“We offer pragmatic class housing and build towns and residential areas in and around Moscow and St Petersburg, not individual buildings. We have an asset-light model and a healthy balance sheet where we can fund the development from our cashflow,” says Stanislav Shekshnya, chairman of the board of directors of Samolet since June 2018.
Russia’s residential real estate market is recovering as the economy emerges from several years of crisis. Incomes have been stagnant for six years, but everyone has a job and the demand for housing is enough for developers to build a second Moscow to meet it. And even though salaries are not going up, interest rates are going down making new housing affordable for more Muscovites each year.
There are four big players in the residential development business, but one of the things that marks Samolet out from its peers is that it doesn’t purchase land plots but partners with landowners in development projects. Together with these partners the company already has a land bank of more than 10mn square meters – one of the biggest in Russia. (PIK has 10.9msqm, LSR 7.8msqm, and Etalon 4msqm). It is also the only one of the big four that is not listed.
“We have good relations with many people and organisations who have land banks and we are constantly looking for new partners who have land they want to develop,” Shekshnya told bne IntelliNews in an exclusive interview, emphasising that building up long-term relations with the company’s partners is the backbone of the business model.
Many of these partners are large Russian firms with access to land but for whom development is not a core business. The land is acquired as part of an acquisition into a business and the owner turns to Samolet to make some more money out of it by developing the land. In other cases the land was used to collateralise a debt that went bad and was acquired by a business that is not in the real estate business.
While the land acquisition, design, permissions, project management through to the eventual marketing and sales are all done in-house, the actual construction of the buildings is outsourced to professional construction companies.
In this way Samolet has built up a sizable business in the most lucrative Moscow metropolitan area that is second only to that of the market leader PIK, but the company is growing much faster, says Shekshnya. Today Samolet has delivered more than 1.5msqm of apartments and is the second biggest developer in the Moscow region. While the leading publicly-traded residential developers PIK, Etalon and LSR Group are growing in single digits, Samolet saw its revenues grow by 38% year-on-year in 2018. Now the company is moving up a gear and targeting projects that have more than $1bn of sales volumes from a portfolio that is already worth RUB107bn ($1.6bn).
“And we can maintain that rate of growth for another five years,” says Shekshnya, who adds that while the market is not booming, it is already “healthy” and there is plenty of work in just Moscow and St Petersburg – the two largest cities in Europe – so he has no plans yet to move into the regional market or go to one of Russia’s near-neighbours.
Middle class expanding
“We are focusing on building affordable housing on the open market to offer to new stratifications of the Russian population. With the falling interest rates people can finally afford mortgages and that is opening up new opportunities,” says Shekshnya.
Mortgages have been around since about 2013, but they really took off from around 2008 and now they account for the largest share of financing purchases for would-be homeowners.
Samolet targets Russians who earn between RUB90,000 and RUB120,000 a month ($1,387 and $1,850) as they can afford to service the mortgage payments. But price remains an important factor for this group, says Shekshnya, and a change in rates of as little 0.4% can swing the buy/don't buy decision.
Mortgages have been falling steadily in recent years with the Central Bank of Russia (CBR) cutting rates following the emergency rate hike to 17% at the end of 2014. Last year the government was subsidising mortgage rates over 12% to broaden the pool of purchasers but the subsidies stopped earlier this year after the average mortgage rate fell below 10% for the first time. The CBR has cut rates three times this year, most recently in September by 25bp bringing the monetary policy rate to 7%,, and the average mortgage has followed it down: at the start of October some banks were offering mortgages for a record low 8.5% if customers did things like open a bank account and took out insurance on the loan. And with inflation falling back to the CBR target rate of 4% in September analysts speculate there may be one more rate cut this year, but even if there is no cut in October there will almost certainly be more cuts next year.
“Each 1% fall in interest rates lowers the salary threshold where people can afford a mortgage by about RUB10,000. So if rates are cut again by 1% we can sell apartments to people that are earning RUB80,000 a month,” says Shekshnya, adding that each one percent cut adds at least 100,000 new customers or more to the potential customer base in Russia’s twin capitals and several million new customers for developers nationwide.
Funding from revenues
The big change in the real estate business this year is that the government has banned pre-selling apartments as of July 1 and now pre-payments for unfinished projects have to be kept in escrow accounts until the construction is complete. That has made life more difficult for developers who now have to organise financing to complete projects.
“The change caused some anxiety as we didn't really know what was going to happen,” says Shekshnya. “But at the end of the day it didn't have a negative impact on sales.
Samolet can fund its new developments from the cashflow of previous ones. Shekshnya says they have different sized projects that mature at different rates, all of which contributes to a strong cashflow. Most of the financing for new projects is paid for out of retained earnings, but the company has also issued bonds on the domestic market and can tap local banks for credits. However, about 70% of the funding for developing a new project comes from retained earnings and the rest from debt.
ESG's growing importance
Like many of its peers Samolet follows best business practises and in an increasingly popular trend is hiring professional managers and adopting an environmental, social and governance (ESG) strategy.
Shekshnya himself is a professional manager and not an oligarch. He has previously served as chairman of some of the largest Russian companies, including coal miner SUEK and telecoms giant VEON. Big companies are increasingly turning to the growing number of professional managers that are building up Russia’s businesses to international standards.
Samolet has already put the corporate governance in place in the form of several independent directors on the board and things like remuneration committees and IFRS accounts to ensure transparency.
“Corporate governance has become a business tool,” says Shekshnya. “You do it not only to protect yourself from malfeasance, but also because it is simply good business practice that makes the company easier to run.”
The social part is also taken care of by Samolet’s business model.
“We build complete villages which includes things like schools, hospitals and fire stations,” says Shekshnya. “You could say this adds to the costs, but it also adds to the value of the properties. We target the middle class and they have kids. They are not going to buy a place if there is no school or healthcare nearby, but will pay more if these things are easily available. The social objects made the property more valuable.”
The social aspect of Samolet’s developments is also part of the business model, as the relation with the client doesn't end with the sale of an apartment. The company also provides the financial services to pay for the apartment and then continues to service the village or town, providing the school, cafes, restaurants, health club, cleaning and maintenance, stores and transport for the village – in short the panoply of services that come with a town.
The environment is also covered in the sense that shoddy Soviet-era housing accounts for 10% of Russia’s entire CO2 emissions. The modern buildings that Samolet and its peers are putting up are a lot more energy and emissions efficient and as bne IntelliNews recently reported in “The cost of carbon in Russia" the new developments have already cut the building related emissions by more than half since the 1970s.
“We have made substantial progress in ESG in the last two years, but there is still more to do. We need to add the planet to our plans and profits. We are well aware of the need and expect we will make more progress in the next two years,” says Shekshnya.
Taking ESG seriously has suddenly become a major issue in Russia as international equity investors have started shunning stocks that ignore sustainability as part of their business model. Some leading Russian blue chips lost a third of their investors last year, as a result of low ESG scores.
Three of Samolet’s largest peers are publicly traded companies and PIK in particular has proven to be popular with portfolio investors. Samolet will very likely list as well at some point.
“We are already IPO ready,” says Shekshnya. “It’s an important financial institution, but we don't need the money at the moment to fund our growth as we have significant cashflow and we can borrow. An IPO can add to our capital but it is also important that we do things in stages that benefit the development of the company.”