investment opportunities of st. petersburg

Investment opportunities of St. Petersburg residential real estate market

September 2013

prepared by SIG

Russian Real Estate

2

Russian residential real estate market Structurally attractive

ü The Russian residential property market is still in its infancy and lags behind the international market in size, scope and sophistication.

ü With per capita living space 40% below the global average and 20% of existing stock in need of a major overhaul/full reconstruction, Russia’s residential property market remains structurally undersupplied. Importantly, new stock is almost exclusively oriented towards internal demand.

ü Despite double-digit growth in 2010-12, the mortgage market accounts for a negligible 2.6% of Russia’s GDP. Given that 90% of Russians own their predominantly low-quality, small-size flats and houses with no mortgage or rental payments attached, the Russian residential market presents a significant trade-up opportunity for underleveraged consumers.

ü According to a report released in late February 2012 (based on IMF, OECD, Eurostat and national statistic bureaus’ data), Russia — with the economy growing at 3.4 percent — ranked first in the G8 and second among BRICS nations, in terms of economic growth rates in 2012.

ü In 2012 transaction volumes in St. Petersburg’s primary market (by sq m sold) increased by 31% YoY. Sales volume reached 195 billion Rub.

ü Average selling prices in St. Petersburg’s primary market constantly growing since late 2010.

ü According to 2012 figures, 690,700 loans were issued for a total amount of RUB 1.29 trillion

(EUR 25.7 billion), which is 1.3 times higher in quantitative terms and 1.4 times higher in money terms than in 2011. In terms of number of loans, this is 341.2 thousand loans reached pre-crisis peak in 2008 (349.5 thousand loans).

Low residential construction levels New residential construction peaked in the late 1980s at around 70 mn sq m. per annum, before falling to a low of around 30mn sq m. in 2000 as the state’s involvement in residential construction reduced significantly. Thereafter construction volumes gradually improved and peaked at 65.2 mn sq m. in 2012, albeit still below levels delivered in the 1980s. Population Russia is the ninth-most populous country in the world, with a population estimated at 143.3 mn at January 2013. The mortgage market Russians carry minimal mortgage debt per capita, estimated at just 2.6 % of GDP in 2012. This compares with 5% of GDP in Turkey, 52% across the EU and 81% in the US. Housing stock per capita The current housing stock is insufficient, with an average housing stock of 22 m2 per capita, far below other more developed countries, while the demand for housing is 1,570 mn sq m., which corresponds to 31-32 m2 of per capita. Quality of housing stock R a p i d g o v e r n m e n t - f u n d e d h o u s i n g construction decreased dramatically after the breakup of the Soviet Union in the early 1990s. As a result, the existing Russian residential housing stock includes a substantial amount of aging or obsolete stock.

Residential completions, (mn sq m)

65

50 43 42 41 39 38 38 35

31 30 25 22

Housing stock per capita (sq m)

average 38

Existing residential stock in Russia

60%

11%

9%

20%

Poorly maintained

Need urgent major overhaul

Need full reconstruction

Other

Mortgage lending as a proportion of GDP, 2010

Source: European Mortgage Federa2on Source: Russian Ministry of Industry and Trade

Source: Rosstat Source: UNECE, Rosstat

3

Russian residential real estate market Snap shot

70,0 65,2

5,2%

5,4%

5,6%

5,8%

6,0%

6,2%

6,4%

6,6%

0

10

20

30

40

50

60

70

80

share of St. Petersburg and Leningrad region (right scale)

81%

52%

11% 5% 2,6%

USA EU-27 Ukraine Turkey Russia

ü Residential real estate market of St. Petersburg is characterized by the lack of supply and high demand.

ü The housing market is fully recovered from the 2008 economic crisis. The volume of supply and demand returned to pre-crisis levels.

ü A significant share of both supply and demand shifted to suburban areas. Suburban areas account for almost a third of the total market.

ü Sales for the 1Q-3Q 2012 practically reached figures FY 2011, exceeding the pre-crisis level.

ü The share of low-rise residential of the total market volume does not exceed 25% in terms of supply and 5% in terms of market sales.

ü The main driver of growth of demand for residential real estate has been and remains mortgage loans.

ü As a result of the research performed at the end of 2010, was identified that a backlog demand for residential real estate in St. Petersburg existed in the amount of 18.1 million sq. m., over half of which is economy class. Before 2016 demand for the residential real estate in St. Petersburg won’t be satisfied, providing the existence of a stable demand outside the forecast period.

ü The degree of consolidation in the industry enables investors to enter the primary housing market and become a middle tier player the next 3-5 years.

ü It is economically feasible to enter the market with high-rise residential projects of 50 thousand sq m. or more.

Saint-Petersburg residential real estate market Snap shot

4

12%

25%

0%

5%

10%

15%

20%

25%

30%

35%

2,0

2,5

3,0

3,5

total supply low-rise residential supply (right scale)

72% 69% 72% 69% 67% 67% 71% 71% 73% 73% 69% 66% 72% 66% 63% 56%

28% 31% 28% 31% 33% 33% 29% 29% 27% 27% 31% 34% 28% 34% 37% 44%

city suburb

2,3 2,4 2,6

3,2

2,6 2,7 2,6 2,6

0,5 0,7 0,8 0,9 1,0 1,0 1,1 1,1

St. Petersburg Leningrad region

80%

70%

76%

81%

77%

60%

65%

70%

75%

80%

85%

2,0

2,5

3,0

3,5

4,0

4,5

5,0

total supply share of economy class (right scale)

Source: Spb realty, analyst research es2mates

Source: Rosstat Source: Spb realty, analyst research es2mates

Annual residential completion, mn sq m Supply, mn sq m

Territorial structure of supply, % Economy class supply, mn sq m


crisis period Q1 2008 – Q1 2010

+16%

crisis period 9 quarters

Saint-Petersburg primary residential real estate market Supply

5

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

200

400

600

800

1 000

1 200

total sles low rise residential share (right scale)


Source: Spb realty, analyst research es2mates Source: Spb realty, analyst research es2mates

Economy class high-rise residential real estate prices, thousand RUB per sq m

Residential real estate prices, thousand RUB per sq m

Primary residential real estate Sales, thousand sq m Territorial structure of sales high-rise residential real estate, %


96%

93% 94%

92%

91% 90%

88%

85%

90% 91%

91%

89% 91%

89% 89% 86% 83% 84%

77% 78% 78% 79%

4% 7% 6% 8% 9% 10% 12% 15% 10% 9% 9% 11% 9%

11% 11% 14% 17% 16%

23% 22% 22% 21%

city suburban areas

Saint-Petersburg primary residential real estate market Prices and sales

peak sales before crises

6

50 55 55

58

66

74 77 75

71 66 65 64 63 63 62 63 65 66

70 72 74 73 75 76

37

45 45 47 51

58

65 62

57 55 54 53 51 53 52 54 55 57 57 57 60

62 63 65

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

city suburban

98 111

121 118 115 108 102 97 94 95 93 92 101 106 108 112 115 120 127 130

197

223 234 218 213 203

191 187 187 195 191 200 204 200 203 211 222 225 227 230

66 74 77 75 71 66 65 64 63 63 62 63 65 66 70 72 74 73 75 76

middle class elite economy class

Major players in terms of revenue in the residential market, 2011 Major players in terms of market size in the residential market, 2 Q 2012 *

*Market size - the total gross area, or the number of apartments in buildings under construction that are on sale, including sold apartments. In the market does not include objects in which sales of apartments have been completed, suspended or have not yet started. Source: analyst research estimates

Saint-Petersburg primary residential real estate market Economy class prices and sales

7

Source: analyst research es2mates

Source: analyst research es2mates Source: analyst research es2mates

Supply forecast, mn sq m Segmentation of households by income per month, thousand RUB

Number of households by income per month, thousand RUB

Sales forecast, mn sq m

Source: analyst research es2mates

Saint-Petersburg primary residential real estate market Valuation of effective demand Supply and sales forecast

8

3,0 3,2

4,2 4,6 4,8 4,8

2,7

3,4

2011 2012 2013F 2014F 2015F 2016F

forecast fact

*the average value over the year

3,5

3,3

3,4

3,3 3,3 3,3 3,3

3,6

2011 2012 2013F 2014F 2015F 2016F

forecast fact*

<40 41-120

121-250

251-600

600-1000

1200

33% 29%

42% 50%

24% 20%

0,17% 0,03%

2008 2011

elite (>1200k RUB)

middle (121-1200k RUB)

economy class (40-120k RUB)

insolvent demand (up to 40k RUB)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1986

1990

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1986

1990

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

CR3

min

max

CR3 - three largest companies in the industry in terms of revenue

I. Beginning II. Growth IV. Balance

Consolidation of the industry before the crisis 2008

Consolidation of the industry after the crisis 2008 CR3

min

max

2006

18,5% 22%

macro shock, financial crisis 2008

2024 2002

23 years

2021 2002

22%

III. Specialization

40%

20 years

40%

25%

27%

rate of consolidation

Russia's economy in general and the construction industry in particular, have been deregulated since the collapse of the Soviet Union. In this analysis was estimated residential real estate industry consolidation. Shares of the companies were distributed according to the amount of revenue from the sale of residential real estate. (revenues from other businesses of the analyzed companies are not included). Currently the industry is in the middle of the second stage of consolidation. Growth leaders are Glavstroy, LSR and SETL City. Combined market share of these companies is 27.5% in terms of revenue. Since deregulation the construction industry has experienced two macro shocks - one in 1998 and the second in 2008. The result of the recent crisis has been an acceleration of industry consolidation and a reduction in the t ime i n t e r va l s be tween t he s t ages consolidation. At this stage, there is an opportunity to become one of the leaders in the industry, but this requires above-average growth or absorption of second-tier players. In the absence of macro shocks in the future, the industry will come to the third stage of consolidation in 2021, when the transformation into an industry leader will be practically impossible, if it has not happened in the previous stage.

I. Beginning II. Growth IV. Balance III. Specialization

Saint-Petersburg primary residential real estate market industry Consolidation

9

Arsen Kelemenyan CEO at SIG mob.: +7 911-916-18-42 e-mail: [email protected]

Thank you for your attention

Contact information

10