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vk.com/id446425943

Russia

Real Estate

12 November 2018

Equities

Periodical

Real Estate Watch

3Q18; rushing for mortgages and flats

This report launches our quarterly wrap on the operational statistics from the real estate development segment. It saw upbeat volumes in 3Q18, as clients enjoyed a gradual recovery in incomes, the extended offer from homebuilders, a local bottom in mortgage rates, and uncertainties associated with changing regulations. The stock performances overlook that, in our view, with the shares of listed developers down 24% YTD.

The area under construction grew 9% YoY to 131mn sqm, after three flattish quarters.

Mortgage rates lost 45bp YTD to a historical low of 9.4% in September. New issues of RUB 2.07tn in 9mo18 are already greater than for the whole of 2017.

Moscow registered deals went up 35% YoY and 32% YoY in 3Q18 and 9mo18, respectively.

Primary prices increased 9-12% YoY in Moscow and St Petersburg in 3Q18, while the secondary market remained generally flat.

Stock valuations contradict the impressive operations. The market capitalisation discount to NAV is at a historical high of 55-67%.

Maria Kolbina, Equities Analyst

+7 495 663 46 48 // maria.kolbina@vtbcapital.com

Nikolay Kovalev, Equities Analyst

+7 495 287 68 65 // nikolay.kovalev@vtbcapital.com

Alexander Gnusarev, Equities Analyst

+7 495 660 67 99 // Alexander.Gnusarev@vtbcapital.com

Prices cited in the body of this report are as of the last close before, or the close on, 09 Nov 2018 (except where indicated otherwise). VTB Capital analysts update their recommendations periodically as required.

Please refer to the Disclosures section of this report for other important disclosures, including the analyst certification and information as required by EU-MAR. Additional disclosures regarding the subject company(ies) discussed in this report can be found at http://research.vtbcapital.com/ServicePages/Disclosures.aspx.

vk.com/id446425943

Russia

Real Estate

Real Estate Watch

Table of contents
Consumer backdrop: no signs of material improvement.........................................................	3
Supply side: acceleration prior to legislative changes.............................................................	4
Mortgage market: going through the roof..................................................................................	5
Demand side: fuelled by gradual real incomes recovery and mortgages...............................	6
Residential prices: promising primary trends...........................................................................	7
Valuation.......................................................................................................................................	8

12 November 2018

vk.com/id446425943	Real Estate Watch
Russia	Real Estate Watch
Real Estate

Consumer backdrop: no signs of a material improvement

In 3Q18, consumer budgets remained stretched, posting only a gradual recovery from a modest base. Clients remained price-sensitive and highly reactive to promotional activities. Inflation was at 3.0% YoY during the quarter, while the 7.4% YoY advance in real wages reported by Rosstat has not been reflected by the listed constituents of the consumer segment, which reported results worsening from July to September.

USDRUB volatility has direct implications for consumer behaviour in Russia and sales on the residential development segment. The local currency depreciated 11% YoY and 6% QoQ in 3Q18. Clients’ front-loaded inflationary expectations are one reason for the 8.6% YoY growth in the non-food retail categories vs. 3.2% YoY for food turnover.

Residential sales were solid in 3Q18, with primary deals in Russia up 6% YoY. Among the key support factors, we highlight the gradual recovery in consumption, accelerating sales launches, the bottom in mortgage rates having been tested, and FX volatility. Across listed names, blended sales surged 25% YoY as the largest players reacted rapidly to the favourable trend.

Figure 1: Wages* and inflation

	960	941	874
	858		874																								18%
	858
	800
	800																						732715717
					672				659											705			732715717				13%
	640				672				659							632612						640				639	13%
																						640
													568		553
USD							503			521		503	568		553										7.4%		8%
										521																	8%
	480												455															YoY
	480												455												3.0%			YoY
																											3%
	320																										-2%
																											-2%
	160																										-7%
																											-7%
	0																										-12%
	1Q14	2Q14	3Q14		4Q14		1Q15		2Q15	3Q15		4Q15	1Q16	2Q16	3Q16	4Q16		1Q17		2Q17		3Q17	4Q17	1Q18	2Q18	3Q18
	Average monthly salary (lhs)														Real wage (rhs)										CPI (rhs)

Source: Rosstat, VTB Capital Research
-* Accrued monthly nominal wages of employees of organizations
Figure 3: Monthly average income per capita*
	800	780 774
	651					686
	651																								627
																									627
	600									565			546						570				539 525				522
											485		546										539 525			506	522	489
															459 471						463					506


USD	400							405
	400													356

	200
	0
	1Q14	2Q14		3Q14		4Q14		1Q15		2Q15	3Q15		4Q15	1Q16	2Q16		3Q16		4Q16		1Q17		2Q17	3Q17	4Q17	1Q18	2Q18	3Q18
				Labour renumeration															Social Transfer
				Property															Entrepreneurial Activities
				Others

Source: Rosstat, VTB Capital Research

-*Includes gains of persons engaged in entrepreneurial business activity, paid remuneration of employees, social transfers (pensions, grants, benefits, insurance compensations), property income in the form of deposits, securities, dividends and other income.

2 USDRUB, quarterly

90	0%				16%					12% 2% 2% 7% 3%						1% 3%
-8%		-4%					-20%	-4%-13%							-4%			-9% -6%
			-32%-31%				-20%
			-32%-31%
75									75
75				63			63	66											66
								66											66

										66	65							62
60												63	59		59
												63

														57		58	57
														57		58	57

			48			53
			48
45
35		36

30	35
	35

1Q14	2Q14	3Q14	4Q14	1Q15	2Q15		3Q15	4Q15	1Q16	2Q16	3Q16	4Q16	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18

Source: Bloomberg, VTB Capital Research

Figure 4: Oil prices

120	108	112																	5.4	6
	108	112																	5.4
																		5.0
90				95
90	3.8	3.8	3.7			3.5										3.8 4.0		79	83	4
				3.3	3.2	3.5	3.2			3.2		3.5			3.3	67	70
60				3.3	3.2	64	3.2			3.2		57	3.0	2.8	3.3	67
60				57	55			2.7	2.7		3.1	57	3.0	2.8	58
							48			50	49		53	48
							48			50	49			48
								37	40											2
																				2
30
0	1Q14	2Q14	3Q14	4Q14	1Q15	2Q15	3Q15	4Q15	1Q16	2Q16	3Q16	4Q16	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18	0
	1Q14	2Q14	3Q14	4Q14	1Q15	2Q15	3Q15	4Q15	1Q16	2Q16	3Q16	4Q16	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18
		Brent Oil, USD (lhs)									Brent Oil, 000'RUB (rhs)

Source: Bloomberg, VTB Capital Research

12 November 2018

vk.com/id446425943	Real Estate Watch
Russia

Real Estate

Supply side: acceleration prior to legislative changes
The upcoming				regulatory changes concerning				the	Figure 5: Area under construction in Russia
ability to collect client funds during the construction									Figure 5: Area under construction in Russia
ability to collect client funds during the construction
stage and the				implementation of		escrow	accounts			180	6%		10%		14%	15%				9%
have pushed developers to pre-secure the construction													10%				4%			9%
																		0%	1%

pipeline		and	attain additional construction permits.
pipeline		and	attain additional construction permits.																	131
Coupled		with	the		pick-up in residential demand,			the												131
Coupled		with	the		pick-up in residential demand,			the		120	111		114		119	120	115	114	120	17%
trend saw the area under construction advance 9%										120	111		114		14%	15%	115	114	15%	17%
trend saw the area under construction advance 9%									mn sqm		12%		14%		14%	15%	15%	15%	15%
YoY in 3Q18, following three flattish quarters. We also											12%		14%				15%	15%
YoY in 3Q18, following three flattish quarters. We also
observed certain market consolidation as the top-10
increased their share of the area currently under										60										83%
construction to 17%, from 15% last year.											88%		86%		86%	85%	85%	85%	85%	83%
construction to 17%, from 15% last year.											88%		86%		86%	85%	85%	85%	85%
9mo18 completions were down 2% YoY at 45mn sqm,
primarily reflecting the unimpressive sales of 2015-16 at										0
a time of pressured consumer budgets and a high										0	4Q16		1Q17		2Q17	3Q17 4Q17 1Q18 2Q18 3Q18
a time of pressured consumer budgets and a high											4Q16		1Q17		2Q17	3Q17 4Q17 1Q18 2Q18 3Q18
interest rate environment. Moscow was less impacted												Top-10 developers					Other Chng, YoY


by the downbeat trends and observed an improvement
by the downbeat trends and observed an improvement									Source: United registry of homebuilders, VTB Capital Research
early, overall printing 20% YoY advance in YTD
completions.			For		2018, the ministry of construction				Figure 7: Residential completions
estimates the country’s commissioning reaching 82-									Figure 7: Residential completions

										100
84mn sqm, a recovery of some 5% YoY.										100	7%		19%			1%	-6%		-1%	-2%
84mn sqm, a recovery of some 5% YoY.											7%		19%			1%	-6%		-1%	-2%
In	Moscow,			the	mass-market	segment	saw	an					84			85	80		79
In	Moscow,			the	mass-market	segment	saw	an		80							80		79
acceleration in the supply and share of unsold flats in										80	70
acceleration in the supply and share of unsold flats in											70		36				31
the commissioned estates increased to 35%, from 30%													36			33	31
																33
a year ago, according to the latest IRN data. For the									sqm	60									33
a year ago, according to the latest IRN data. For the										60	32
City, developers got 21mn sqm pre-approved estates																				45

									mn
to	build	in-line		with previous legislation, backing				the	mn	40			19			18	18
																18				16
pipeline for 5-6 years.																			18	16
pipeline for 5-6 years.											16
											16					16
										20			16			16	16		15	13
																	16
											12
											12
											10		14			18	16		13	16
										0	10		14				16		13	16
										0	2013		2014			2015	2016		2017	9m18
											2013		2014			2015	2016		2017	9m18
														1Q	2Q	3Q	4Q	Chng, YoY

Source: Rosstat, VTB Capital Research

Figure 6: Top-10 developers, September 2018*

Etalon,MR Group,

FSK Lider, 0.9 0.8

1.0

PIK, 6.9

Samolet, 1.1

Glavstroi, 1.2

1.5	23mn sqm
Ugstroiinvest,
CDS, 1.6

LSR, 4.9

Setl Group, 2.7

Source: United registry of homebuilders, VTB Capital Research -*Area under construction, mn sqm

Figure 8: Sales launches of listed developers*

2,000

1,808

	1,633
	1,500
sqm	1,000
000	1,000
000
	644					532
	500				507	532
	500					415
	0	PIK				LSR
		PIK				LSR
			9m16	9m17	9m18

Source: Company data, VTB Capital Research *-not disclosed by Etalon

12 November 2018

vk.com/id446425943	Real Estate Watch
Russia	Real Estate Watch
Real Estate

Mortgage market: going through the roof

The key rate in Russia had declined 25bp YTD to 7.5% as of September 2018. The mortgage rate followed the path and reached a record low blended level of 9.4% in 3Q18. The spread between the two rates has stabilised at 190bp lately and we see this as sustainable in the medium term.

The local bottom in the mortgage rates and clients’ view on the limited further easing sparked new mortgage origination in 9mo18. The total value surged 61% YoY to RUB 2tn, thus already overtaking the total figure for 2017. The market is consolidated: Sberbank and VTB accounted for 66% and 70%, respectively, of new issues in 3Q18 and 9mo18.

The share of credit sales in the results of public homebuilders has also reached an unmatched level of 55-65% in the mass-market segment. We see the share as capped at 80%, i.e. the level observed for peers at the developed markets.

Figure 9: Mortgage blended rate vs. key rate

15%						15.3%
15%
			12.4%								13.1%			13.0%
			12.4%														11.8%
											11.2%						11.8%
											11.2%			10.8%						10.5%
														10.8%
																	9.9%
10%																	9.9%						9.5%
10%																				8.8%			9.5%
																				8.8%
	8.0%																						7.5%
																							7.5%
5%
1Q14	2Q14		3Q14		4Q14		1Q15		2Q15		3Q15	4Q15		1Q16	2Q16	3Q16	4Q16	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18
									Mortgage rate							Key rate
Source: CBR, VTB Capital Research
Figure 11: Share of mortgages in sales
70%																					64% 66% 64% 65%
60%																			59% 60%					56%
60%																	55% 54%					54%		56%
																	55% 54%		52%			54%
															49%	50%			52%
50%															49%	50%					47%		52%
50%		43%								44% 42%				45%		45%		45%		45%	47%		52%
														45%		45%		45%		45%			42%
41%				40%									41%								41%	40%	42%	41%
40%				40%						39%			41%								41%	40%
40%				35%							37%		32% 34% 34%				42%		33%	35%
37% 37%				35%		32%							32% 34% 34%						33%	35%
37% 37%
30%		23%		28%		23% 25%									21% 22% 23%
20%		23%				23% 25%				20%				20%	21% 22% 23%
										20%				20%
						22% 22%												22%
17%											15% 15%
10%											15% 15%
10%								11%
								11%
0%
1Q14		2Q14		3Q14		4Q14		1Q15		2Q15	3Q15		4Q15	1Q16	2Q16	3Q16	4Q16	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18
										PIK				LSR		Etalon
Source: Company data, VTB Capital Research

Figure 10: Mortgage origination
			2,400			32%			31%			-34%			27%			37%		61%
						32%			31%			-34%			27%			37%		61%
																	2,021			2,071
																	2,021
			1,800						1,753											761
															1,472			736		761
																		736
						1,339			538
	bn								538

			1,200									1,158			446
	RUB		1,200			444						1,158			446
	RUB								450									513

												399								727
												399			362					727
						359									362
			600			359						300
			600						433			300			341			452
									433									452
						311
						311						242								582
												242
									333						323			321
						224			333			217			323			321
				0		224						217
				0		2013			2014			2015			2016		2017			9m18
						2013			2014			2015			2016		2017			9m18
								1Q		2Q		3Q		4Q			Chng, YoY



Source: CBR, VTB Capital Research
Figure 12: Mortgage availability
45			68%		67% 66%		70%													44		70%
45			68%		67% 66%				65%	63%								43	41	44	42	70%
									65%		62%			40 59%		40					42
				65%							62%		59%
				65%				63%				37	59%				38					60%
36								63%				37	36		36		38					60%
								35			34 57%		36		36		53%
				33					33	33							53%
			30	33	32	32	32		33	33				52%		52%			49%		49%	50%
			30											52%		52%						50%
27																		47%		46%		40%
27																				46%
000'RUB18							22	22
000'RUB18			20	21	21	21			21	21	21	21	21	21	21	21	20	20	20	20	21	30%
				21	21	21			21	21	21	21	21	21	21	21


																						20%
9																						10%
																						10%
0			1Q14	2Q14	3Q14	4Q14	1Q15	2Q15	3Q15	4Q15	1Q16	2Q16	3Q16	4Q16	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18	0%
			1Q14	2Q14	3Q14	4Q14	1Q15	2Q15	3Q15	4Q15	1Q16	2Q16	3Q16	4Q16	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18
		Average monthly payment (lhs)											Average monthly salary (lhs)
		Average monthly payment (lhs)											Average monthly salary (lhs)
		Payment as % of average salary (rhs)

Source:				VTB Capital Research

12 November 2018

vk.com/id446425943	Real Estate Watch
Russia

Real Estate

Demand side: fuelled by a gradual recovery in real incomes and mortgages
Consolidated		residential			demand			in	Moscow		has	Figure 13: Moscow registered deals														Figure 14: St. Petersburg registered deals
surprised on the upside YTD and the total number of												Figure 13: Moscow registered deals														Figure 14: St. Petersburg registered deals
surprised on the upside YTD and the total number of												65	3%	32%		32%	21%	-2%	5%	14%	21%	36%	26%	35%	50		35%		50%	24%	6%	0%	-1%	28%	21%	35%	27%	6%
deals surged 35% YoY in 3Q18 and 32% YoY in												65	3%	32%		32%	21%	-2%	5%	14%	21%	36%	26%	35%	50		35%		50%	24%	6%	0%	-1%	28%	21%	35%	27%	6%
deals surged 35% YoY in 3Q18 and 32% YoY in																					57.0			57.5											43.6		44.1
9mo18. The			primary		market			(up	47%		YTD)										57.0		56.0	57.5											43.6		44.1	40.9
9mo18. The			primary		market			(up	47%		YTD)	52													40									38.6				40.9
outperformed		the secondary					(up 25%)			as	the						47.2														36.0			38.6		35.9
outperformed		the secondary					(up 25%)			as	the								44.6			46.1							34.8				34.7
developers	extended			and		made		the	offer		more			42.3						42.6		46.1							34.8				34.7
developers	extended			and		made		the	offer		more			42.3						42.6										30.1
affordable	and		flexible.		On	the secondary				market,		39	34.8			37.4		34.0			69%		68%	65%	30		26.5			30.1		26.6			65%		65%	66%
affordable	and		flexible.		On	the secondary				market,		39	34.8					34.0			69%		68%	65%	30		26.5					26.6			65%		65%	66%
sellers are	also		more	reluctant			to	price	declines and			'000													'000
sellers are	also		more	reluctant			to	price	declines and			'000										65%			'000									63%		65%
																																		63%
discounts.												26					74%		70%	70%					20				67%	68%	70%		73%
discounts.												26		82%		75%		69%	70%	70%					20					68%		72%	73%
The trends in St Petersburg are also robust but inferior													81%	82%		75%											74%
																											74%

												13													10
to Moscow. Consolidated volumes added 6% YoY in												13									31%	35%	32%	35%	10				33%					37%	35%	35%	35%	34%
3Q18 and 20% YoY in 9mo18. As with Moscow, the																25%	26%	31%	30%	30%	31%		32%	35%			26%			32%	30%	28%	27%	37%	35%	35%	35%	34%
3Q18 and 20% YoY in 9mo18. As with Moscow, the													19%	18%			26%	31%	30%	30%										32%	30%		27%
city benefits at the expense of its surrounding region as												0	19%	18%											0
city benefits at the expense of its surrounding region as												0	1Q16		2Q16	3Q16	4Q16	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18	0		1Q16		2Q16	3Q16	4Q16	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18
the offer has become more comparable on prices while													1Q16		2Q16	3Q16	4Q16	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18			1Q16		2Q16	3Q16	4Q16	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18
the offer has become more comparable on prices while
the real estate itself is more conveniently located.															DDUs		Buy-sell agreements					Chng, YoY						DDUs		Buy-sell agreements					Chng, YoY
the real estate itself is more conveniently located.

The sales of listed developers were impressive, reflecting the overall strong market trends and are in our view the most appealing product among peers. LSR increased volumes 46% YoY in 9mo18, reflecting adjustments to real estate to target clients’ reduced budgets, the pressured comparison base, and the growing maturity of projects. PIK also surprised with a 6% YoY advance for 9mo18, outperforming the record 2017 sales for the segment.

The strong demand trends mainly reflect people’s desire to improve their living conditions and, to a lesser extent, investment purposes (10% of sales in 3Q18). The latest rental yields for housing were 5.9% and 6.8% in Moscow and St Petersburg, respectively, in 3Q18. Adjusted for taxes and utility costs, we consider this to be modest.

Source: Rosreestr, VTB Capital Research

Figure 15: Sales of listed homebuilders, YoY

1,800	56%	95%					63%
	56%	95%		30%		46%	63%	2%	19%
		6%		30%				2%	19%
1,200		1,231 1,309			-17%
					-17%


000 sqm	632					620
600	632					620
600				509	424				417
					424		342	350	417
							342	350
0		PIK			LSR			Etalon
		PIK			LSR			Etalon
			9m16	9m17		9m18

Source: Company data, VTB Capital Research

Source: Rosreestr, VTB Capital Research

Figure 16: Annualized rental yields, 3Q18

7.8% 7.9% 8.0% 8.2% 8.2% 8.3%

6.8% 7.1% 7.2%

6% 5.9%

Moscow

St.Petersburg

Kazan

Ufa

Ekaterinburg

Samara

Novosibirsk

Omsk

Volgograd

Rostov

Source: Domofond, VTB Capital Research

12 November 2018

vk.com/id446425943	Real Estate Watch
Russia	Real Estate Watch
Real Estate

Residential prices: promising primary trends

In Moscow, primary prices increased 12% YoY in 3Q18 and YTD, supported by a spike in demand and gradually recovering household budgets. The secondary market is on a flattish trend and its premium to the primary market has been eliminated of late. The south and south-east regions demonstrated the most upbeat trends: they are significantly in the mass-market segment and have seen progress on large-scale projects and redevelopment areas through the construction stages.

In St Petersburg, primary and secondary prices added 9% YoY and 3% YoY in 9mo18. In the latest quarter, the growth rate was comparable for both segments at 8% YoY. Amid the recent pick-up on the secondary segment, its discount to the primary market in St Petersburg remains at a record high of 20%.

Listed residential developers were inflating LFL prices some 10% YTD with a gradual pace through the period. However, the greater focus on the less premium market offer caused a certain dilution, meaning a 3% YoY advance and 3% YoY correction for PIK and LSR in 9mo18, respectively. Etalon’s product mix is less volatile and the consolidated price increase for the period was 8% YoY.

Figure 17: Moscow residential prices

200

					191		193	192
					191	188
	190		183185			188			188
			183185							181	183	182181
	180	179								181		182181		179
/ sqm	180	179							182					179	176173174
								175							176173174					173
	170				175174173			175										168	170172
000'RUB	170	167	170170							160									170172
000'RUB										160								164

	160
	150										153	157	155	156	158	154154
	150										153					154154
	140	1Q14	2Q14	3Q14	4Q14	1Q15	2Q15	3Q15	4Q15	1Q16	2Q16	3Q16	4Q16	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18
		1Q14	2Q14	3Q14	4Q14	1Q15	2Q15	3Q15	4Q15	1Q16	2Q16	3Q16	4Q16	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18
							Primary			Secondary

Source: Rosstat, VTB Capital Research

Figure 19: St Petersburg residential prices

	110																	107107108
	105																101
		99 100															101
	100	99 100		97	97								97	97	98	99
				97	97			95				95	97	97
sqm/	95					93	94	95	93		95	95
	95
										91


000'RUB	90		90	91	91						90	90	90						90	92
000'RUB		89	90	91	91						90	90	90	89	88		89	89	90
	85													89	88		89	89
	85															86
																86
	80					80	81	83	82
						80	81
	75	1Q14	2Q14	3Q14	4Q14	1Q15	2Q15	3Q15	4Q15	1Q16	2Q16	3Q16	4Q16	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18
		1Q14	2Q14	3Q14	4Q14	1Q15	2Q15	3Q15	4Q15	1Q16	2Q16	3Q16	4Q16	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18
							Primary			Secondary

Source: Rosstat, VTB Capital Research

Figure 18: Moscow blended prices, 000’RUB/sqm*

Source: IRN, VTB Capital Research

-* Percent figures indicate YoY change in prices

Figure 20: Prices of the listed homebuilders

160		12%	4%	3%		14%		4%	2%	8%
			4%	3%				4%	2%	8%
							-6%	-3%		120
							-6%	-3%
120									112
120				107		105		109
			103					109
/ sqm		99	103				100	97
		99					100	97

000'RUB	80
000'RUB
	40
	0		PIK				LSR	Etalon
			PIK				LSR	Etalon
					9m16	9m17		9m18

Source: Company data, VTB Capital Research

12 November 2018

vk.com/id446425943

Russia

Real Estate

Valuation

In the development segment, we see a significant divergence between the impressive operating results of listed companies and their share prices. Stocks are among the worst performers in Russia, losing 24% YTD.

Current market capitalisations imply record discounts to LSR’s and Etalon’s net asset values (55-67%). We anticipate both stories maintaining an impressive dividend payout in the short term, with yields of 9.3% and 12.2%, respectively.

PIK is less owned by foreign institutional investors and its valuations were less impacted by the YTD worsening in sentiment on RUB stories and the less liquid universe. We see the company completely deleveraging in the short term and increasing its dividend yields (3.8% in our forecasts).

We deem large scale developers as best positioned for the upcoming regulatory changes as they have better access to capital, a stronger market offer, and more efficient cash flow management. There are over

3,000 developers in Russia and we see the sector well positioned for consolidation, favouring the constituents of our real estate universe.

Real Estate Watch

Figure 21: Share price dynamics

6
4
USD
2
0
Nov-13	May-14	Nov-14	May-15	Nov-15	May-16	Nov-16	May-17	Nov-17	May-18	Nov-18
		LSRG LI		ETLN LI			PIKK RX
Source: Bloomberg, VTB Capital Research
Figure 23: 12-month dividend yield outlook
14%
12%		12.2%
12%
10%					9.3%
					9.3%
8%
6%
4%								3.8%
2%
0%		LSR			Etalon			PIK
		LSR			Etalon			PIK

Source: Bloomberg, VTB Capital Research

Figure 22:	NAV
Etalon	67%
LSR	55%

PIK -10%
-20%	0%	20%		40%	60%		80%
Source: Company
Figure 24: Comparative valuation
12x
		Kaufman &
10x		Broad
10x
	Enka	Berkeley Group
	Persimmon			PIK		EM
8x	Persimmon			PIK
P/E'19	Barratt Developments		DM	Dom Development
P/E'19		Bellway				AP Thailand
						AP Thailand

6x	Mrv Engenharia			Lennar Corp		Finvest
6x	China Vanke					Finvest
	Aldar Properties			LSR		Land
4x	Etalon Robinsons
4x	Country		Land
	Garden
Agile Group
2x
0x		5x				10x
		EV/EBITDA'19

Source: Bloomberg, VTB Capital Research

12 November 2018

vk.com/id446425943	Real Estate Watch
Russia	Real Estate Watch
Real Estate

Disclosures

Important Disclosures

The information and opinions contained within VTB Capital Research are prepared by JSC VTB Capital. As used in this disclosure section, "VTB Capital" includes JSC VTB Capital, VTB Capital Plc and their affiliates as necessary.

VTB Capital and/or any of its worldwide affiliates which operate outside of the USA (collectively, the “VTB Group”) do and seek to do business with companies covered in their research reports. Thus, investors should be aware that the VTB Group may have a conflict of interest that could affect the objectivity of this research report. Investors should consider this research report as only a single factor in making their investment decision.

Where an issuer referred to in this report is not included in the disclosure table, the issuer is either considered not to be covered by VTB Capital Research, or the reference is considered to be incidental and therefore the issuer is not a subject company within this report.

Disclosures on the companies covered by this report can be obtained by writing to the offices listed on the back page. In order to receive i) a summary of any basis of the valuation or methodology and the underlying assumptions used to either evaluate a financial instrument or an issuer, or to set a price target for a financial instrument, as well as an indication and a summary of any changes in the valuation, methodology or underlying assumptions; ii) detailed information about the valuation or methodology and the underlying assumptions in any nonproprietary models; or iii) material information about the proprietary models used; please consult the VTB Capital Research web-site at https://research.vtbcapital.com or contact the authors of this document.

Issuer Specific Disclosures

Disclosure checklist

Company	Ticker	Recent price	Disclosure
Etalon Group	ETLN LI	2.04 (USD)	4a, 5a, 6a, 9a
LSR Group	LSRG LI	1.89 (USD)	4a
PIK Group	PIKK RX	348.8 (RUB)	4a

4a. VTB Capital or an affiliated company is a provider of liquidity and/or a market maker in the securities of the relevant issuer at the time this research report was published. VTB Capital or an affiliated company will buy and sell securities of the relevant issuer on a principal basis.

5a. VTB Capital or an affiliated company has been lead manager or co-lead manager over the previous 12 months of a public offering of securities of the relevant issuer.

6a. VTB Capital or an affiliated company is party to an agreement that has been in effect during the previous 12 months, or has received compensation during the previous 12 months, from the relevant issuer relating to the provision of investment banking services.

9a. VTB Capital or an affiliated company expects to receive or intends to seek investment banking related compensation from the relevant issuer within the next 3 months.

Analysts Certification

The research analysts whose names appear on research reports prepared by VTB Capital certify that: i) all of the views expressed in the research report accurately reflect their personal views about the subject security or issuer, and ii) no part of the research analysts’ compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analysts in research reports that are prepared by VTB Capital.

The research analysts whose names appear on research reports prepared by VTB Capital received compensation that is based upon various factors including VTB Capital’s total revenues, a portion of which are generated by VTB Capital’s investment banking activities.

12 November 2018

vk.com/id446425943	Real Estate Watch
Russia	Real Estate Watch
Real Estate

Investment Ratings

VTB Capital uses a three-tiered Investment Rating system for stocks under coverage: Buy, Hold, or Sell.

The three main ratings correspond to the next 12-month Expected Total Return (ETR), defined as the difference between the Target Price and the Last Price divided by the Last Price plus the expected Dividend Yield over the next 12 months. The correspondence is as follows (as of the publishing date):

BUY: ETR exceeds plus 20% or more HOLD: ETR is between zero and plus 20% SELL: ETR is less than zero

VTB Capital Research assures the correspondence between the active Investment Ratings and the aforementioned definitions at the time of the Target Price and/or Investment Rating revision. Between such revisions, day-to-day movements in the prices of financial instruments could result in a temporary discrepancy between the Investment Rating and the aforementioned definition. Analysts address such discrepancies based on their scale and duration.

UNDER REVIEW: In the event that significant information about an issuer is due to be announced or is expected to become public in the foreseeable future, or the analyst needs time to evaluate such information, which was announced recently, s/he might choose to place that issuer Under Review. This means that the analyst is suspending the previously published financial forecasts, Target Price and investment rating in order to review them while waiting for the impending information. As such, they are no longer valid and should not be relied upon.

RESTRICTED: In certain circumstances, VTB Capital is not able to communicate issuer ratings due to internal policy and/or law and regulations. In this case, any revision of the financial forecasts, Target Prices and Investment Ratings will be carried out only after the Restricted status is removed.

Notwithstanding the above, VTB Capital may from time to time issue investment recommendations predicated on a different time horizon (such as short-term trading recommendations) to that which is described above. Where VTB Capital issues such an investment recommendation, the use of an alternative time horizon for the purpose of formulating such investment recommendation might result in differences between such investment recommendation and any investment rating published in accordance with the Investment Rating system described above.

The below table details the distribution of VTB Capital’s Investment Ratings on the basis of the three-tier recommendation system described above.

VTB Capital Ratings Distribution

Investment Rating Distribution

Buy	68	59%
Hold	35	30%
Sell	6	5%
Restricted	0	0%
Not Rated	0	0%
Under Review	7	6%
	116

Source: VTB Capital Research as at 31 October 2018

Ratings Distribution for Investment Banking Relationships

Buy	16	76%
Hold	2	10%
Sell	0	0%
Restricted	0	0%
Not Rated	0	0%
Under Review	3	14%
	21

As of 10 April 2016, the VTB Capital Ratings Distribution table accounts for all the instruments covered, rather than the companies covered. In instances where we provide a recommendation for more than one instrument issued by a company, these are now counted separately. This accounts for the increase in the number of ratings from the count as of 29 February 2016. A list of those companies for which we cover more than one instrument can be found at DoubleRecPLC20181031.pdf.

12 November 2018

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