Page 97 - RusRPTDec19

see the sector undergoing a sizable consolidation in the medium term (there are currently 3,100 homebuilders in Russia), with the leading developers becoming the prime beneficiaries and gaining market share.
Deputy Prime Minister Vitaly Mutko has offered to revise the housing completion targets for 2019-21 under the National Project by 14- 23%, keeping a flattish performance to the 75.7mn sqm delivered last year. Our View: For 2019, the Ministry of Construction forecasts a 6% YoY increase in completions to 80mn sqm, seeing support from a pick-up in residential sales in 2017- 18. As the demand was strongly up-front-loaded and the market is currently cooling, medium-term completions could well see headwinds. State officials have also highlighted the uptick in mortgage rates in 9mo19 to 10.2% (compared with the 8.9% assumed in the National Project for the year). The key uncertainty for completions in the next 4-5 years is the transition to escrow accounts. Medium and small developers have tougher access to capital and project financing, jeopardising their long-term construction pipelines. The sector currently comprises 3,100 developers and we think it is set to see significant consolidation.
State Duma representatives have submitted a draft law to introduce interest for escrow accounts. ​The current framework assumes no interest on escrow accounts, with the funds coming available to developers once building has been completed. If escrow accounts have to pay interest, project financing from banks would become more expensive. In turn, higher development costs might then be passed on to prices. The latter increased 10-12% y/y in October on the primary markets of Moscow and St Petersburg against a backdrop of elevated demand, as there has been concern over supply and prices after the introduction of escrow accounts. Currently, developers are targeting progressive interest rates in escrow project financing, subject to accounts building up at the bank, and a blended rate in the mid-single digit territory. As of October, escrow accounts saw a total balance of RUB73.8bn while the project financing book reached RUB640.9bn. Given that household budgets are under pressure, upward movements on prices could eat further into primary residential demand, that has recently been cooling (it declined 5-15% in 3Q19 in the capitals). Higher project finance costs could also make developers more vulnerable to interest payments and dependent on the sustainability of project sales. As a result, sector consolidation could be accelerated while volumes might see downside risks. We anticipate greater details over the draft law and note controversial feedback from industry participants and overall vague implementation prospects.
Construction activity was up +1.0% y/y in October. ​VTBC index construction related output has been expanding at an average pace of +5.4% y/y this year, foreshadowing a pickup in construction activity and a revision to the 2019 construction activity data. The VTBC index is, to a large extent, supported by the production of Portland cement and asphalt. The latter is in line with the current stage of implementation of those national projects related to ​infrastructure​. In particular, road construction is one of the main focuses of the projects, with RUB885bn ($14bn) and RUB665bn ($10bn) assigned for 2019-24 to build highways of federal significance and a network of high-speed roads, respectively. Construction is being undertaken by state-owned company Avtodor, which is to build over 1,700km of roads in the next six years. The recent ​news ​suggests that Avtodor's current main focus is on the Moscow St Petersburg highway (construction is currently underway and is due to be completed in 2020).
97​ RUSSIA Country Report​ December 2019 ​ ​www.intellinews.com