23 July 2020
‘Russian homebuilders. Driven by favourable fundamentals’

Press briefing hosted by Artem Yamschikov, real estate and transport analyst, Renaissance Capital

Key highlights

On the sector’s outlook

We take a positive stance on the residential real estate sector in Russia and expect favourable fundamentals to contribute positively to the financial performance and capitalisation of publicly-traded homebuilders over the next 18 months. We see low interest rates and sector consolidation as key growth drivers.

On long-term growth drivers

We believe that in the long term the Russian residential real estate will be driven by low interest rates (our macro economists expect the Central Bank of Russia’s (CBR) monetary policy to remain expansionary throughout 2021 and see the interest rate at 5.5% at the end of the year) and old housing stock (only 25% built over the past 25 years). Russia still has low penetration levels, with the housing stock per capita in Moscow and St. Petersburg (20-25 sqm per capita) 30-40% below the largest European capitals’ average levels. Given this, the government has strongly prioritised the national programme ‘Housing and the urban environment’, where one of the objectives is to build at least 120mn sqm of housing per year. We see this as an ambitious goal, which can be accomplished only if the government extends its support for the construction industry.

On the post-pandemic recovery

In 1H20, Russian homebuilders commissioned 28mn sqm of housing, down 7% YoY. However, in June the decline was curbed to just 3% YoY – following a more than 20% slump in April and May – which implies ongoing recovery of activity in the sector. On the demand side, sales plunged as well, especially in Moscow, where construction operations were put on hold and lockdown measures were much more rigorous than in other regions. The sector picked up in June, and developers have noted that with higher prices consumers just opt for smaller apartments rather than giving up on the purchase. In addition, the mass-market segment is benefiting from the government’s mortgage subsidies, coupled with the CBR’s ongoing key interest rate easing, which bodes well for lower mortgage rates.

On the mortgage market

The Russian mortgage market has been on the rise over the past decade, but it remains under-penetrated and has room for growth, in our view. The total mortgage portfolio is around 7% of GDP currently, with the potential to reach 20% plus over the long term, on our estimates. Certainly, we think additional momentum should be expected from the government’s support, which reportedly can be extended and expanded.

On sector consolidation and tightening regulation

The Russian residential real estate market remains fragmented (2,000+ homebuilders in Russia and c. 90 in Moscow), but signs of consolidation are already evident. Since the beginning of the year, the number of market players has dropped by 10%. Fewer market players imply less competition for land plots and construction projects. Sector consolidation will be further driven by tighter regulation, in our view, with the introduction of escrow accounts as smaller and weaker players will be unable to attract proper project financing from the banks. Homebuilders will be seeking to maximise pre-sales and to accumulate as many funds as possible in their escrow accounts in order to minimise the interest rates in the first stages of their projects. This should also lead to more rational planning of construction activities and commissioning by the largest players, with a price-over-volume strategy being in developers’ minds defining the current market trends.

On how this crisis is different from previous ones

Unlike previous economic meltdowns, this crisis was triggered by the external force of the pandemic rather than issues within the financial system. Some industries, such as telecoms and technology, have gained an additional boost while others have experienced a more serious impact (eg, air travel and tourism). Real estate has had its challenges and saw troughs in April and May; however, the declines gave way to recovery pretty soon. On the positive side is the rational competitive environment, where developers are more focused on margins rather than absolute volumes of construction and commissioning. The government has prepared a list of systemically-important construction companies, of which the major players can be described as fairly stable, with sufficient liquidity and working capital for seamless operations.

On government support beneficiaries

Mortgage subsidies from the government should, in the first place, support developers operating in the mass-market segment, which has traditionally been marked by a significant share of mortgage financing. A positive impact is also possible for the business segment, with the amount of subsidised mortgage loans available increasing to RUB12mn in Moscow and St. Petersburg, and the realisation of deferred demand.

On housing as an investment instrument and price corrections

Investments in housing remain relevant against the backdrop of lower deposit interest rates and a 13% income tax on deposits exceeding RUB1mn. With extended government support for mortgage loans for new housing, we think existing demand can in part be channeled from the secondary market to the primary, thereby resulting in lower activity and price corrections in the secondary housing market.