Supported by momentum, contained by fundamentals
We find that there are generally three main aspects of the Russian residential real estate market that investors find attractive: 1) the local market is perceived to be structurally undersupplied; 2) the quality of housing stock is poor; and 3) the housing market offers alternative exposure to fast-growing domestic consumption. We have critically tested these three factors and conclude that while the near-term prospects of the market look solid, given existing supply limitations, long-term demand fundamentals are less appealing. The bottom-up screening singles out PIK (Buy) and Etalon (Buy), which offer growth optionality, and market footprint, supported by attractive valuation.
Housing market: strong near-term momentum, less constructive LT outlook
In this report, we look at Russian housing market fundamentals and assess key consensus beliefs. In particular, we investigate the perception that the market is structurally under-supplied, which, arguably, underpins the Street's bullish long-term view on the sector. We break down housing demand to identify possible sector drivers: our findings suggest that these include relatively low mortgage penetration (set to double by 2018E in DB forecasts), and expected disposable income growth. These positive developments could be outweighed by negative demographic trends, which in a low-case scenario could bring housing demand growth rates in Russia down to an average of 2.3% in 2013E-2015E (vs. our real GDP growth rate forecast of 3.6%). Our base case forecast is a 3.7% demand CAGR 2013E-2015E, premised on an average fixed assets investment growth estimate of 6.0% (same period). On the supply side, we find that the market is not as under-supplied as perceived and recent government initiatives could lead to housing supply easing (not good for prices).
Eoin Treacy's view
My view – The vast majority of interest in Russia
focuses on the country's vast commodity wealth but this is to ignore the increasingly
vibrant consumer culture that has emerged in the last decades. However, compared
to the commodity sector, consumer related shares represent a negligible weighting
in the overall market.
Russian property related investment vehicles plummeted in 2008 as the Ruble collapsed and the credit crisis sapped the market of speculative interest. Since then a base formation has been evident. PIK Group rebounded impressively from the 2009 low and has been ranging mostly above $2 since 2011. It most recently found support in that region in June and continues to extend is rally. A clear downward dynamic would be required to check current scope for some additional upside.
Etalon Group has been ranging with a downward bias, below $7, since its IPO and has halved since September. It has at least paused above $3 but a break in the progression of lower rally highs would be required to check the overall downward bias.
The Russian supermarket sector is also worthy of mention with Magnit also listed on London's International Exchange. The share has paused below $60 since May in what has so far been a relatively similar-sized range; allowing a steady reversion towards the mean. A sustained move below the 200-day MA would be required to begin to question medium-term uptrend consistency.