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Lending to the housing and communal services sector is both possible and necessary

Chairman of the Board of Directors of Center-invest Bank, Dr. Vasily Vysokov, addressed the plenary session of the VII All-Russia Forum for Managers in the Housing and Communal Services Sector, held in Moscow on 12-13 December. Presenting a paper entitled «Financial Engineering to Modernize the Housing and Communal Services Sector», Dr. Vysokov spoke about the bank’s experience of lending to finance projects in this sphere.

The bank’s participation in this dedicated forum is a good indicator of the investment opportunities presented by the housing and communal services (utilities) sector. Indeed, consumption of fixed capital in the sector is running at 60%, more than 50% of boiler rooms and utility lines are in need of repair, and 15% are in a dangerous state. While more than 40% of multifamily residential buildings require renovation, less than 3% of the housing stock is renovated annually.

Given the current level of disrepair and obsolescence of fixed assets in the sector, the higher demand for housing-related services can only be met by increasing charges. The alternative is to genuinely modernize the sector so that increased demand can be met on the basis of new, more modern technologies and equipment, without the need for price increases. The difference between the efficiencies of the old and the new technologies would provide the return on investment in modernizing the sector and thus also increase its investment appeal.

However, not many banks are willing to lend to the housing and communal services sector due to the high risks involved. First, there are institutional risks: the economic weakness of the existing homeowner associations, management companies and local authorities. The risks that a homeowner might appeal against a majority decision taken by a homeowner association are very considerable. In other countries, it is common for homeowners to be active participants in the housing and communal services market. However, in Russia, flat owners are reluctant to take responsibility for the buildings. Finally, there are inconsistencies, and, often, even contradictions, in the body of legislation relating to communal services, local authorities, land, tariffs and energy efficiency, as well as the regulations on technical supervision. These make any project in the sector almost unfeasible.

Center-invest Bank applies an integrated approach to manage all these risks through technical, financial and social engineering. With this approach, the efficiencies achieved by new technologies should cover the risks of lending to the housing and communal services sector.

In 2004, Center-invest Bank helped Teploenergo, a district heating company in the city of Taganrog, to modernize five boiler houses by leasing energy efficient equipment, installing metering devices and replacing pipelines. Thanks to the success of these first projects, the European Bank for Reconstruction and Development decided to become a shareholder in Teploenergo, and independent experts named it «the best heating company in Central and Eastern Europe». By introducing new technology, the company almost halved its labour, electricity and water costs, as well as its carbon dioxide emissions. In 2011, Center-invest Bank expanded its range of loan products for homeowner associations and management companies to include loans for building renovations, introducing energy efficiency technologies, and installing metering devices.

So far, the bank has made 52 loans for these purposes, with an average value of approximately RUR1m. These loans have improved living conditions for the residents of 4,000 flats.

The measures taken have cut energy consumption in the buildings by 20%. Even more importantly, the residents have seen for themselves that it is worth taking out a bank loan to renovate a block of flats. Using energy savings alone, the project payback period is just 2-4 years, but there is also the aesthetic effect of living in a renovated, comfortable building.