Roman Gromov of UniCredit Aton -

Real estate companies appear to be some of the first Russian victims of the liquidity crisis. Real estate developers have decided to freeze a large portion of their less-profitable development projects due to a lack of access to funding from banks, which are now short of funds. Notable developers that have frozen projects include:

1) Mirax Group, which announced it is halting approximately 83% of its projects based on gross buildable area (GBA) or 10m square metres (sqm);

2) Sistema Hals, which is planning to cut its portfolio approximately 25%, or 1.7mn sqm, by selling projects or finding strategic partners. We assume these projects will also be frozen;

3) Midland Development, which is reducing its GBA pipeline by 31% or 500,000sqm; and

4) Korston, which is to freeze 91% of its portfolio, or 990,000sqm.

We see the possibility of a real estate bubble bursting on the Russian market, similar to in the US and Japan. With banks hesitant to issue loans, the number of real estate deals fell 13% on year already in the first half. Interest rates have increased dramatically and are continuing to grow, with interest rates up from 10-14% to 20-25%, and scarce even at the higher end, with banks preferring to roll over existing facilities rather than fund new development projects. There have been media reports that credit-dependent companies may start selling off their assets on a large scale at discounts to listed prices of 10-30% in order to increase cash, cover debt and invest in future projects.

We believe the current situation in Moscow partly resembles Japan's real estate crisis of the 1990s. Like in Tokyo where real estate prices rose 10 times over 1985-1991, Moscow real estate prices have had a period of outstanding growth, causing the industry to expand rapidly. However, when developers in Japan began to have difficulties paying back their debt prices fell sharply and remain underwater. As Russian real estate developers are now short of funds we expect a similar situation to unfold in Moscow.

While some developers may be desperate for financial resources, most of them are remaining silent about their financial hardship. We believe more developers may soon report problems. PIK Group, the largest Russian residential developer, with a portfolio of 22m sqm, is currently seeking $1bn to fund its development projects. However, creditors, wary of the company's risk, are hesitant to lend to the company. We see this as a big problem for real estate developers, as they have to repay a large portion of debt by the year-end.

Financially stable companies can benefit from the crisis. We believe this is only the beginning of the Russian real estate sector's woes and expect the situation to worsen in the short term. Specifically, the crisis could hit small, highly leveraged companies, especially those with high short-term debt, making them more attractive targets for M&A deals for financially stable companies.

We also expect prices to fall across all real estate segments by the year-end, with the declines continuing in 2009. Cash-stripped developers, corporates seeking liquidity, and individuals that purchased property as an investment are likely to add a wave of supply to an already frothy market.

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