Since Russian residential developer Samolet Group listed on the Moscow Exchange (MOEX) in October last year with a valuation of $721mn a lot has happened. Surprisingly most of it has been good.

The first thing is that despite the coronacrisis, business has been booming. Real estate is one of the sectors that has actually done well out of the crisis and the company’s market capitalisation has gone up by 60% since then, making it a billion dollar company.  

That is partly because the company has put in such strong results. Samolet reported sales up by 46% in the fourth quarter and topped RUB59.7bn ($0.8bn) for 2020 overall as the housing market expanded by 22% year on year in 2020 largely thanks to a government subsidised mortgage programme that brought borrowing rates down to 6.5% as a way of supporting the economy in general and the banking system in particular.

Samolet’s share price has soared by 60% since October as a result, only slightly worse than market darling and sector leader PIK, which was the first of the real estate developers to see its share bounce back after the market-wide sell-off in the spring.

“Other companies started to bring out good results for last year and investors realised the sector is growing, so our share price took off,” Andrey Pakhomenkov, Samolet’s CFO, told bne IntelliNews in an exclusive interview.

bne IntelliNews profiled Samolet ahead of its IPO and the business has been booming. Pakhomenkov says the company earned its best profits ever in 2020 and the company announced equally strong first-quarter results this week.

“It was a strange but amazing year,” says Pakhomenkov. “But we received the best results in our history. People stayed home and ended up wanting more space so that increased demand and the sales went up”

Specialising in Moscow City and the Moscow region, Samolet saw sales up 30%, revenue up by 18% and EBITDA up 51%, in 2020, says Pakhomenkov.

Last week the company also published the valuation of its land bank, which as of December 31, 2020 had reached RUB260.5bn ($3.4bn), up by almost half (47%) versus June 2020, with a land bank of 20mn square metres – the biggest of all the developers – up by just under a third half on half.

“The company offers the most aggressive development profile (for the short term) of the companies under our coverage, while having the country’s largest land bank and enjoying sector tailwinds,” VTB Capital (VTBC) said in a note last week. As Russia comes out of recession the real estate sector is hotting up again.  

Mortgage dynamics

Over the last two years the real estate business has had a boost from the Central Bank of Russia (CBR) string of rate cuts that brought the overnight rate down to a post-Soviet low of 4.25% in March – on a par with a “normal” country for the first time since the 1991 collapse of the USSR.

Analysts say as a rule of thumb each 25bp rate cut makes a mortgage affordable for millions more Russians and so the subsidy programme has increased the demand for new builds dramatically.

However, CBR governor Elvira Nabiullina surprised the market with a 25bp prophylactic rate hike at the March meeting and made it clear the easing cycle is over for the time being. That may slow the growth in sales down somewhat, but Pakhomenkov says that mortgage rates will not rise by as much as the CBR hikes for the time being.

“In 2018 the CBR rate was 7.5% and the mortgage rate was 9.6% – a 2% difference and there were no subsidies then,” says Pakhomenkov. “By May last year the CBR rate had dropped to 4.25% but the average mortgage rate had fallen to 5.9% – so less than a 2% spread as the business gets more competitive. What will come next? The CBR interest rates rising by 50 or 75bp? I don't know, the mortgage rates are not likely to rise as fast.”  

Crisis mild impact on real estate development

The crisis has boosted profits but it also reduced the amount of new space that Samolet and other developers were building. Three years ago the sector added 10.239mn sqm of new apartments, but that has fallen every year since and only 6.832mn sqm were built in 2020. The falling volumes of new supply have helped keep prices up and maintained profits.

At the same time, the sector has been through a major consolidation as the rules were changed to protect homebuyers. Many developers used to pre-sell apartments before construction had even begun and use the money raised from sales to pay for the cost of construction. Inevitably a few scammers would sell apartments and disappear with the cash without building anything. More unfortunately, some genuine developers went bust during construction and the buyers lost their money.

To prevent these problems the government introduced a new system in 2019 where homebuyers can still buy apartments at reduced prices before they are built but the money is held in an escrow account and is not released to the developer until the project is finished. That means the developer has to raise hundreds of millions of dollars of financing before it can start and that kind of deal is only available to the very largest developers.

“Since the escrow system was introduced about 300 developers have left the market,” says Pakhomenkov. “There has been a big consolidation so that the top ten players now account for about half the market in MMA.”

Banks love the real estate business, as it is bringing them a lot of new and profitable business in otherwise difficult times. They are issuing more mortgages to the population and offer them the escrow services as well as cutting multi-million dollar financing deals with the developer to get the project done. The increasing demand and volumes have been driving down the developers’ cost of borrowing.

“In 2019 the cost of borrowing was about 4% but that changed in 2020 and today you can borrow at around 2.6%, partly due to the CBR rate cuts and party due to the increased number of banks that want this work,” says Pakhomenkov, who added that previously only a few banking giants were prepared to take on the financing deals, but now the company can pick and choose who it wants to work with.

Fixed prices

Costs are important, as Samolet’s competitive advantage is that it offers some of the lowest prices on the market. As incomes have been squeezed in the last year yet again but the subsidised mortgage programme makes financing a new home possible, price has become more important than ever, pushing more customers from competitors to Samolet.

“We are keeping the prices at the level of December 2020 in our business model forecast. Keeping them constant is important to us and customers as a result come to us, as we are affordable in the MMA area. So even during the downturn, the downturn itself brings us more demand. It's a natural hedge,” says Pakhomenkov. “Our average price for the MMA area tend to stay lower in the market and growth will come from growing the volume of projects we develop.”

And there is plenty of work left to do. Moscow has an average 20 sqm per person, while the national average is a slightly bigger 24 sqm.

“If you think about it, there are 20mn people living in the Moscow region, so if you are just going to increase their space to the national average you will need to build an additional 80mn sqm, but currently only about 7mn sqm were added in 2020. We can work for ten years just to bring Moscow in line with the rest of the country,” says Pakhomenkov.

There are several decades more of work after that if Russia is to catch up with the rest of Europe. Londoners have an average of 34 sqm, the Germans 37 and Americans 60.

Future funding

Russia’s economy is forecast to grow by 3.1% this year and real incomes should finally start to rise again after over six years of stagnation as stimulus and national project spending gets underway. That will improve the conditions for real estate developers who can go back to increasing the volume of new builds. But that will require even more financing and Pakhomenkov says Samolet is already thinking about a SPO, even though it floated the company only six months ago.

The company is also working on improving its appeal by introducing an environmental, social and governance (ESG) strategy and has recently hired Russian tech entrepreneur Oscar Hartmann, the founder of e-commerce site KupiVIP, to advice on innovation, who Pakhomenkov says has already given the management some new ideas.

“An SPO is something we are considering in prospect of 1,5-2 years,” says Pakhomenkov. “Our results have been very strong and we are expecting to see EBITDA up 2 times this year (to RUB23bn) and 2 times next year (to RUB49bn). Bankers tell us we are growing at the rate of an IT company! But we have to prove this rate of growth to the investors first before they invest.”   

 

Samolet 2020 IFRS highlights

RUB mn	2019	2020	Chng, YoY	2020F, VTBC	Diff
Revenues	51,145	60,100	18%	54,470	10%
Chng, Y/Y	32%	18%		7%
Gross profit	9,859	15,200	54%	13,482	13%
Gross margin	19%	25%		25%
Adjusted EBITDA	7,521	11,300	51%	10,081	12%
Adjusted EBITDA margin	15%	19%		19%

Source: Company data, VTB Capital Research

Samolet 1Q21 IFRS highlights 

RUB mn	1Q20	1Q21	Chng, Yoy
Revenues	14,191	19,300	36%
Chng, Y/Y		36%
Gross profit	3,552	6,500	83%
Gross margin	25%	34%
Adjusted EBITDA	1,822	4,500	2.5x
Adjusted EBITDA margin	13%	23%

Source: Company data, VTB Capital Research

Samolet 1Q21 trading update

RUB mn	1Q20	2Q20	3Q20	4Q20	1Q21
Residential sales, 000 sqm	127	101	124	138	126
Residential sales, RUB mn	13,835	11,397	15,854	18,549	18,400
Average price, RUB / sqm	110,000	113,254	128,128	134,375	148,000
Share of mortgages, as % of sales	69%	71%	71%	73%	70%
Chng, Y/Y
Residential sales, 000 sqm	4%	-7%	5%	8%	-1%
Residential sales, RUB mn	23%	11%	37%	46%	33%
Average price, RUB / sqm	19%	19%	31%	35%	35%

Source: Company data, VTB Capital Research