Russian Real Estate - Mortgages Remain Key Driver for Sales, BUY on Both Names

Mortgages have been an important driver for residential real estate sales for some time now, but this year has once again underscored their importance. The state mortgage support program has proven to be a huge catalyst for the sector and has helped real estate stocks outperform, as it has softened the impact of the pandemic on residential sales. Meanwhile, the shift to escrow financing is going smoothly despite Covid-19. We keep our BUY on LSR Group and upgrade Etalon Group from HOLD to BUY.> State mortgage support program the key sales driver this year. Banks have already issued some 159k mortgages worth R432 bln under the program. Almost half of the loans have been issued in Moscow, St Petersburg and Moscow Region, which bodes well for LSR Group and Etalon Group, as they operate primarily in these regions. The program has already had a significant impact on mortgage issuance. In July, banks granted a record R362 bln worth of new mortgages (+63% y-o-y), while new mortgage issuance for primary real estate expanded 120%. The overall stock of mortgage loans was up 16% y-o-y at end-July, the highest annual growth rate so far this year. Thanks to the program, the average mortgage rate retreated from 8.3% in April to a record low of 7.3% in July, while the average mortgage rate for primary real estate fell from 6.9% to 5.9%. The program also helped residential real estate developers mitigate the impact from the pandemic and lockdown measures on their 2Q20 sales.> Transition to escrow financing continues despite the crisis. The latest data suggests that 99 mln m2 of residential real estate is currently under construction in the country, with around 39 mln m2 being completed using escrow accounts. Almost 150k escrow accounts have been opened and contain more than R500 bln. Some R1,560 bln of credit lines have been opened for residential real estate developers.> LSR Group (BUY; target price $2.70 per GDR). Lower mortgage rates should provide a strong tailwind for LSR Group, since its sales are still dominated by mass-market residential real estate (a 69% share in 2Q20, up from 62% in 1Q20). The recently announced shift to semiannual dividends is an additional positive in the company's investment case, in our view. We keep our BUY recommendation.> Etalon Group (BUY; target price $2.00 per GDR). We believe Etalon Group looks attractive from a risk/reward perspective given its very low valuation multiples. Importantly, since our previous note, there have been several steps that have improved clarity around the investment case.