investments, investments in mortgages secured by real estate (Tatarova, 2003, p. 11).
The sources and amount of real estate investments are affected by:
• expected return on investment,
• bank interest rate,
• tax policy in general and in the investment sector,
• inflation rates,
• the degree of risk of real estate investments (Tatarova, 2003, p. 12);
The real estate market is attractive to potential investors, since real estate investments could be characterized by a significant degree of safety, security and the ability to control the investor.
The investor receives a package of rights, while most other investment objects do not entail ownership. Moreover, investments in real estate can save money from inflation and are accompanied by an acceptable return on operations (Tatarova, 2003, pp. 12-13).
2.7. Real estate risks
Risk is the possible deviation of the real results of a particular operation or project in the negative direction compared to initially planned. The extent of the risk involved in real estate transactions can significantly vary (Parsons, 2004, p. 144).
In general, risks can be classified into three groups.
1. Market risks, that are associated with the specifics of the business sector and the impact of macroeconomic and regional factors.
3. Financial risks, arising due to the general condition of the financial system in the country and the adoption by a company or firm of certain decisions regarding the financing of its activities (Asaul & Karasev, 2001).
Among the main causes of market risks can be identified:
• Legal (the possibility of loss of ownership, loss due to mistakes in concluding contracts and agreements, the claims of third parties, etc.).
• Economic (macroeconomic changes and changes in the regional economy, fluctuations in supply and demand in the market, the emergence of competing firms or new facilities).
• Architectural and construction (the wrong choice of location for the real estate objects, its inconsistency with the surrounding buildings, mistakes in design decisions, the wrong choice of materials, inaccurate determination of the layout of apartments, etc.) (Asaul & Karasev, 2001).
One way or another, all types of risks have a financial dimension, either by increasing the costs of a project or transaction, or by reducing income, or by exceeding the planned investment terms, or in the extreme case, by the loss of not only income, but also capital.
Financial risks can be divided into several groups:
1. Risks arising from the general condition and changes in the financial system (changes in interest rates on loans, the introduction of restrictions on the fluctuation of the exchange rate, changes in inflation compared to forecast).
2. Risks caused by one or another option chosen by the company or firm to finance its activities.
3. Risks arising from mistakes in financial calculations. Mistakes in the preparation of a plan of income and expenditure of financial resources can lead to insolvency of a company, which will require the attraction of higher resources (Asaul & Karasev, 2001).
For the primary market, economic and production risks are of great importance, while for the secondary market, legal risks are more significant. The primary and secondary markets are mainly operated by legal entities with the qualified specialists. In the secondary market, the main subjects are individuals, and legal risks are possible with greater probability, which is mainly due to the fact that the object in the primary market is only constructing and there could not be any past transactions, while the number of transactions with the object in the secondary market can be large (Asaul & Karasev, 2001).
3. Consumer behaviour in the real estate market
The following chapter contains description of determinants of consumer behaviour in the real estate market and information regarding consumers in the real estate market in Europe and in the United States. This chapter is based on a series of studies among Americans that were conducted by The National Association of Realtors and Ipsos, as well as consumer market study on the functioning of the real estate services for consumers in the European Union that was conducted by European Commission.
3.1. Determinants of consumer behaviour in the real estate market 3.1.1. Internal determinants
One of the key determinants is the force that drives a consumer to purchase a property, or in other words, motivation. According to Srinivasan (1987), motivation for a property buyer fulfils two main needs simultaneously, which are a utilitarian need for space and a hedonistic need for status.
The second determinant is perception. Perception primarily influences the buyer's willingness to invest in real estate. If a potential consumer perceives the city in which he considers buying real estate dangerous, then he estimates the investment risks to be high and he is less likely to make a purchase (Gilber & Nelson, 1998).
The third determinant is knowledge and learning, which suggests that potential consumers are receptive to information and agree with their beliefs and preferences (McGuire, 1972).
Advertisements for the sale or rent of real estate generate associations that further shape or influence the decision-making process (Anderson, 1983).
The fourth determinant is attitude. Attitude depending on the strength and direction affects the final decision. If a potential consumer has doubts about the purchase of real estate, he will try to find more information and his attitude could be changed. According to Nelson and Rabianski (1988), single-family housing value is a function of demographic, economic, and psychographic variables. The level of social pressure is also put into the determinant of
“attitude”. Thus, the consumer can make a socially acceptable purchase of a family house, while he is able to make a purchase according to his desires and purchase a loft (Ajzen, 1991).
Another internal determinant if self-concept. Representation and perceptions of self and
for the individual fulfils emotional, individualized and personal roles in life. Thus, buyers will choose properties that match their self-image or have associations with their ideal image.
Personality is one of the internal determinants that influence consumer behaviour.
According to Foxall and Bhate (1993), personality is linked to how consumers make product decisions. Thus, an impulsive and risky person is more inclined to buy old real estate in an old area in order to further improve the condition of his home, as well as take advantage of the state improvement of the area. Likewise, a person who is willing to take risks is more likely to purchase a home on a mortgage than a person who avoids risk (Gilber & Nelson, 1998).
Lifestyle is also one of internal determinants that can affect decision-making process when purchasing a property. In general lifestyle has a significant impact on how shoppers spend their money. Extroverts, consumers who value interpersonal relationships and social interactions are likely to value houses with more apartments with large numbers of people or in crowded areas.
Whereas introverts and buyers who are focused, self-centred and respect privacy will appreciate a secluded apartment (Gilber & Nelson, 1998).
3.1.2. External determinants
According to research by Herr, Kardes, and Kim (1991), reference groups have a greater influence on behaviour than advertising and other marketing sources, since greater perceived trust is critical. Thus, a married couple who want to belong to a group that loves to party can buy a large family home with entertainment (Gilber & Nelson, 1998).
Cultural norms have an effect on the demand for real estate and can manifest itself in trends such as cohabitation with older parents. There is a tendency to have a separate personal bedroom and bathroom for each family member in some countries, such as USA. If there is a cultural ritual that is expressed in a family meal, so buyers will prefer a property with a spacious dining room (Gilber & Nelson, 1998). Thus, consumers will prefer housing that meets standard according cultural habits.
Another important determinant is subculture. Ethnic groups that have special rituals, traditions and customs could also affect the demand for real estate. For example, for some potential buyers of Asian descent, the design and location of the home is more important because they believe in invisible energy flows that can bring happiness and good fortune or trouble (Fost, 1993). Thus, for such buyers, a house that does not meet the required characteristics would be an unacceptable choice.
Social class is another determinant that affect consumer behaviour and decision-making process, since property ownership is one of the determinants of wealth and class. According to Gilbert and Nelson (1998, pp. 18-19), place of residence, house, area are decisive factors that can show the social class of the owner of the real estate. Since upward mobility is currently possible in many countries, some buyers are trying to move up the class structure by buying more expensive housing. Thus, social class influences what characteristics of real estate consumers will consider when choosing a home (Gilber & Nelson, 1998).
Another external determinant that influences decision making process is family. At the moment, big changes are taking place in the standard family life cycle. A large number of people do not marry, have children out of wedlock, get divorced, and then remarry. All these changes build demand for different housing options throughout a person's life, taking into account various demographic factors (Gilber & Nelson, 1998).
3.2. Characteristics of home buyers in the USA and Europe 3.2.1. Expected age of buying the first property
In June 2018, Ipsos company conducted a survey among European people aged over 18 who have not yet bought property. The main research question of the survey was “At what age do you expect to buy your first property?” The respondents had following options to choose:
1. under 30 years,
2. between 30 and 35 years, 3. over 35 years old,
4. I don’t want to buy a property, 5. I don't expect to be able to buy, 6. I don’t know;
Figure 5: Expected age of first property purchase in 2018
Source: Statista (2018)
The Figure 5 above shows the answers to a question asking at what age consumers who had not bought their first property yet in Belgium and Europe expected to do this. 9 percent of Europeans answered they expected to buy under the age of 30, while 35 percent of the respondents answered they believe they would not be able to buy. Both numbers are lower than the Belgium average. 20 percent of European respondents were unable to answer the question.
13 percent of respondents expect to buy their first property at the age between 30 and 35 years.
10 percent of Europeans have chosen option “Over 35 years” and 14 percent of Europeans do not want to buy a property at all (Statista, 2018).
3.2.2. Reasons of absence of property ownership
In 2018, The National Association of Realtors conducted a telephone interview in order to find the main reasons why people do not buy property in the United States of America. 8,140 US respondents aged 18+ took part in the telephone interview. The researched year were divided into quarters. The Figure 6 below shows the results.
Figure 6: Main reasons why U.S. non-homeowners don't currently own a home in 2018
Source: Statista (2018)
In the first quarter, 38 percent of respondents said that they could not afford to purchase a home while, 26 percent of respondents said that their current living conditions were not suitable. 13 percent prefer to rent rather than owning, 10 percent did not want to take responsibility of owning the property, and 11 percent chose the option “Other”.
In the second quarter, 33 percent of respondents referred to financial difficulties, 32 percent to unsuitable life circumstances, 14 percent prefer renting property, 8 percent are not ready to take responsibility and 11 percent chose the option “Other”.
In the third quarter, 49 percent chose the first option “Can't afford to buy a home”. 25 percent would rather rent a property than buy their own, while 10 percent don't want to have responsibilities of owning a property and 16 percent of respondents did not choose any option in the survey.
In the fourth quarter, 43 percent said they could not afford their own home, 16 percent preferred a rented home, 8 percent did not want to held responsibilities for owning a property and 33 percent have other reasons that were not offered in the questioner (Statista, 2020).
To sum up, the statistic shows that the main reason why non-homeowners don't currently
The National Association of Realtors also conducted a study to identify why foreigners do not buy real estate in the United States. The results of the study, which was conducted in 2018, are shown in the Figure 7 below. The study involved 1511 people.
Figure 7: Reasons why foreign buyers don't purchase real estate in the U.S. 2018
Source: Statista (2020)
The statistics shows that 31 percent of respondents cannot find a suitable property to buy, while 29 percent cannot afford housing because of the high cost. 22 percent of respondents mentioned difficulties to move money from their home country to the United States. 11 percent of respondents chose the option “Expose to U.S. tax laws” and the same number of respondents chose the option “Property taxes”. 9 percent of respondents cannot receive finance, and the same number of respondents have problems with migration laws and visa issues. 7 percent of respondents cannot afford their own home because of the exchange rate, 2 percent because of insurance costs, and 1 percent could not buy a property because of the loss of benefits from their home country. 21 percent chose the option “Other” and 9 percent were unable to answer the question (Statista, 2020).
Real estate transactions in the EU occur mainly within countries. However, consumers also make cross-border transactions. The study showed that in all surveyed EU countries, consumers experienced difficulties finding property located in another EU country, as they did not know where to get advice or consultation. 65 percent of the respondents identified the main problem as foreign language of communication and emphasized the difficulty in communicating with a realtor who speaks another language. Thus, the respondents were more uncertain and suspicious. The second reason why Europeans have difficulties to purchase real estate abroad is ignorance of the legal framework of another countries. Based on the study, it was concluded that Europeans who want to buy property outside their home country, focus on the information provided to them and rely less on their experience and intuition (European Commission, 2018).
3.2.3. Distribution of home buyers
Figure 8: Distribution of home buyers in the United States in 2019, by generation
Source: Statista (2020)
Boomers. 13 and 6 percent are represented by the younger Gen Y/Millennials and the silent Generation, respectively (Statista, 2020).
3.2.4. Marital status of home buyers
The National Association of Realtors also conducted research to determine marital status among home buyers in the USA. The results of the study are represented in the Figure 9 below.
5,870 respondents took part in the research. The respondents were divided in 6 age groups.
Figure 9: Marital status of home buyers in the U.S. 2019, by age group
Source: Statista (2020)
In the youngest group, which is between the ages of 22 and 29, 88 percent are married couples. 2 percent of single women and 7 percent of single men, 3 percent of unmarried couples. In the second group between 30 and 39 years old, 81 percent are married couples, 8 percent are single women and 3 percent are single men, 9 percent are unmarried couples. The third group, which includes people between the ages of 40 and 54, is represented by married couples, which make up 73 percent. 15 and 7 percent are single women and men, respectively.
5 percent are unmarried couple, and 1 percent chose the option “Other”. The fourth group is represented by people aged 55 to 64 years. Among them 65 percent are married, 22 percent are single women, 6 percent are single men, 5 percent are unmarried couple. The fifth group includes representatives aged 65 to 73 years, of which 70 percent chose the option “Married
couple”, 20 and 7 percent single women and single men, respectively, 2 percent unmarried couples and 1 percent of respondents chose the last option “Other”. The last group is represented by respondents aged 74 to 94 years. 68 percent of this group are married couples, 22 percent are single women, 7 percent are single men and 1 percent are unmarried couples. 3 percent of respondents chose the last option (Statista, 2020).
The Figure 10 below summarizes the overall results.
Figure 10: Marital status of home buyers in the U.S. 2019
Source: Statista (2020)
As can be seen from the Figure 10, 72 percent of home buyers in the United States in 2019 are married couples, 16 percent of home buyers are single women, 6 percent single are single men. 4 percent are unmarried couple, and 1 percent of respondents chose the option “Other”
(Statista, 2020).
3.3. Steps of home buying process 3.3.1. Most difficult steps
In 2019, The National Association of Realtors conducted a survey to identify the most
Table 1: Most difficult steps of home buying process U.S. 2019, by age group
Source: Statista (2020)
The first group is represented by respondents aged 22 to 29 years. This is the youngest group that took part in the study. 63 percent of respondents said that one of the most difficult steps in buying a property is finding the right property. 39 percent consider the whole process and steps difficult. 30 percent assume that the most difficult step is saving money for the down payment. 24 percent consider paperwork a difficult step. 9 percent chose the option “Getting a mortgage”. 8 percent of the respondents did not find the process difficult at all, and 4 percent of the respondents found the appraisal process difficult. 3 percent of respondents chose the option “Other”.
The second group is represented by respondents aged 30-39 years, 60 percent of which consider the most difficult step in the process is to find a property that would meet their requirements. 23 percent do not understand the home buying process. 20 percent chose the saving money option. 22 percent have difficulties with documents, 8 percent with obtaining a mortgage, and 12 percent do not see any difficulties at all. 6 percent of respondents consider appraisal of the property the most difficult step, and 7 percent of respondents choose the option
“Other”.
The third group includes respondents aged 40 to 54 years, 53 percent of whom consider finding a suitable property a difficult step. 15 percent do not understand the process of buying their own home. 14 percent have difficulty keeping money for a down payment. 18 percent chose paperwork, and 10 percent chose the mortgage. 19 percent think the process of buying a
home is not complicated. 6 consider the difficulties in assessing the value of real estate, and the same number of respondents chose the last option “Other”.
The fourth group is represented by respondents aged 55 to 64, among whom 52 percent consider the most difficult step to find a suitable property. 7 percent find the process and steps of buying a property difficult. 6 percent said saving money for the down payment. 14 percent consider the process with documents difficult. 7 percent find it difficult to get a mortgage, and 23 percent do not find the process difficult at all. 4 percent of respondents chose the option
“Appraisal of the property”, and 7 percent chose the last option.
The fifth group is represented by respondents aged 65 to 73 years. For 53 percent of respondents, the most difficult step is finding the right property. 15 percent consider paperwork as the most complicated step. 10 percent have difficulty understanding the process and steps.
2 percent chose saving money for payment. 8 percent see difficulties in obtaining a mortgage, 4 percent chose the option of real estate appraisal. For 26 percent, the process of buying a property is not difficult. 4 percent did not choose any of the offered options.
The last considered group are respondents from 74 to 94 years old. The most difficult step for the oldest group is finding the right property. This option was chosen by 46 percent of respondents. In second place is paperwork. This option was chosen by 12 percent of the respondents. 11 percent of respondents find the process and steps of buying a property difficult.
2 percent have chosen keeping money for payment, 5 percent getting a mortgage, and the same number of respondents chose the appraisal of the property. 35, and 4 percent of respondent chose the options “No difficult steps” and “Other”, respectively (Statista, 2020).
The results of this study were summarized for all age groups in the Figure 11 below. The vertical axis represents the options that were given to the respondents. The horizontal axis shows the percentage.
Figure 11: Most difficult steps of home buying process in the United States in 2019
Source: Statista (2020)
Thus, 55 percent of respondents cannot find a suitable property. 19 percent consider the paperwork the most complicated step. 18 percent of respondents do not understand the process and steps of buying a property. Among the less complicated steps, respondents chose to save money for a down payment (13 percent), get a mortgage (8 percent) and appraisal of property (5 percent). 18 percent of respondents did not find any difficult steps, and 6 percent chose the option “Other” (Statista, 2020).
3.3.2. Methods of home purchase
The most popular home buying methods among Americans in 2019 was buying a home with the help of a real estate agent or broker. 89 percent of people surveyed chose this option.
5 percent chose the second method, which is direct purchase from builder of builder’s agent.
The same number of respondents who took part in the study chose the direct purchase from the previous owner (Statista, 2020). See Figure 12 below.
Figure 12: Methods of home purchase in the United States in 2019
Source: Statista (2020)
3.3.3. Conditions influence neighbourhood choice
Neighbourhood is an important factor when choosing a home to buy. In 2019, an online survey was conducted among 5,870 respondents to find out what conditions influence the choice of neighbours among Americans. 63 percent of surveyed people said about the quality of the neighbourhood, while 46 percent mentioned a convenient location to job. 44 percent chose the overall affordability of homes. 41 percent said the location was great for friends and family. 30 percent said they felt comfortable shopping, 28 percent mentioned design. 26 percent of surveyed consumers said the school district was of quality and 23 percent highlighted entertainment opportunities. 22 percent emphasized the convenience of schools, 21 percent paid attention to parks. 20 percent said large halls were available and a similar number of respondents chose the walkability option. 18 percent mentioned having a place to walk their pets. 12 and 9 percent opted for a clinic and bicycle parking, respectively. 8 percent chose the option of a house in a planned community, the same number of respondents chose the option different and close to the airport. 5 percent consider the availability of public transport to be an important factor (Statista, 2020).
Figure 13: Location of home purchase in the United States in 2019
Source: Statista (2020)
The conditions for choosing the neighbourhood largely depend on the location of the house itself. See Figure 13 above. 50 percent of the respondents purchases home in the suburbs or in sub-divisions in the United States. 22 percent bought houses in small towns. 13 percent in the urban areas or central cities and the same number of respondents purchased home in rural areas and 2 percent in the resort/recreation areas (Statista, 2020).
Figure 14: Types of homes purchased in the United States in 2019
Source: Statista (2020)
The statistic presents the types of homes purchased in the United States in 2019. The most common type of home purchased is the detached single-family home, which made up 83 percent of all homes in the U.S. in 2019. 6 percent of home purchased are townhouses and row houses. Apartments and condos in building with 5 or more units made up 1 percent. 4 percent homes purchased are duplexes, apartments, condos in 2 to 4-unit building. 6 percent are represented by other types of homes (Statista, 2020). See Figure 14 above.
3.3.4. The first steps during home buying process
Among 5,870 respondents who took part in the survey, 44 percent chose the option
“Looked online for properties for sale”. The second most popular step is contacting with a real estate agent. This option selected by 16 percent of respondents. 12 percent chose to look online for information about the home buying process. 7 percent of respondents contacted a bank or mortgage lender. 6 percent talk with friends or family about the home buying process. 5 percent of respondents drove by homes and neighbourhoods. 4 percent of respondents have visited open houses. 1 percent contacted builder or visited builder models. Also, the same number of respondents were looking up for information about other neighbourhoods and areas, such as schools, local lifestyle and nightlife, parks and public transportation, and 1 percent contacted the home seller directly. The same number of respondents attended the home buying seminar.
None of the respondents looked in newspapers, magazines or home buying guides and read books or guides about the home buying process (Statista, 2020).
3.4. Information channels used for a house to purchase
In 2019, the National Association of Realtors conducted a study on what information channels consulted when looking for home to purchase. The survey involved 5,870 Americans who were divided into age groups.
Table 2: Information channels used for looking a house to buy in the U.S. in 2019
Source: Statista (2020)
The respondents were given 12 options to choose from. As it can be seen from the Table 2, the most popular channels for all age groups are online websites and realtors. Less popular but nonetheless used channels are open houses, yard sign and online video sites. Among the least popular and least used channels of information are printed newspaper advertisements, home books or magazines, billboards, reallocation companies and television (Statista, 2020).
Figure 15: Information sources used when looking for a house to purchase in the U.S.
Source: Statista (2020)
The results of the study were also represented for all age groups in the Figure 15. 93 percent of respondents use online websites and 87 percent of respondents turn to real estate agents when looking for a home to purchase, that makes Internet and real estate agents one of the most popular channels used (Statista, 2020).
European consumers as well as Americans also used online advertisements, real estate websites and real estate agencies, when looking for real estate. A consumer study found that among survey participants who purchased or rented a home in the past 7 years, 62 percent accessed the websites of real estate agencies, 53 percent used real estate websites, and 33 percent searched for advertisements online (European Commission, 2018).
3.4.1. Internet and online websites
Figure 16: Frequency of Internet use for home searching in the United States in 2019
Source: Statista (2020)
Among American respondents aged 22 to 29, 92 percent use the Internet frequently, and 5 percent on occasion. Respondents from 30 to 39 years old 93 percent use the Internet often, and 5 at times. The third group are people from 40 to 54 years. 88 percent of them use Internet for home searching often, 9 occasionally. 83 percent of the 55-64 age group use the Internet frequently, and 11 percent sometimes. 73 percent of respondents aged from 65 to 73 use the Internet frequently, while 16 percent rarely. In the 74-94 age group, 43 percent use the Internet frequently, and 25 percent occasionally (Statista, 2020). See Figure 16.
The results of the study that are summarized in the Figure 16 above showed that Internet is the channel that is frequently used among all people that took part in the study, regarding the age.
Figure 17: Useful features of property websites according to U.S. home buyers in 2018
Source: Statista (2019)
The Figure 17 represents results of the research that was conducted by the National Association of Realtors to find out the most useful characteristics of real estate sites among Americans. The study involved 7,191 people. The study was conducted in 2018 among Americans. 87 percent of surveyed people said that online websites should contain photographs of the property. 85 percent indicated detailed information about properties, 52 percent of participants said floor plans, while 46 percent indicated the need for virtual tours. Also, 42 percent of respondents mentioned the presence of contact information of a realtor. From the results of the study, the main conclusion is that home buyers consider the necessary characteristics that allow them to visually evaluate and imagine apartments (Statista, 2020).
European mystery shoppers have analysed the information that is presented on real estate websites. In this study, mystery shoppers concluded that all European real estate websites contain photographs of apartments, the price of the property or the price of the monthly rent, and information about location. The websites also provide information on the number of rooms, living space and a list of key characteristics. A behavioural experiment that was also conducted showed that participants visualized real estate better when real estate advertisements contained
percent of buyers emphasized that there is a lack of information on the property's energy performance on the website. Nearly one in five (22 percent) survey participants from 28 EU countries that recently purchased or rented an apartment highlighted the lack of information on property damage, 17 percent of respondents mentioned the lack of information on energy standards, and 12 percent said there was a problem with false or unreliable information about utility bills (European Commission, 2018).
3.4.2. Real estate agents
The second most popular channel for finding housing among European and American consumers is real estate agents.
In a survey of consumers among Europeans, it was concluded that respondents did not face the problem of lack of choice of a realtor. However, 44 percent of consumers who sold or rented property compared the characteristics of multiple real estate agents. When asked what influenced the choice of a realtor, 39 percent said about the reputation and competence of the realtor, 21 percent answered that they relied on the recommendation, and 17 percent had experience with this realtor. 21 percent of respondents said they chose a realtor based on their appraisal of the property and 22 percent considered the agency's fee, while 27 percent of survey respondents mentioned the location of the real estate agent (European Commission, 2018).
The Figure 18 below summarizes the results of a survey of what respondents expect from realtors. The survey was conducted in the United States in 2019.
Figure 18: Expectations of house buyers from real estate agents in the U.S. 2019
Source: Statista (2020)
52 percent of respondents expect that realtor will help to find the right home to buy. 12 percent of home buyers expect a realtor to help negotiate the terms of sale, and 11 percent expect a realtor to help negotiate a price. 8 percent expect help with documents. 6 percent expect real estate agent to determine what comparable homes were selling for. 4 percent expect a realtor to determine how much a buyer can afford, and 3 percent expect a realtor to help with financial planning. 1 percent expect to get more information about neighbours or infrastructure.
3 percent did not choose none of the options. None of the respondents expect the help of a realtor in finding renters for buyer’s property (Statista, 2020).
The vast majority of participants in the study in Europe who had experience with real estate agents confirmed that they gave a clear understanding of the terms and conditions of the contract. During the cooperation, realtors did not use aggressive sales tactics. However, several respondents said that real estate agents pushed them to sign a contract and also urged them to
4. Methods
This chapter describes the methodological part of the thesis, which was used when working with primary and secondary data in the practical part.
4.1. Secondary research
The main goal of the secondary research is data extraction and analysis of the current situation on the real estate market in Russia. The analysis is carried out in three parts.
The first part deals with the analysis of the legal framework governing relations related to real estate and includes a detailed description of main transactions between different market participants and the legislative system that regulates the real estate market in Russia. In the course of the research, the Legislative Acts of Russia, as well as the Basic Codes of Russian Law were studied.
The second part of the analysis concerns the real estate market environment. The analysis primarily focuses on the macro and micro market environment. Macroanalysis was conducted using PESTEL framework and focuses on external indicators that allow to identify aspects of the macroenvironment that affect Russian real estate market. Environmental microanalysis focuses on Porter’s 5 driving forces that determine the level of profitability and market competitiveness.
The third part of the analysis focuses on the consumer behaviour of Russians in the real estate market. The chapter contains the results of a study that examined the main characteristics of Russian buyers, as well as considered their preferences regarding real estate. This part also includes keyword analysis that was performed using Google Trends and Yandex Direct. In the course of the research, the interest of Russians in the topic of real estate was analysed. On the basis of the statistical data obtained, tables that include own comments on the main results of the analysis were compiled.
The whole secondary research was carried out in the form of an analysis based on the collection of statistical data from Internet resources such as The World Bank, Statista, Trading Economics, Rosstat. Moreover, researches by Yandex, Yandex Realty, Google, Nielsen and others were studied.
4.2. Primary research
The literature review and secondary research were aimed at obtaining information and data for understanding various aspects related to the functioning and development of the real estate market, as well as for a deep understanding of consumer behaviour.
Despite the detailed information, none of the studies provided information on what tools are used by various channels of information about real estate to increase trust among buyers.
According the Mail.ru Group study realtors are among the top three channels that Russians use when they look for real estate (Mail.ru Group, 2019). Despite this fact, Heads Consulting concluded that the number of realtors significantly decreased by 45 percent (Zaritskij, 2016).
Thus, based on the summarized literature review and secondary research, the research question for the qualitative research is:
“What methods do realtors and real estate agencies use to gain trust among clients?”
Sub-objectives include the following:
1. Create a profile of respondents
2. Analyse the main activities of real estate agencies and realtors
3. Determine the main reasons for the distrust of Russians in the activities of realtors 4. Identify the most important tools that realtors and real estate agencies use to build
credibility and trust
5. Analyse development prospects for realtors
For the method of collecting qualitative data for the research semi-structured interviews were selected, since questions could be prepared in advance and it will give an opportunity for realtors to be prepared and express their opinion on their own terms. A complete questionnaire is included in the list of annexes. See Annex 1. Each interview took from 10 to 30 minutes.
After conducting 10 interviews with realtors in Russia, responses were coded and categorized into sequential groups using MAXQDA in order to effectively analyse the responses of all respondents who took part in the study. Category-Coded Maps are included in the list of annexes. See Annex 2. Thus, the respondents' answers were divided into six categories, which include responsibilities, conditions, problems, trust issues, methods to build trust and development prospects. Within each category, subcategories were created that reflect the necessary information on the main research topic. Collected information from semi-structured
study was carried out from September 2020 to November 2020. The sample of respondents was selected on the basis of a deliberate selection method with elements of selection of quotas.
The survey respondents have the following characteristics:
• Russian,
• fluent in English,
• realtor,
• legally employed at the time of research;
The questionnaire is written in English and includes 9 questions. The total sample size was N=10 respondents, including 7 men and 3 women.
4.2.1. Limitations
There are admittedly some limitations to the research and analysis, namely the small sample size. The second limitation that can be taken into account is bias. To the greatest extent, the study concerned the illegal activities of realtors. Since only realtors took part in the study, their opinion probably reflects negative bias for the study.
Also, one of the limitations of the study can be called language proficiency. Despite the fact that realtors were fluent in English, the possibilities of expressing their thoughts in a foreign language are limited. The study was also limited by demographic factors, since it is involved realtors who live and work in cities with population more than one million.
4.2.2. Recommendations
The first recommendation for further qualitative research is to expand the sample of respondents, which will not be limited by any demographic factors. First of all, it will help to gain new knowledge on the research question and to confirm or oppose the statements of this study. Also, for a more detailed study, the opinion of other stakeholders is needed. Since the profession of realtors is directly related to clients, it is necessary to describe their perspective.
An alternative future research could be comparative research that contrasts the methods to build trust and increase popularity used by realtors and real estate agents with client expectations.
