- YIT Group started construction on three major housing complexes in Russia in the fourth quarter
- The apartments that YIT Group is building represent a substantial upgrade for most newly middle-class Russians
- It is likely that Russians will want to move to these apartments to improve their standard of living
- These projects should expand the company's footprint and reputation in Russia
- These projects should materially reduce the company's dependence on the weak Finnish housing market
Over the past several weeks, Finnish construction company YIT Group (OTC:YITYF) announced several new construction projects in Russia which could serve to grow the company's footprint in the nation. In my previous article on YIT Group, I stated that Russia could be the most promising market for the company because, out of all the European markets in which the company operates, Russia has by far the strongest property market. By launching the new projects which will be discussed in this article, YIT Group shows that it is fully aware of this fact and is moving to take advantage of the opportunities present in the nation. Additionally, this may represent an attempt by the company to diversify away from its home market of Finland which accounted for 63% of the company's revenues in the third quarter.
On November 18, 2013, YIT Group announced that it began construction of nine apartment buildings with a value of approximately €70 million in Pushkin, a suburb of St. Petersburg. These nine buildings will contain approximately 600 apartments with a total of roughly 200 parking spaces to share among them.
Source: YIT Group
Each of these apartments will likely seem small by American or even Western European standards as they vary in size from 269-968 sq. ft. and contain from one to three rooms. However, these apartments are both larger and in much better condition than what most Russians are accustomed to. Most housing available in the area, and even the rest of the country, consists of rundown Soviet-era housing that is much more cramped than these apartments will be. Therefore, the region's emerging middle class is likely to see these units as a step up from their current housing situation and so may be inclined to relocate into one of these units.
Should demand for these apartments prove robust, as it likely will, then YIT Group could easily expand the complex. Although the company is only building 600 units right now, it has plot reserves to construct an additional 1900 units in Pushkin should the demand be there. However, if the demand is not there then the fact that the company is constructing the project with some flexibility as to the number of units built will ensure that it does not have a high amount of inventory that it cannot sell.
On December 27, 2013, YIT Group announced that it has begun building a significant residential complex in the Primorsky district of northern St. Petersburg. This development is one of the largest that the company has built in the country and it could even prove to be a major game changer in expanding the company's footprint in both St. Petersburg and the whole of Russia.
This project is, to put it mildly, huge. The first phase, which started in the fourth quarter, consists of two twenty-five story buildings with a total of 450 apartments which each contain from 1-3 rooms. The total value of the first phase is approximately €70 million. However the total complex will, when complete, contain a total of 10,000 apartments at a total value of more than €1 billion.
Source: YIT Group
In addition, several other facilities are planned for the area which should make it very appealing for newly middle-class Russians looking to improve their standard of living. Other facilities planned for the area include several parking garages, retail and business centers, five daycare centers, two schools, a large supermarket, pharmacies, and a sports and leisure center. The entire complex is also right next to the Novo Orlovsky Forest Park, allowing its residents to be quite close to nature. It should be quite obvious why newly middle class Russians would certainly consider moving to a place like this!
The success of this project could result in YIT Group constructing much larger projects in Russia going forward which could have an accretive effect on the company's future earnings.
The company's third Russian new project that will be covered in this article actually represents YIT Group's expansion into a new Russian city where it has never operated before and in so doing showcases the company's expanding Russian footprint.
Tyumen is one of the wealthiest cities in Russia due in large part to its location. Tyumen sits near the western edge of Siberia and is one of the centers of the nation's oil and gas industry. The city is the transport hub and industrial center of Tyumen Oblast, which is a vast, oil-rich section of the country that stretches from the Kazakhstani border to the Arctic Ocean. Many of the companies that are active in the country's oil and gas industry are located here.
Tyumen is not only a wealthy city, with many high-paying jobs, but it is also a growing one. Approximately 20,700 people moved to the city of 700,000 in 2012 in search of these jobs. All of these new people will need places to live and that is where YIT Group comes in.
YIT Group acquired its first plot of land in the city in the first quarter of 2013 and began constructing the first phase of its residential project in the third quarter of 2013. This phase consists of 288 apartments which will be finished in the second quarter of 2015. However, the full complex will be much larger than this. The final complex, when built, will consist of three seventeen- or eighteen-story apartment buildings holding 900 apartments between them. Additionally, the complex will contain space for twenty offices and two stores. Similar to its other two developments discussed above, the complex in Tyumen will contain some amenities for customers wishing to improve their standard of living. In this case, those amenities consist of two parking garages accommodating a total of 580 cars, a children's' playground, and a sports field. The total value of the first phase of the project that is currently under construction is €20 million and the total value of the completed complex is approximately €70 million.
Success in Tyumen could also grow YIT Group's earnings from Russia going forward. One reason for this is the net population growth that the city is seeing. All the new citizens of the city will need a place to live and so there will be the potential for the company to expand in the city and build several more projects. Additionally, the high number of well-paying jobs should mean that the citizens of the city should be able to afford more expensive homes than citizens in other Russian cities that are not as wealthy.
One of the reasons why success in Russia is so important to YIT Group's growth going forward is because the nation has the strongest housing market out of all the countries in which YIT Group operates including Finland, Estonia, Latvia, Lithuania, the Czech Republic, and Slovakia. We can find evidence of this by looking at the company's Russian sales figures from the third quarter:
Source: YIT Group
As the chart shows, YIT Group actually sold more residences in the third quarter of 2013 than in the second. The company sold 1,162 residences in Russia during the third quarter, an increase of 12% from its second quarter sales of 1,037 residences. Additionally, the company's year-to-date sales are also up compared to the same period of the previous year.
There are a few reasons for this strong demand for new housing in Russia including the following:
- Good economic development in Russia including a rapidly growing middle class
- High consumer confidence
- Low unemployment
- Good developments in the mortgage market such as a leveling off of previously rising interest rates
- The country's average living space per person is lower than in Western Europe or North America and current housing is generally in poor condition. This creates the need for and demand for high quality housing
These factors all combine to create a strong market for housing in the country, especially for the modern high-quality units for which YIT Group is known. These new projects are likely going to grow the company's footprint in the country. As discussed above, all three of these projects will be constructed in phases to allow the company to control its costs in line with demand. The first phase of each of these projects will see the company constructing a total of 1,338 housing units in Russia. This is more than what the company started in the third quarter of 2013 as shown by the chart above. In the third quarter, the company started constructing 1,106 housing units. Therefore, just these three projects represent a 121% increase over the company's third quarter starts and that does not even include the housing units that it started constructing outside of these three projects. In the third quarter, the company had a total of 9,897 housing units under construction in Russia. Therefore, these three projects only increase its units under construction by 13.5% over third quarter levels (of course, some of the units under construction in the third quarter will be completed during the fourth quarter). We can see the full impact in the company's current figures, which were released on February 6, 2014:
Source: YIT Group
As these numbers show, YIT Group's presence in Russia has grown significantly due to the three projects that were discussed in this article. These projects should also materially reduce the company's dependence on the Finnish housing market. During the fourth quarter, YIT Group only began constructing two housing projects in Finland containing a total of 429 apartments. While the company did begin constructing a few commercial projects in Finland during the quarter, these have entirely different economics and the company does not need to actively find a buyer as one has already been secured prior to the start of the project.
Although there are certainly some quantitative growth prospects here, part of the appeal of these projects are the qualitative aspects. For example, the company will dramatically increase its reputation in the country as a builder of quality apartment units. As already discussed, the apartments that YIT Group is building now represent a substantial upgrade for most newly middle-class Russian citizens who have been living in poor quality apartments that were built by the Soviet Union. These apartments, while small, are up to Western European standards. Thus, the quality here is much better. I can certainly imagine a scenario in which the families that buy these new apartments and move into them have guests (friends and family) over who see the quality of these apartments and begin demanding YIT Group-built housing for their own families.