Along with a fall in demand, 2009 is likely to see a severe reduction in supply within the primary property market. Many property developers will be unable to finance planned projects given their low levels of internal cash resources, due to negative free cash flows, low cash balances, and a lack of access to external funding, with banks and investors increasingly unwilling, or simply unable, to provide new debt and equity financing. "Build-and-sell" developers are now less able to part-finance projects with pre-sales, as customers become increasingly reluctant to make cash deposits on non-completed projects for fear that developers are unable to deliver the final product. Although asset and project disposals, as well as investment partners, could provide financing, these could be challenging to achieve in the current difficult climate. Scaling back operating expenses is expected to only release limited additional funds - insufficient to meet considerable construction costs.
Following a severe contraction in lending to the Russian property sector in 2008, Fitch believes the financing environment is unlikely to materially improve in 2009. New public debt issuance will be especially challenging to achieve. Access to bank financing - a major source of funding for the sector over the past several years - will continue to be highly rationed, due to liquidity constraints within the domestic banking system and with the reduced activity of foreign banks in the sector. Similarly, financing via the equity market is unlikely to be a feasible option during 2009. Companies that are able to obtain financing from state-controlled banks or from supportive parent companies, such as Sistema-Hals JSC, are likely to fare better. Fitch notes that only one company in its rated universe of Russian developers, OJSC LSR Group, was explicitly included in the recent government list of corporates qualifying for potential federal support. This implies that a large-scale state bailout of the sector is unlikely.
The historical reliance on short-term debt to finance long-term projects will leave some property and construction companies facing substantial debt maturities during 2009. In many cases, the prospect for repaying or refinancing these debts is uncertain because of weakening operating cash flows, the difficult environment for asset sales, limited availability of new debt and low levels of back-up liquidity including cash and long-term undrawn committed credit facilities. The risk could be even higher for companies with substantial foreign currency-denominated debt. These companies are particularly vulnerable to further rouble depreciation, unless they have a sufficient proportion of operating cash inflows denominated in or linked to foreign currency. Fitch also notes that the expected fall in profitability and asset values during 2009 could lead to covenant problems, which in turn could intensify liquidity pressures by triggering the early repayment of certain debt packages.
Credit profiles within the sector have been under pressure since the spring of 2008, as reflected in a number of negative ratings actions in the past year. Fitch currently rates four top-tier Russian construction and property companies: JSC OPIN ('B'/Stable), Sistema-Hals JSC ('B'/Negative), OJSC LSR Group ('B'/Rating Watch Negative), and Mirax Group LLC ('B'/Rating Watch Negative). Given the negative trends across the sector, further negative rating actions remain a possibility during 2009.
