LSR looks to Russian govt for contracts

By Daryl Loo and Yuliya Komleva

LONDON/MOSCOW (Reuters) - Russian real estate and construction firm LSR Group said on Monday it was actively seeking government contracts, from which it expected to book at least 16 billion roubles ($513.6 million) in sales next year.

"We are interested in ready cash, and the government is an ideal provider. It pays well and it pays on time," LSR (LSRG.MM)(LSRGq.L) Chief Executive Igor Levit told the Reuters Global Real Estate Summit by phone on Monday. LSR, which mainly focuses on Russia's second-largest city of St Petersburg, said that so far it had obtained two housing contracts from the Russian Ministry of Defense, and was in the process of tendering for more government contracts, despite significantly lower profit margins.

"What is important for us now is to load the capacity of our prefabrication panel plants as much as possible, even at the cost of lower margins," Levit said.

The company, which also owns construction and building materials businesses in the Urals, was forced to announce last December plans to cut capital expenditure by 50 percent and to shed 10 percent of its jobs after being hit by the downturn.

Levit said LSR continued to focus on cost cutting and had suspended new investment activities, while its Moscow and St Petersburg commercial office projects remained frozen as the company waited out the economic crisis.

"I would not be brave enough to say that the crisis is over. In my personal opinion, the real recovery in the property market could come only next spring," he said.

DEBT TALKS

Like in most real estate markets, Russia's developers gorged on debt when property prices soared due to rising incomes and a fast-growing economy. However, the credit crisis has now forced many of the firms to seek state bailouts.

Developers rescued by state banks this year include Sistema-Hals (HALS.MM), which saw a stake sold to VTB (VTBR.MM), while PIK PIK.MM mandated creditor Sberbank (SBER03.MM) to restructure its 44.8 billion roubles loan portfolio.

Of the 12.5 billion roubles in debt that LSR has due by the end of 2009, Levit said the company would repay 2 billion roubles worth of bonds that are due this year with new bank loans.

LSR is also in talks with Sberbank and VTB to refinance the approximately 8.4 billion roubles that it needs to repay the state banks this year, although the new debt will likely come at a high cost with interest rates nearly doubling, the CEO said.

"What has changed is the cost of borrowing. For example, last year we could borrow at less than 10 percent interest rate, but today we are borrowing at about 16 to 17 percent," Levit said, adding banks now also require collateral for all new loans.

Global property investors are already looking to Russia, lured by the prospects that banks will hold deeply discounted sales of repossessed properties.

LSR said it was not interested in buying these properties.

"It makes no sense for LSR to acquire these new assets because we've got enough land and projects of our own. But we will be prepared to consider managing these properties for the banks when these offers do come," he said.