If it weren’t for the political risks, shares in Russian real estate group Raven Russia (RUS) would be an out-and-out bargain, trading as they are at a 10 per cent discount to adjusted net assets. But the potential for damage from sanctions imposed on Russia remains an unknown quantity, although solving the situation in Ukraine would immediately sweep away the uncertainty factor.
On the positive side, net rental income rose 12 per cent to $97.8m (£59m) in the half year to June, while occupancy remained high at 97 per cent. Demand for quality warehouse space in and around Moscow remains strong, and there is a chronic undersupply of new space, the worst of all major European capital cities. For Raven Russia, there is a further 107,000 square metres of new space, equivalent to around 8 per cent of the total portfolio, due for completion by the end of this year, which is already 50 per cent pre-let, and will add $12.5m to net operating income.
And, quite sensibly, Raven Russia has moved to reduce the risk of higher borrowing costs, should sanctions start to bite, by extending the average maturity of the debt portfolio and locking in to extended fixed-term rates. Group finances remain strong, with $188m of cash on the balance sheet. Some of its rivals are not so well placed however, and there could be opportunities for corporate deals on advantageous terms should some property companies become over-extended.
There are other less supportive factors to consider. Apart from the obvious risk of sanctions reducing growth in Russia, there has also been a big increase in new building, with construction underway equivalent to around a quarter of existing stock. The risk here is that vacancy rates may start to rise, and rents may face downward pressure; particularly pertinent as Raven Russia has leases expiring this year and next with a combined rent roll of around $24m.
But Raven Russia has strong defensive qualities should the economy deteriorate, although growth in net operating income is likely to be modest. Analysts at Equity Development are forecasting net operating income of $202m for 2014 (from $186.4m in 2013).
