Ivan Lepikhov, CEO, Vigvam.ru construction firm: “It is now crucial to work in short cycles”

Russia is undergoing a boom of country houses construction (specifically, those made of wooden structures) that began in 2020 because of the pandemic and continued in 2021. The Russian house construction market is therefore facing an acute shortage of timber: Wooden Housing Construction Association reports sawn timber deficit for wooden houses structures, specifically a shortage of 2-2.5 million m³ for rafter systems in the whole low-rise construction sector, which accounts for 30-40% of annual consumption. In the emerging circumstances, it would be interesting to find out how the low-rise wooden houses construction segment generally feels. That is why WhatWood Agency talked to Ivan Lepikhov, CEO at Vigvam.ru – a firm specializing in building timber frame houses in the vicinity of Moscow.

Ivan, thank you for finding the time to answer our questions in such a busy season. Your company is building timber frame houses. What are the key advantages of this construction technology and why did you decide to focus on frame houses construction?

I have been doing business in a completely different area for 20 years: one of my companies manages high-traffic online projects for women. At one point, I built a frame house for myself near Moscow, having studied the pros and cons of different technologies before construction, and I simply fell in love with frame houses. In my opinion, a frame house is currently the most modern, easy-to-build and energy efficient structure making it possible to get a dwelling of maximum comfort at minimum cost. I have often witnessed disputes by proponents of different technologies, and I really like the following argument of frame houses advocates: the frame technology is used for the roof’s rafter structure in almost all private houses, i.e. any house is frame-based, at least at the top.

A frame house has a number of advantages from the business perspective. Until recently, when timber became significantly more expensive, a frame house used to be much cheaper than a stone one. I should, however, make a caveat here: building a frame house by the proper technology, not just going through the motions, has always had a substantial cost.

Another advantage is: no house can compare to a frame house by construction speed: you can sign handover statements with the client 3 – 4 months after signing the contract. Now, when construction materials are growing more expensive literally by the day, this kind of turnover is extremely important.

Haven’t you faced the problem of losing professional workers and construction crews at the moment?

No, we haven’t, but we have to pay more to both crews and professionals involved. Some people charge dozens of thousands of rubles for a few hours of their work with a weird justification: “Air conditioning fitters charge their clients 15,000 rubles for a few hours – why should we charge less?” Unfortunately, such inadequate demands are numerous: many people from the construction sector have felt that they can strong-arm their clients if the demand for their services is high. I don’t think this is the most advantageous position. Sooner or later, the demand will be satisfied and what are such money-grubbers going to do?

Where do you usually purchase dried sawn timber? Are you facing any problems with these purchases?

I cannot say there is a shortage; at least we don’t see it. We have some tried and tested vendors that can supply really high-quality planks promptly and in the required quantity, but the prices leave much to be desired. The price of 20,000 per m³ seemed exorbitant not so long ago; now edged board costs much more.

How much does 1 m² of a house built by your technology cost?

We would like to sell frame houses at the price upwards of 100,000 rubles per m²; this would make it possible to use the best materials and design in all subtle aspects of comfortable accommodation. Unfortunately, we rarely encounter customers who can afford such high-quality and pricey houses. A mass-manufactured house with utilities and fine finish can cost 40,000 – 50,000 rubles per m². Discussing the price of a square meter tends to be rather abstract. Calculations must refer to a specific house made of specific materials in a specific configuration and at a certain point in time.

Are you planning to develop the real estate development business, i.e. build your houses on purchased land and then sell them to your clients as a ready-made solution: a land plot plus a house?

This is a very fashionable trend nowadays. My partners have been doing this for a long time and are very satisfied, since the return on investment in this business is 70-80% in under a year. To my mind, you need high turnover to make good money: unless we are developing whole villages, we have to find numerous liquid land plots that meet certain requirements and build numerous houses, which requires significant funds, and it is preferable to build same-type houses by a limited number of designs. There are many challenges here, from the fact that selling ready-made houses is a different business, after all, compared to selling construction services, and to the fact that good land in the immediate vicinity of Moscow has either been already sold over the past year and a half, or costs exorbitant money. I think the game is worth the candle; I will definitely try this business in the nearest future.

What technology is the key competitor to frame houses construction?

I think it’s autoclaved aerated concrete blocks. This construction technology wins many people over with a low price, and marketing has created an impression that it means both very warm walls and a stone house and, most importantly, that such a house is inexpensive. I personally do not agree with these statements but I don’t want to stop at that. Discussing “which house is better” most often turns into a religious argument.

How do you convince a future customer to use the frame technology, not autoclaved aerated concrete blocks or brick?

“Do you want to move into a great house for a reasonable price by winter? Then a frame house is your best choice.” Discussing the technology stops immediately after this argument.

According to Wooden Housing Construction Association, demand for wooden houses construction in Russia grew by 2.5 times based on Q1 2021 indicators, compared to the same period of the previous year. How is your company doing in terms of order volumes? Do you feel the consumer demand is still high at the moment?

I would call the current demand roaring, not just high. We have adequate marketing budgets and advertise our services online – this yields numerous requests from clients. On the other hand, we have discovered that this demand doesn’t always mean the ability to pay. It appears that people are unprepared for the rising costs of construction, which is currently a fact of life. We have to reduce the area and simplify the configuration, and also replace expensive materials with cheaper ones wherever possible to fit house construction into the client’s budget. Customers do not expect the prices that we currently have to charge them. Moreover, clients are now frequently asking for a thermal envelope – this is a feature that enables turning on heating in the house to suspend construction for a long time. So, customers are ready to build right now, spending all their available money in anticipation of future price growth, and hoping to lay by enough for the finishing in the future. Credit products certainly enjoy a very high demand now, but unfortunately this involves numerous challenges, too.

What can you say about the Fachwerk (timber framing) technology as something similar to frame house construction? This segment is now intensely marketed in Russia.

Fachwerk promoted in Russia is a debatable issue. There are indeed some well-known market players that promote this technology by appealing to the following fact: Fachwerk used to be expensive but now affordable house kits are available that enable quick and low-cost construction. Nevertheless, as far as I know, these house kits are far from cheap, while the quality is not great, to put it mildly: The Internet is full of negative reviews. I believe it’s more about marketing than technology and the Fachwerk technology is essentially discredited now. There are no miracles, you cannot build a high-quality house at a disproportionately low cost. A Fachwerk house made by the proper technology cannot be a cheap and widely available product.

House frames are mostly built of dried sawn timber; why do you think the prices for it have surged so rapidly over the past half-year?

It’s hardly surprising if the price for 1 m³ of planks in the US exceeded $700 during the pandemic year. The prices almost quadrupled. According to my understanding, the US is currently experiencing a boom of low-rise construction, since many people used to have private houses even before and literally everyone wants an isolated dwelling now because of the pandemic. The prices in Europe are understandably following the American price. The emerging timber shortage and growing prices in the global markets obviously provoked price growth in Russia, too. It was exacerbated by ruble devaluation – the rate dropped by 20% in 2020. Fewer and fewer people here can afford to own a house because of these rising prices. Even a small country house is becoming a luxury now. And we should also remember that prices for metal, along with other construction materials, have also increased significantly.

Another important aspect is the increasing timber output around the world; the prices are already lowering and will probably return to the pre-pandemic level but I cannot remember anything ever growing cheaper in our country. I think such prices are here to stay and we need to get used to living and working in these new conditions.

Does this price growth with a high demand have a favorable impact on the business? Or were negative consequences more numerous?

Oh no, there is nothing favorable about that. We are striving to build comfortable houses for our clients and this is becoming more and more complicated in such a crisis.

Then why is the demand for building individual residential houses still so huge if, as you are saying, “fewer and fewer people can afford to own a house”?

The demand is primarily caused by the pandemic and lockdowns: some people are afraid to live in a city because they are scared of getting infected, others don’t want to find themselves banned from going outside again. If you watch the news and focus on the narrative of the Moscow authorities, it becomes clear that a lockdown like the one in 2020 may repeat at any time – especially after the elections in the fall. People believe they can afford a house but they are often wrong. Some customers are asking us to build a 10×10 turnkey house for 1 million rubles.  We are trying to explain that this is impossible with the current prices. But people don’t always believe that, particularly when our colleagues from the development business promise, for advertising purposes, to build a turnkey house for the price of 20,000 rubles per m². Fraud is the only word for it; such a price wasn’t exactly realistic even a couple of years ago. Hence customers’ frustrated expectations that I am talking about.

By the way, if a person has only a million or a million and a half, we weren’t able to offer them anything until quite recently but not we have developed some projects that make it possible to fit a high-quality 6×6 house in this small budget – and with a configuration enabling you to live in this house immediately upon completion of construction. We hope to bring this product to the market in the nearest future and I think the demand is going to be very high. It should be noted that this will be a really high-quality house complying with all the rules, and the key problem of selling such houses on a mass scale will be persuading customers in their quality.

Prices for construction materials are currently unpredictable; doesn’t that make you afraid of taking orders for the future? Will you be able to fulfill all your obligations to your clients?  

As I’ve said, it is now crucial to work in short cycles. No one knows what is going to cost how much in 2 months or, say, half a year, so we should build as quickly as possible. This is achievable with frame houses; and of course, construction should be broken down into short stages. For instance, we try not to sign any contracts for finishing now. Firstly, clients frequently don’t have the money; secondly, you can really get yourself into trouble because of the current price fluctuations. That is why we are trying to purchase everything as early as possible but this is challenging for us a small company – it means warehouses, material storage, logistics; the problems are numerous.

So, when you sign a contract with a client, the price for the whole facility is fixed? Do you assume such risks?

Of course, we freeze the price for what we are building in the nearest future. This is a significant work scope; the customer simply wouldn’t sign the contract otherwise. But, on the other hand, we initially sign only a contract for the thermal envelope and exterior finish to build, essentially, this “shell and core” in a very short time period of several months. This is not challenging. Discussing the interior finish with the customer, however, is simply dangerous from the business perspective. Who knows by how much, say, the plywood price will grow? Our clients generally understand this situation and, as far as I know, we are not the first company sharing these problems with them.

What government support measures could have a positive impact on the Russian business of private individual wooden houses construction?

It is still a mystery to me why the government hasn’t intervened in the unfolding situation at the very beginning of the crisis, when it became clear that prices would be growing wildly. It seems that the whole country is eventually going to suffer the blowback of what has happened in the construction market. It wouldn’t take much – merely introducing safeguard duties on sawn timber. On the other hand, the President of Russia had given an instruction to ban export of some types of roundwood but I am not exactly sure what impact it eventually had on the harvesting volume and the timber price. I think we will be able to analyze these numbers a little later.  Unfortunately, it often happens in our country that “we wanted the best, you know the rest”. As for governmental support – not sure: over many years of doing business I grew accustomed to counting only on myself and my colleagues. The most important thing the government can do is to stop the growing prices, enabling construction companies to work in a more or less stable manner.

Have you considered innovative technologies of wooden houses construction for your product portfolio – like building houses from CLT or MHM panels?

Innovative technologies are great but I consider myself somewhat of a conservative in business: to my mind, pioneers always have it harder. Application of innovations not yet implemented on a mass scale involves great expenses and challenges in sales, so eventually they are not profitable for a small business. I must admit that I am currently worried about specific and very real problems of house construction – and let other people, pioneers of this housing construction, take care of implementing innovations. Frankly speaking, I do not know how to persuade clients to build houses of strange panels and why we need these exotic features. And besides, speaking of CLT, for example, I am skeptical about such materials. If these panels are glued in Europe, the price in euro will be exorbitant. If they are made locally, the question is: what about environmental features, what kind of glue do our innovators use? Maybe they have a great product, but I will never be able to explain to customers that this is safe and should be used to build a house where this person is going to eat and sleep.

What potential do you think frame houses have in Russia?

If clear regulations and requirements to house construction and utilities are developed in our country, this will become another advantage and frame houses will enjoy a particularly high demand exactly because the very technology of their construction makes it possible to follow the regulations precisely. Utilities need to be planned at the design stage, and frame houses give you creative opportunities thanks to hollow walls. It is not surprising that almost all houses in fully regulated countries like the US and Canada are frame houses.  Another important feature is, people are now striving to build contemporary, non-standard houses; a frame house makes it possible to create very original shapes that are simply impossible in case of using other technologies. That is why in the glorious future, when residential design will be particularly important to people here, frame houses will be in high demand as embodiments of artistic ideas. And as for the present, the price is an important advantage; I still believe that things will go back to normal and we will be able to declare, as we used to, that building a frame house is significantly cheaper than a house by another technology. Today, unfortunately, this is one of the most important factors of choosing the house construction technology for our fellow citizens.