OREANDA-NEWS. Fitch Ratings says that the Russian government's extension of its mortgage subsidy programme by another 12 months, at a cost of around RUB16bn, is likely to help smooth out the negative effect on the real estate market from a stagnating economy.

Although it is difficult to quantify the impact of the subsidy programme, Fitch believes that the programme has been important to the real estate and construction industries in Russia, especially to companies active in mass-market properties. Some of these companies, in particular those with high leverage, have been hardest hit by the recession. One of the largest real estate construction companies (SU-155) is currently facing bankruptcy claims from its lenders. Given the company's focus on the mass-market segment and its reliance on the mortgage programme, the Russian government is closely monitoring developments.

Companies with diversified portfolios across multiple real estate segments and robust financial structure are less dependent on the subsidy programme, in our view. Although sales of LSR Group (LSR; B/Stable) will remain under pressure in the coming years, the company has considerable headroom in its credit metrics to withstand the adverse market conditions. This is further supported by its integrated business model and the diversification of its portfolio across the luxury, mid-market and mass market segments.

The subsidy programme from the Russian government, which started on 1 March 2015, was initially scheduled to expire a year later. It aims to support the construction, real estate and banking sectors in current difficult economic conditions, which have seen real disposable income fall 4% in 2015. The subsidy reduces the interest rate for mortgages in the newly-built mass-segment properties. The maximum mortgage interest rate under the programme is set at 12%, slightly above the Central Bank of Russia's (CBR) current refinancing rate of 11%, and compared with market mortgage rates of 14%-16%.

Issued mortgage loans in Russia fell to RUB1,230bn in 2015 from RUB1,760bn in 2014, according to CBR data, but were still comparable with 2012-2013 levels. At end-2015, 41% of mortgages were issued using the subsidy.

The extension of the programme is pending parliamentary approval.