On March 10-13 the 20th Exhibition of Investment Opportunities in Real Estate - MIPIM 2009 - was held in France. "Who came to Cannes this year?" – This was the main question of the first day. "Where to find an investor?" - This question was raised throughout the exhibition. "The state will become the main engine of the Russian market." – This was the final conclusion.

In the past sending 10-20 people from any company to MIPIM was considered normal. It was a type of reward for good work. During the day there was a tight schedule of meetings and then in the evening there were the parties - an indispensable attribute of the exhibition. This year on the first day of the exhibition many Russian chief executives, clutching attache cases and portfolios, could be seen running around and making contacts. The total number of participants at MIPIM this year fell to around 20,000 (from 29,000 in 2008). Of those, 1,153 were from Russia.
The evening parties did not spoil the business mood at MIPIM. Most participants said that they were more interested in finding business partners than enjoying the high-society events in the evenings. "This is the first time people have come to make deals, rather than bask in the limelight," noted Sergey Ryabokobylko, senior executive director of Cushman & Wakefield Stiles & Riabokobylko.
What the exhibition lost in scale, it gained in quality – is what many participants said. "The presence of a large number of investors looking at well designed investment projects - that's the main thing that we expect from MIPIM. Having our projects attracting their attention, we will gain the needed investment funds," says Valery Shantsev, the governor of the Nizhny Novgorod region.
Russian regional authorities are openly seeking investments in their constituencies. According to Dmitry Kozak, a deputy prime minister of the Russian Federation, the government is expecting the arrival of foreign investors in the regions and he promises to assist them in this endeavor.
Unlike last year when developers could wait for large investors to come to their stands by themselves – to the last day, now these same developers started actively looking for investors. In addition, the developers faced a difficult task: investors don't just want to talk about the benefits of a specific project, but to be convinced themselves that Russia is a good market for investments – i.e. successful like the French, English or Italian markets.
"I think that today we have no illusions about the interest of Western investors in the Russian real estate market. We have a situation where Western money is concentrated at home on their local markets. I believe that today one should primarily bet on obtaining Russian money. This is the money from local private investors. But, of course, the main engine of real estate investments, in my opinion, should be the state," believes Vladimir Pinaev, managing director, owner & occupier services, Russia and CIS, Jones Lang LaSalle.
"I believe that in the long term Russia is interesting to foreign investors, but for now other markets are more attractive, mostly because in Western Europe and in America the capitalization rates have declined. Therefore I think that in the medium term interest in Russia will be somewhat lower. But of course everything depends more on oil prices than on any other commodity, and if prices start to rise again the investment attractiveness of Russia's real estate sector will also increase," notes Sergey Gutnik, head of the property department at the European Bank for Reconstruction and Development.
Whereas previously the country risks were compensated by the high rates of return, today these risks are of prime importance. And although foreign investors do not deny the attractiveness of the Russian market, noting its low saturation levels, they are in no hurry to invest in Russia.
"We have been investing in Russia for two years now, in various commercial real estate sectors. There are good opportunities here for development, but the current environment looks bleak. Now we are watching to see how things evolve," said Thomas Erdmann, member of the board of directors at Europolis.
Although the interest of foreign investors in Russia fell heavily last fall, local market experts do not agree that the country has lost its investment attractiveness. Nevertheless only high quality projects are now in demand in Russia. In addition, foreign investors are interested in buying only finished objects - good ones and cheap. They are not interested in taking on development risks.

"Western investors have capital that they want to invest in Russia. They perhaps don't have such a great amount of money, and thus they are moving very cautiously. In my opinion, the focus has changed. Whereas earlier, in the previous two years, investors were willing to invest in development projects, today they are mostly looking at already existing assets which can provide a steady income, and are being very careful in choosing the project and the sector," says Vera Setskaya, president of GVA Sawyer.
Investors at the exhibition acted like submarines. They were nowhere to be seen. Once in a while they surfaced, and then disappeared from view again. At one such event where foreign investors surfaced was the meeting of the Investors Club, organized by the Managers and Developers Guild. The panel discussion was attended by representatives of investment banks and investment funds like Eurohypo AG, Pramerica RE Investors, Geomar, Union Investment, Europolis, DEGI / Aberdeen, and Amplion.
What is the nature of the current crisis? Is it simply a cyclical crisis or civilizational – a consumer society crisis, a crisis caused by irresponsibility of the financial structures? How will the development business change and what will post-crisis construction look like? What are investors interested in today? These were some of the issues considered at the Investors Club meeting.
Many experts in the discussion pointed out that in the long term the Russian market is interesting for investors. It needs improvement, because previously the rental rates were unhealthy, and the cost of construction was going up every two weeks.
"The current crisis certainly has a cleansing character", believes Andreas Schiller, the discussion moderator and editor in chief of the CompETence Circle magazine. "Take last year's MIPIM – the majority of these projects were merely virtual and they had no relationship to reality. Developers had simply become the appendages of bankers, who used the land as a financial asset. Scooping up land to strengthen its capitalization - then trying to re-sell it at higher prices. This bubble has now burst. Now the market should once again become more realistic, closer to consumers."
According to Thomas Bayerle, head of global research DEGI / Aberdeen Property Investors, the real estate market of Russia will begin to emerge by 2010. This will be helped by the revitalizing economies of Asia, which the expert predicts for 2010-2011, and which will cause energy prices to increase. For the Russian real estate market, this will be the time when capitalization rates will decline, as rental rates will start to increase.

According to Thomas Beierle, Moscow and St. Petersburg are on par with such East European capitals as Budapest, Prague and Warsaw, and by their level of development have already approached the border dividing the developing and mature markets. In his opinion, it is this crisis that can help this transition happen.
However, not all investors are so optimistic about the Russian market. According to Thomas Heller, chief investment officer of Europe Pramerica, American investors currently take a dim view of the Russian market and are not ready to invest in it. The primary reasons, according to the expert, are the political risks. He believes that European investors are more positive. Perhaps, in 2010 his fund will take interest in investing in some existing facilities. Meanwhile, Heller says they are sizing up the market.
The current situation is far from optimistic. Naturally, there arises the question of whether there is a future for the Russian market.
According to Darrell Stanaford, managing director of CB Richard Ellis in Russia & Ukraine, in the short term the situation will become problematic for developers, given that leasing rates, influenced by the flagging demand, have taken a plunge. But in the long term such a situation is going to improve the market. However the expert believes that a year ago the leasing rates, having reached their peak in May, worried investors much more than they do now. According to him, the Russian market has become more risky today, but at the same time more predictable. And it still might be of interest to foreign investors in terms of profitability.
With the reduction in investments, the state has become the most attractive investor, believes Veniamin Golubitsky, president of Renova-StroyGrup. He sees the future of the market in public-private partnerships, which can be most clearly expressed in the complex development of territories. "Infrastructural projects are supported by governments in many countries, and Russia is no exception," says the expert. Such large-scale projects are resistant to crisis conditions, as they are originally designed for a long implementation period, during which market downturns are inevitable. Irina Dzyuba, commercial director of MR Group, adheres to another strategy. This year her company plans to begin construction of a project with the area of 40,000 sq m. "The volume of the project significantly affects its budget, one has to forget about large-scale projects for the moment," she says.
"Today every project should be flexible. Instead of the two phases of 50,000 sq m each, it is better to divide the project into 5 phases and commission every 20,000 sq m separately," Stanaford says.
This idea is supported by Golubitsky. With regards to the integrated development of the territories, he stresses that here it is very important to react flexibly to the needs of the market. According to him, this way one can always sharply increase the volume of areas launched onto the market, or vice versa, reduce it.
Speaking about the concepts of new projects as a whole, Dzyuba stresses that today the market belongs to buyers and that the issue of price is now in the foreground. She believes that the future will see a demand for projects developed on the built-to-suit scheme. Darrell Stanaford forecasts that offices in central business districts will be in demand. For the rest of this year he sees no opportunities for the construction of shopping centers.
The issue of the future of the Russian market was addressed during many events and discussions. Public-private partnership was mentioned by many experts as the most likely trend.
Again during MIPIM governments of various regions and cities presented their large-scale projects, just like in the previous years. However investors, even though they might be ready to provide money, are willing to do so in significantly smaller amounts.
Those developers who are already working on similar projects believe that they are resistant to the crisis and will continue to evolve. Projects for integrated development of the territories, with due account for the recession and having a flexible approach with the correct phasing will always be in demand. "In my opinion, the projects for integrated development of territories are best prepared for this crisis. Many short-term fluctuations in the market have less impact on these projects," says Lev Pukshansky, vice-president of the Morskoy Fasad MC.
The number of large-scale projects has not increased this year; many of them have just come back again and were shown just like in the previous year. And although the preferences with regards to the volume of investments have changed this year, large-scale projects did attract interest. Above all, the most attractive partner for these projects was the State. Investors hope that after becoming a partner of the State they will obtain security guarantees.