A Patriots’ Market

In recent years, investment in Russian commercial properties grew at breakneck speeds. Just in 2006, they were 10 times higher than the preceding year. As reported by consultancies, from 2005 to 2008 the total money infused into the realty market exceeded $10 billion. Of this, more than half came from Western investment funds which snapped up offices, malls, warehouses and hotels like hot cakes, attracted by 20% yields – a far better deal than they could possibly strike in Europe. However starting last fall Western managers withdrew some $5 billion from the Russian market. Will they come back any time soon?

The American fund Developers Diversified Realty was the first to stop its activity in Russia when the crisis hit. At that moment, it had already purchased land in Yaroslavl for the construction of a shopping center, in partnership with German ECE, and intended to raise one billion euro from investors to develop this project in Russia. Now all its plans have been put on hold, until loan capital becomes cheaper. Aberdeen Property Investors did not have time to spend money in Russia, Parkridge Holdings stopped their expansion plans, and returning money to its investors and selling its only project in Russia was Rutley Russia Property Fund. In addition, the representatives of One Equity Partners Investment Company – which was recently created to operate in Russia by the "Interros" Holding and the direct investment fund of JPMorgan Chase, – suddenly declared that the new investor is no longer interested in real estate.

Real estate market analysts agree unanimously on the three main reasons why investors have left – lack of money for fund formation, expensive additional financing and a great deficiency of quality projects. Maxim Klyagin, analyst with IK Finum, gave one more reason, "Western funds work closely with their shareholders in making decisions, therefore any changes in economy place in doubt their further plans. After all, their investment horizons are 3–5 years; they are focused on the fundamental increases in a project`s price, instead of long-term rental income."

With the economy turning sour, office leasing rates have fallen by almost 50%, vacancy rates are reaching 30–50%. As a result, real estate capitalization rates have decreased too. According to Mr. Klyagin, in some projects by as much as 30%.

Justin Berry, head of investment services at CB Richard Ellis, thinks that Europe has once again become more attractive than Russia. "Foreign investors can find suitable projects for investments, with the required risk to profitability ratios, in other markets". Justin Berry gives an example of Central London, where there are many very interesting projects for investors with euro currency – since today the pound is relatively low with respect to the euro. Besides this, ten-year bonds of the British government are trading at record low levels, which means low interest rates will soon follow.

Here we can also add the transparent legislation as well as a well-developed and clear system of taxation in England – so Russia at once becomes an outsider. As a result, according to latest information from Jones Lang LaSalle, in the 3rd quarter of 2009, investors have placed 1.1 billion euro into the real estate market of the United Kingdom, and only 660 million euro into the Russian market. "Therefore domestic buyers – funds and private investors – are the most active group of investors in the Russian market," explains Natalia Tishendorf, director of financial markets and investments at Jones Lang LaSalle in Russia and the CIS.

Quality comes first

However, there are investors in the market, who still believe in Russia. The Fashion House English Company in partnership with GVA Sawyer has started buying land for the construction of 10 shopping centers in Russia. Of course, investors are thinking twice before investing into land, which in many places has "sunk" 3–5 times since the crisis hit. The British fund Raven Russia that came to our country in 2005, is finishing all projects that it started. The Hungarian TriGranit Development has slightly adjusted its plans, corrected for the crisis, but continues with active development. "We have concentrated our resources exclusively on the centrally located objects in Moscow and have given special attention to the quality of each future project – the concept, design, prime contractor, tenants," explains Marianna Romanovskaya, Deputy General Director, TriGranit Development.

Thus, according to Justin Berry, investors who are looking for investment opportunities in Russia remain in the market. "Foreign investors are in constant search of quality projects," confirms Natalia Ivanova, public relations director of AFI Development. She knows what she is talking about – her company, being a developer, constantly communicates with many investors. Their criteria for the selection of projects are simple – these must be ready projects that are rented out and bring in steady revenues and profits. And which are being sold at "crisis" prices. However, there are not that many such offers in the market. Only average and poor quality projects are offered cheap, and investors do not want them. The developers, who are not being forced to sell everything, are demanding market prices for their good projects. "Or quality objects have been mortgaged to the banks as a loan security. And the banks will hardly sell such assets when prices are "at the bottom," adds Mr. Klyagin.

In October, the market witnessed its first collateral sale. The Alfa Bank sold the "Polar lights" business center, which it took over after re-structuring the debt of the Kopernik Group. Experts have estimated the deal to be worth $85–90 million. This project, with the area of 39,000 sqm, was worth twice more before the crisis. Though it was a Russian buyer who obtained "Polar lights", Natalia Tishendorf believes, this has signaled the best moment for foreign investors to enter the market, "This deal has defined the capitalization rate for investors."

Analysts are convinced that the interest of foreigners in the Russian market will rekindle in the next few months. Justin Berry believes that in 2010 we can expect a net increase, in comparison with this year, in the funds earmarked for investment in Russia, "After prices in mature West-European markets have risen now, investors will once again turn their attention to Eastern Europe and Russia." Natalia Tischendorf agrees that the prices in Europe have increased greatly, and the financial condition of the banking system in Moscow is improving, the leasing rates are stabilizing.

First of all, Mr. Berry believes, investors will look at real estate in Moscow and St.-Petersburg – here real estate is more liquid, and it is easier to obtain bank financing. Maxim Klyagin mentions the possibility of investors, including foreign ones, to purchase the stocks of Russian public companies, "The development company stocks now show positive dynamics and good potential," At a recent Internet conference, arranged by Troika Dialog for its clients, Troika`s sales-manager Igor Prohaev also advised clients to pay attention to development company securities. In his opinion, they can rise in price greatly in medium-term prospect. "The worst is already behind for the developers," concludes the expert.

And Natalia Tishendorf nostalgically adds, "Investors, who lost their money during the crisis period, but who came to the country 3–4 years ago, still remember the golden days of its active growth." Sooner or later, the market will once again provide them with profits. Even if these are not that much greater than in Europe, after all, aren`t lower profits an indicator of stability in the market?

Автор: Liliya Lobanova

Commercial Real Estate №23 (129), December,01-15 2009