Ben Aris in Moscow -

Viatchslav Zarenkov must have building in his bones. Once a construction worker himself, Zarenkov founded Etalon Group, Russia's leading residential developer, 25 years ago in St Petersburg during Perestroika, making him a pioneer of Russia's private sector. Today Etalon continues to go from strength to strength and has become a favourite of investors looking for exposure to Russia's emerging middle class.

Etalon, which in April 2011 listed on the main board of the London Stock Exchange raising $575m, is the biggest residential developer in the north west of Russia. It concentrated first on Zarenkov's hometown of St Petersburg, but more recently has moved down to work in the Russian capital. "We offer higher class accommodation at affordable prices," says Anton Evdokimov, Etalon's chief financial officer, in an exclusive interview with bne. "We build in the 'comfort class' that appeals to the middle class. They are not interested in marble entrance halls, but want practical and comfortable places to live."

It is a market segment that Etalon has more-or-less to itself, as its competitors either build cheap residential buildings for the lumpenproletariat or the high-margin elitny buildings for oligarchs and their peers.

And Etalon builds big. The company is known amongst analysts for its good margins and high internal efficiency, but this means it has to stick to the two Russian capitals of Moscow and St Petersburg - the biggest and second biggest cities in Europe respectively - as they are the only metropolitan areas that have the scale of demand to match the size of Etalon's projects. "The regions are growing fast, but the other big cities have populations of about 1m people and the demand is for about 100,000 square metres (sqm) a year, which is too small for us," says Evdokimov.

Etalon's "Golden Bay" development in St Petersburg is typical: it was finished last year and has over 200,000 sqm of residential space. In Moscow, the company has just completed the 140,000 sqm first phase of the 1m sqm Emerald Hills project in Krasnogorsk in the Moscow region, which will cost about $2bn to complete by 2016. "All our developments are outside of the centre of the city as we are building the second and third bands of the city, extending the suburbs," says the ebullient Evdokimov who spends much of his time travelling to places like London and New York to meet with investors.

Financing the dream

The secret to the company's success is it gets its customers to finance the building work by paying for the apartment before it is finished.

To the western ear this sounds incredibly risky and indeed there have been a number of scams where punters bought apartments in the planning stage only to see the developer "go bust" and their money disappear before a single brick was laid. Amazingly, Etalon doesn't even offer discounts on their unmade apartments, which sell at the same market rates as flats that actually exist already.

The reason this pre-paid model works is two-fold. First, almost 70% of residential space in the big cities consists of the so-called Khrushchyovka, or pre-fabricated panel buildings introduced by Nikita Khrushchev in the 1970s, which were quick to assemble and introduced to meet a dire housing shortage, according to Evdokimov. Today, these five-storey houses (the tallest you can build without installing a lift) are in terrible repair and widely derided, but they still sell for "astronomical" prices, says Evdokimov.

Punters are willing to pay upfront if they know they are going to get a good-looking modern apartment and they even get a say in some aspects of its construction while it is being built. More importantly, would-be homeowners trust Etalon to keep its word and finish the building, because it has been in business for 25 years and has never reneged on a deal.

The second reason is Etalon's apartments are easy to finance. Mortgages took off in about 2010 and have been doubling in volume every 18 months or so to account for about 35% of all apartments sales, according to VTB Capital. However, mortgages only account for about 10% of Etalon's sales. "We do no due diligence on the customers or any checking of any sort. As long as they can make the down-payment and keep up the instalments, then we will sell them the apartment," says Evdokimov.

In the topsy-turvy world of Russian finance, ignoring mortgages and due diligence is actually an advantage. Banks carry out stringent and invasive checks on potential borrowers, but the main problem is that most Russians' spending power is way beyond their official income: most people moonlight or have a secondary source of income - both legal or illegal - which can't be taken into the account by a bank when calculating the maximum size of a potential mortgage loan. But with Etalon the only criteria in play is whether you can make the payments.

And the company takes no risk, as the deed is only transferred after the last payment is made. Evdokimov says that usually they can sell 80-90% of the apartments in a complex before it is completed. "There is no true mortgage in Russia yet," says Evdokimov. "It may say 25 years on the ticket, but the actual duration of mortgages in Russia is three years: what people are doing is taking out a bridging loan to move into a new better place and then sell their old apartment, which they use to pay off the loan."

To bank its good reputation Etalon has set up a very strong sales network that operates 10 representative offices throughout the country and another 30 agents.

At first glance, the list of their locations looks bizarre, as it includes several cities that are quite literally in the middle of nowhere: Mirny in the midst of the permafrost of Yakutiya, Sugurt in the western Siberian tundra, Norilsk on Russia's frozen northern coast, and Magadan, the one-time centre of the Gulag Archipelago in Russia's icy far east. However, Evdokimov explains that these cities make perfect sense in the Russian context: Etalon set up real estate sales offices in this terrible places because everyone working there plan to leave. These regions also happen to be amongst Russia's richest thanks to their mineral wealth. "They are all mining towns of one sort or another - Mirny is diamonds, Surgut is oil, Norilsk is nickel - and people go there on 10- to 15-year contracts. But in the last five years, they start to think about what they are going to do next," says Evdokimov.

And given the choice, most people in Russia want to move to one of the two big cities: a study by the World Bank a few years ago found the population of Moscow would double if Russians were given the means to live where they wanted. However, as per-capita incomes continue to rise for more and more people, that dream is coming true. Evdokimov says that over the next three years the company plans to more than double the volume of buildings and commission 400,000 sqm in St Petersburg and 800,000 sqm in Moscow.