LSR to Cut Jobs, Delay Projects

For MTAn LSR-built apartment complex on St. Petersburg's Nevsky Prospekt. The firm plans to cut around 1,800 employees.
LSR Group, the country's second-largest property developer, will cut 10 percent of its workforce and freeze new projects next year because of a slump in the construction industry, chief executive Igor Levit said in an interview.

LSR, which has about 18,000 employees, will suspend all commercial-property projects to free up cash, Levit said. LSR also constructs homes and makes building materials.

The fallout from frozen credit markets has caused construction to slow and has hurt property prices. Mirax Group and RGI International Ltd., two other leading companies, have also canceled projects because of a drop in demand for new offices, homes and industrial space.

"No one was ready for such a sharp downturn," Levit, 37, said in the interview at his office in St. Petersburg. "We started reacting and reviewing plans as early as September, when most people thought the crisis would be over in two or three months."

Goldman Sachs Group, Inc. rated LSR a "buy" as it initiated coverage of the company on Monday. LSR has lost 93 percent of its market value since the company went public in November 2007. The S&P Emerging BMI Index, of which LSR is a member, has dropped 57 percent during that period.

Apartment prices may plunge 32 percent in dollar terms next year, Goldman said. That would end a decadelong boom that turned Moscow into the world's third-most expensive property market after Monaco and London.

LSR, with operations in Russia, the Baltic states, Ukraine and Germany, doesn't plan to start any new residential projects until the end of next year at the earliest. The company will complete about 1 million square meters (10.8 million square feet) of housing that is under construction, Levit said.

There is a "fundamental" lack of housing in Russia, according to the CEO. "No matter how long stagnation will last, it will only create delayed demand for property and may lead to higher prices in the future," he said.

LSR will report a drop in sales of building materials of as much as 20 percent next year, Levit said. These products account for about half of LSR's revenue, while residential and commercial real estate projects make up the rest. The company may convert some of the planned commercial property ventures into residential projects.

LSR's net debt increased 83 percent to $1.15 billion in the first nine months, according to a report on Nov. 25. The company will meet all short-term debt obligations, Levit said. It has to pay $17 million in loans before the end of this year and $159 million in the first half of 2009.

The company hasn't pledged shares as collateral for loans and has canceled a sale of eurobonds because of the turmoil in the international capital markets, Levit said.

LSR is the second-largest of the country's developers by revenue after PIK Group. LSR, which raised $772 million in its initial public offering, now has a market value of $473 million.