Page 10 - bne_May 2021_20210601

10 I Companies & Markets bne June 2021
Debating the programme
The mortgage lending programme is a large-scale subsidised primary market lending programme introduced in late April 2020: the current cumulative origination stands at RUB1.1 trillion ($14.8bn) versus total mortgage lending of RUB4.2 trillion ($56.7bn). This is about 1% of annual GDP and about a quarter of all mortgage lending during this period.
The first programme had the following conditions:
• borrowing rate of 6.5% or less;
• only primary market borrowing is eligible, i.e. new housing;
• max borrowed amount of RUB8mn and RUB3mn for Moscow
and St Petersburg versus other regions respectively;
• minimum down payment of 20%;
• total lending cap under programme at RUB740bn;
• the lender keeps full credit risk and is reimbursed monthly an
amount equal to Central Bank of Russia's [key rate + 3pp max
(6.5%, lending rate)] on the residual size of the loan;
• expiry date set at 1 November, 2020.
However, in November the programme was extended with the following changes:
• max borrowed amount increased to RUB12mn/RUB6mn for Moscow and St Petersburg/other regions;
• min down payment reduced to 15%;
• total lending cap lifted to RUB1.8 trillion;
• expiry date pushed to 1 July 2021.
The programme is due to expire in the summer but analyst say it may be extended, although they are expecting more adjustments to the conditions such as the possible exclusion of regions with the largest price rises.
VTBC says the current debate is mostly shaped by an attempt to reconcile three visions for the programme:
• A 'growth focused' vision of the programme assumes that it has been effective in supporting housing demand and suggests that it thus needs to be extended – preferably committing public support for another 34 years.
• A 'price stability focused' vision of the programme assumes that it has been key to the spike in real estate prices, and thus ultimately reduced affordability, so if housing inflation were to be allowed to run unchecked it could ultimately result in new financial vulnerabilities. Therefore, this argument goes, the programme must be either abandoned or constrained to a regional instrument.
• A 'public finance focused' vision of the programme is concerned with its efficiency, i.e. how much marginal demand the programme delivered per unit of funding and with accumulating floating rate liabilities at uncertain future cost for the tax payer.
What next?
The end of the CBR’s easing cycle will already put a brake on residential real estate growth. Interest rates are not expected
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to rise dramatically but the overnight rate has already been raised from 4.25% at the start of this year to 5% after the CBR hiked in March (25bp) and April (50bp). CBR Governor Elvira Nabiullina kept the door open to more hikes later this year and analysts say another 50bp could be added to the prime rates.
Samolet told bne IntelliNews in a recent interview that it will not increase prices and that banks offering loans won’t raise rates as fast as the central bank to maintain their market share in what has become an ultra-competitive segment.
In the first quarter the area under construction of residential real estate contracted by 13% y/y to 100mn sqm, the sixth consecutive quarter of contraction in Russia, as smaller and medium-sized players were unable to adjust their operations to the new escrow legislation requirements introduced last year after financing construction using pre-sales was banned. The smaller companies lack access to large-scale funding and are being pushed out of the market.
“Thus the sector consolidation continues, with the share of the ten largest companies increasing 1.5pp y/y to 19%. The implementation of escrow accounts is picking up, and 57% of the total portfolio (+27pp over the last 12 months) is being realised under this scheme as of March 2021, Dom.RF figures indicate,” VTBC reports. “According to the United Registry of Homebuilders, 1,978 homebuilders in Russia have portfolios of less than 100k sqm and account for 40% of the area under construction, which could trigger a further narrowing of the sector,” VTBC adds.
In the first quarter residential completions increased 15% y/y to 17.8mn sqm, reflecting a pick-up in the construction pipeline in the second half of this year.
The total amount of construction permits issued during the quarter reached 871 (+15% y/y) for a capacity of 7.2mn sqm vs. 4.7mn sqm as of the first quarter, as the overall project size has increased.
“The second quarter of this year will have a low comparison base, as last year construction sites were frozen from early April to mid-May in a number of regions, including the core Moscow Metropolitan Area,” VTBC reports. “It represented 30% of country completions in 1Q21 and 50-100% of sales for listed developers, while its higher prices (a more than twofold premium to Russia) brought favourable construction economics to local operators.”
The government estimates that completions will correct 5% y/y to 78mn sqm in 2021, according to Deputy Prime Minister Marat Khusnullin. The long-term target of 120mn sqm annual completions by 2030, a goal that is part of the 12 national projects, remains intact, implying a 2020-30 compound average growth rate (CAGR) of 4% versus the 3% observed over the last ten years.