Page 105 - RusRPTMar19

working in the sector, which will struggle to raise the financing to complete projects. The government has been considering ways to ease the pain. The main thrust of the new law is pre-payments for apartments must be held in escrow accounts until the building is completed. This week Russia’s Ministry of Construction has proposed exemption criteria from the implementation of escrow schemes from 1 July 2019. Development projects could be implemented under the existing framework if they have been more than 30% completed and more than 10% of the area is pre-sold. Developers that participate in the Moscow renovation program, and those, which are finishing the estates of bankrupt companies, would also be exempt. One of the upshots of the new scheme is it is expected to drive a consolidation in the sector as the smaller companies, unable to finance developments, will sell out to the bigger companies and/or merge with each other. “The development segment is seeing a significant change in its operating economics. From 1 July, companies are no longer going to be able to collect funds from clients. This is to be replaced by escrow accounts and project financing from banks. This change offers sizable downside risks to the volumes and sustainability of developers, so the government is considering exemptions (the final version is likely by 1 May, we think),” Maria Kolbina of VTB Capital (VTBC) said in a note. The thresholds offered by the ministry represent a rather liberal scenario, says Kolbina, and imply a transition to escrow schemes over several years. However, the proposal does not consider projects that have attained construction permits and have registered at least one share participation agreement prior to 1 July 2018 and were eligible for exemptions. If a developer builds the necessary infrastructure for the project (schools, medical centres, roads, etc) the threshold is to be reduced further to 15% of the project completion. Another cut is accessible to backbone enterprises (currently leading developers PIK and LSR Group (LSR) are included in the list) and implies a further reduction to 6% of the project completion level, if the appropriate developer meets the financial stability criteria in accordance with the data from the latest quarterly reporting, as submitted to the regulatory authority, according to VTBC.
Russian real estate sector sales boom in 2018 ahead of new rules, lead by LSR Group’s record sales. Russian real estate developer LSR Group (LSR) is rapidly becoming the investor’s darling in the real estate sector after both the company and the sector reported record high sales in the fourth quarter of 2018.
Russia’s listed homebuilders increased sales on average 25% y/y in 2018, outperforming the impressive market demand with primary volumes up 8% y/y to 755,000 deals, according to VTB Capital (VTBC).
The sales were boosted by punters bringing forward apartment purchases ahead of new rules that come into force this summer that ban pre-sales and record low mortgages rates that are expected to rise this year.
“We see those factors continuing to support the sector in 1H19 but highlight downside risks thereafter as the new residential offer and pricing are dependent on how the escrow schemes are implemented. Large-scale developers are best positioned, in our view, because of their access to capital, large portfolios and wide product offers. They are likely to become the prime beneficiaries of the sector consolidation, we think,” Maria Kolbina of VBTC said in a note.
Almost all the leading companies outperformed their original guidance,
105 RUSSIA Country Report March 2019 www.intellinews.com