Residential Sector: A Building Block Of Industry Growth

The awarding of a USD788mn residential construction project in Moscow presents an upside risk to our residential/non-residential building forecast for Russia in the short-to-medium term. Although we anticipate a slowdown in Russia's residential and non-residential sector in 2014 as the momentum generated by the preparation for the Sochi games dissipates, we are more positive in the medium term. From 2016 onwards, we anticipate a rise in demand for housing and for the non-residential sector to grow - supported by the development of peripheral areas and the modernisation of existing infrastructure. As such, we are forecasting average annual real growth of 3% year-on-year (y-o-y) in residential/non-residential building industry value from 2016 to 2020.

This multimillion dollar project has been awarded to LSR Group, the Russian real estate and building materials company that entered the stock market in 2007. The contract involves the construction of a 1.57mn square metre (sq m) residential district in a former industrial area in Moscow known as ZiL. The project involves the development of 584,000 sq m of housing, 365,000 sq m of apartments, 167,000 sq m of offices and 98,000 sq m of commercial areas. Completion is scheduled for Q422.

According to our estimates, residential and non-residential buildings account for almost 50% of total construction industry value in Russia. In addition, Aleksandr Vakmistrov, LSR CEO, indicated that this is the largest construction project in Moscow in the last 30 years. In this context, we saw an uptick in LSR Group's stock price when the announcement was made. These types of projects are part of a wider government policy to improve living standards in Russia's main cities as well as modernising existing outdated infrastructure. We highlight that a potential downside risk to this project is declining property prices in Moscow as Russia's macroeconomic picture continues to deteriorate as capital outflows the market. However, by 2022 when this project is expected to be completed, the market may have recovered.

Residential Construction To Contribute To Industry Recovery
Russia Residential/Non-residential Industry Value And Real Growth %

The awarding of a USD788mn residential construction project in Moscow presents an upside risk to our residential/non-residential building forecast for Russia in the short-to-medium term. Although we anticipate a slowdown in Russia's residential and non-residential sector in 2014 as the momentum generated by the preparation for the Sochi games dissipates, we are more positive in the medium term. From 2016 onwards, we anticipate a rise in demand for housing and for the non-residential sector to grow - supported by the development of peripheral areas and the modernisation of existing infrastructure. As such, we are forecasting average annual real growth of 3% year-on-year (y-o-y) in residential/non-residential building industry value from 2016 to 2020.

Residential Construction To Contribute To Industry Recovery
Russia Residential/Non-residential Industry Value And Real Growth %

This multimillion dollar project has been awarded to LSR Group, the Russian real estate and building materials company that entered the stock market in 2007. The contract involves the construction of a 1.57mn square metre (sq m) residential district in a former industrial area in Moscow known as ZiL. The project involves the development of 584,000 sq m of housing, 365,000 sq m of apartments, 167,000 sq m of offices and 98,000 sq m of commercial areas. Completion is scheduled for Q422.

According to our estimates, residential and non-residential buildings account for almost 50% of total construction industry value in Russia. In addition, Aleksandr Vakmistrov, LSR CEO, indicated that this is the largest construction project in Moscow in the last 30 years. In this context, we saw an uptick in LSR Group's stock price when the announcement was made. These types of projects are part of a wider government policy to improve living standards in Russia's main cities as well as modernising existing outdated infrastructure. We highlight that a potential downside risk to this project is declining property prices in Moscow as Russia's macroeconomic picture continues to deteriorate as capital outflows the market. However, by 2022 when this project is expected to be completed, the market may have recovered.

Stock Price Anticipates Housing Market Performance
LSR Group Stock Price And Moscow Property Prices (USD)

Although we believe that this project will provide a significant boost to the residential sector, we note that a number of factors will continue to weigh on industry growth - most pertinent amongst these being Russia's poor business environment, which continues to exhibit high levels of corruption and red tape, constricting foreign investment flows. As such, it does not surprise that the aforementioned project has been awarded to a local company, a trend that we highlight recently with the awarding of a Public-Private Partnership (PPP) for Lena bridge to a Russia-led consortium ( see ' Bridge PPP Evidences Market Challenges And Opportunities', 15 April).

The weaknesses in the Russian market are reflected in our Risk/Reward Ratings (RRRs) where the country ranks fifth out of 16 countries in Central and Eastern Europe (CEE) with an overall score of 57.7 out of 100. Russia scores weakest in terms of corruption, transparency of tendering process and institutions. In addition, the current crisis with Ukraine has reinforced investor's fears of government intervention and policy unpredictability.

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Related sectors of this article: Infrastructure, Construction, Residential Construction, Housing
Geography: Russia
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