Developers Relying on Russian Banks

MTA VTB 24 branch on Konyushkovskaya Ulitsa. State lenders are filling the gap left by international banks.
The ongoing global credit crunch has caused headaches for local developers, who have seen affordable financing from international lenders drying up, but Russian banks are increasingly stepping into the breach.

"International banks are not giving any money now," said Alexei Yazykov, a real estate analyst at Renaissance Capital. "Russian developers have been relying on Russian banks more heavily. … Credit from Russian banks actually increased last year."

The country's construction industry grew at a rate of more than 16 percent in 2007, accounting for over 5 percent of gross domestic product, but as international lenders tighten up, developers have seen interest rates increase to 15 to 18 percent.

Last year, the country's banks doubled their exposure to the booming real estate sector, with big state lenders Sberbank and VTB in the forefront, Renaissance Capital wrote in a note last month. The trend, the bank said, is unsustainable in the long term, with some banks already looking to reduce their exposure to the sector.

Even so, a number of recent, major financing deals, including Sberbank's approval of a $530 million line to Eurasia/MosCityGroup and VTB's deal to provide AFI with $350 million, show that the "slowdown in lending pace has not been abrupt, and state banks are coming to the rescue," the note said.

VTB said in August that it would expand its loans to the real estate development and construction sector by 46 percent this year, and it originated more than $2 billion in loans in the first quarter of 2008.

While both Russian and international banks have been heavily involved in the sector, financing was traditionally divided between providing credit and loans for the construction phase and funds for refinancing completed projects.

Customarily, "Russian banks […] mostly stuck to the role of financing the construction phase, while refinancing was done by international banks," said Pavel Gurin, the head of corporate banking at Raiffeisenbank.

And even as Russian banks are moving to fill the vacuum and are now more likely to refinance projects, they have been more hesitant on financing projects in the construction phase.

Yet, some international banks are still in the game, particularly Raiffeisen and the Bank of Austria, Gurin said.

Last year, Raiffeisenbank loaned $340 million to LSR, a developer and building-materials maker controlled by billionaire Andrei Molchanov, and has just agreed to more credit with a two-year term, said Dmitry Kutuzov, deputy financial director at LSR.

Another trend over the past year has been that interest rates for real estate projects have "increased by 1.5 to 2.5 percent depending on the stage of construction and developer's reputation," said Alexei Kryuchkov, a real estate analyst at Alfa Bank.

An increase in the price of debt financing would hurt the commercial real estate sector rather than the residential one, Kryuchkov said. "The construction of residential housing is financed by pre-sales […] while in commercial projects, the greater part is financed by bank loans."