Russian billionaires hit by property slump

Wealth Bulletin

3 October 2008 - Jason Corcoran in Moscow

Russian billionaire owners of real estate developers are likely to be among the worst-hit as a deteriorating financing environment pricks a bubble in Moscow's hot property market.

Ratings agency Fitch said Russian developers were dangerously exposed to the crisis because of a large share of short-term debt in their liquidity profiles, significant operational cash outflows as well as limited cash-on-balance sheet

Fitch said reports that Sistema-Hals is likely to sell almost a quarter of its projects to raise up to $500m of cash and that Mirax is likely to undertake something similar highlight a real deterioration in the funding environment for Russian developers.

Sistema Hals is the listed property arm of the conglomerate Sistema, headed by oligarch Vladimir Evtushenkov, while Mirax is owned by billionaire Sergei Polonsky.

Mirax, Sistema Hals and Inteko headed by Russia's richest woman Yelena Baturina has already announced freezes on new and ongoing projects over the next year, according to reports in the Russian press.

Sistema-Hals is planning to sell nearly one-quarter of its development assets to shore up accounts and repay debts, which currently total $1.2bn, or 34% of the value, according to Kommersant.

Julian Crush, senior director at Fitch said: "At a time when the Russian government has had to intervene to support domestic financial institutions and with increasing question marks over the ability and appetite of all but the largest Russian domestic banks to maintain current funding levels to the real estate sector, liquidity risks associated with Russian property developers have never been higher."

Open Investment, Russia's second largest listed developer, has fallen by 52% this year while LSR Group, the Russian developer and building-materials maker controlled by billionaire Andrei Molchanov, has dropped by 64%.

Much focus has been on PIK where Kirill Pisarev and Yuri Zhukov, the main executives at listed property developer PIK have registered paper losses of over $2.2bn each, according to US publication Forbes. PIK's share price has fallen by 78% since its IPO in June 2007.

In its latest results announcement on Tuesday, PIK said it is due to repay $900m over the next six months and it will use $400m of its own cash and $200m from banks but still needs to find $300m.

However, analyst Barry Schumaker at UralSib, sounded a note of optimism for PIK's outlook.

In a note, Schumaker said: "PIK's four-month 90% share price collapse is undeserved and is related to the company's short-term liquidity issue and expectations of a weakening residential market. We reiterate our Buy recommendation and target price of $33/share."

Russia's richest man Oleg Deripaska, with Forbes estimated fortune of $16bn, has much of his money tied up in property and construction interests, such as the emerging business district of Moscow City, along with stakes in Austrian builder Strabag and Canadian auto-parts maker Magna, which he is selling to creditors.

A report in the Daily Telegraph on Wednesday said the oligarch had sacked all his domestic staff in his vast Moscow estate last week and replaced them with cheap labour from a provincial town.

The same report cited Alexander Lebedev – one of Russia’s richest men – who admitted to having lost two thirds of his £1.7bn fortune since the market crisis commenced.