Key rate decrease: builders’ income depends on Minstroy, not Central Bank

Key rate decrease: builders’ income depends on Minstroy, not Central Bank
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How would the Russian Central Bank’s cautious policy impact upon constructors?

Recently the Bank of Russia announced that the interest rate would be cut by 0.5%. The majority of analysts tend to believe that by the end of the year the weighted average interest mortgage loan rate will not be more than 13%.


This decision was highly predictable and prompted more favourable reports from the community and analysts than in June, 2016, when the CB first cut the rate by 0.5%. Then, a number of experts criticized the regulator for pursuing a moderate policy during an actual slowdown in inflation.

It is clear now that the CB’s financial policy is directed at preserving ‘lowflation’, which is expected to be about 4% by the end of the year, according to the bank’s analysts. To achieve this, the CB is planning to keep the key rate at the level of 10% for quite a long period of time. This year, there won’t be any further decreases.

As far as next year is concerned, the Bank of Russia will consider the issue of rate correction in the 1st or 2nd quarter of 2017. Meanwhile, different forecasts have been voiced.

For example, Sberbank thinks that next year the key rate may decrease to 8%. However, the Head of the CB, Elvira Nabiullina, claimed at a press conference that before the end of next year the rate may go down by only 1% to 9%, and interest rate cut intervals may go down to 0.25% per quarter.

Such cautious activity, from the analysts’ standpoint, is being embarked upon as neither the banks nor the population had an idea that the crisis would persist.

The Russian economy won’t be able to accommodate high risk operations next year, but some blowback from the credit crisis is quite probable.

What will the next interest rate cut do for the construction industry? From our point of view, serious changes should not be expected. Yes, the mortgage loan rate is likely to decrease by the same 0.5%, and the most profitable market offers are likely to be about 12% per annum.

However, one should not forget that this year the state program of mortgage loan subsidies is finishing, and next year we are hardly likely to see an 11% mortgage loan. This means that the growth in mortgage loan programs achieved in 2016 will stop.

Meanwhile, the RF Minister of Construction, Housing and Utilities, Mikhail Menn, speaking at the All-Russia conference on housing construction, said that the future of the program is “the topic of a special talk”. Understanding that such measures support the industry, the Ministry of Construction is likely to argue with the Ministry of Finance for this money.

Neither should constructors expect serious changes in project-tied lending. Banks are decreasing interest on savings thus releasing liquidity, but it should be taken into account that housing construction is referred to the fourth group of risks by the CB. That is, for a developer to be given credit the bank needs to reserve 100% of additional money. So, even additional money is offered at such a rate that the industry will not bear it.

And here the leading part is to be played by the Ministry of Construction. If they manage to convince the CB that the indemnification fund of shared-equity construction starting from January 1st, 2017, which is to insure shareholders, is a sufficient mechanism for investment stability, constructors will see actual changes in financial institutes’ attitudes towards them next year.



Expert opinions

Vladislav YABLONSKIKH, Chief Financial Director of the “KORTROS” GC:

All representatives of the business community, as well as developers, are optimistic about the decrease in leveraged finance in value. From this viewpoint, the future looks positive. The decrease of the CB’s interest rate provides for a reduction in the rates of borrowers’ loans.

Development and construction are the ‘multiplying’ industries of the economy. This means that the state’s support of these sectors allows for an improvement in the general economic situation in the country. In stimulating the effective demand in realty, the state actually stimulates all industries connected with construction project implementation. We hope for the continuation of such types of support.

After cutting the interest rate, downward adjustments of mortgage loan credit costs are probable. If the situation develops in this way, we are likely to see a growth in the number of people willing to take out a mortgage loan. But significant growth in borrowers’ numbers should not be expected. Approximately the same categories of the population are ready to take out a mortgage loan for 10.5% or for 10%.

The key rate is hardly likely to increase by the end of the 1st quarter of 2017. It may occur only in conditions of fundamental economic conversions. Closer to spring, we shall carefully watch the situation in the macro-economy and on the realty market, and follow the regulator’s solutions.


Alexander SINELNIKOV, financial analyst:

The key rate decrease by 0.5% is not important, but the tendencies which started on the financial market from the beginning of the current year are. Besides internal efficiency measures, one of the main indices any entrepreneur should pay attention to, for the correct evaluation of business attractiveness, is the rouble volatility index.

Take into account that sales profitability is to be updated, and also the capital and business margins on the whole. It is especially important for the construction industry, where these indices have been steadily decreasing for the last two years.

Since the beginning of 2016 the index has significantly decreased, from 20% to 15%, which served as the basis for the CB to cut the interest rate without the risk of the rouble weakening: according to my calculations, it was done too cautiously, by only 0.5%.

Of course such measures by the CB will decrease the cost of loans and increase their availability, as the market cost of monetary funds is practically determined by this indicator. But a larger effect will be achieved with the increase of the construction business’s attractiveness on the whole. Objects, formerly unattractive because of their low rouble and currency profitability, may be introduced onto the market.