Foreign Investors in Russia. Waiting Too Long?

Patriots’ Market When the crisis hit, the American foundation Developers Diversified Realty was the first one to put its activities in Russia on hold. By that time the foundation in partnership with the German company ECE had acquired a land plot in Yaroslavl for the construction of a shopping mall. All in all the foundation was planning to raise EUR 1 billion to invest in the local commercial real estate. However Developers Diversified Realty had to freeze its plans till loans become cheaper.

Aberdeen Property Investors had no time to invest in Russia at all, Parkridge Holdings slowed down its expansion, Rutley Russia Property Fund is giving the money back to investors and sells the auto and service center on Kievskoye Highway, its sole business in the country. Some have gone even further. One Equity Partners, a new holding company established by Interros and JPMorgan Chase direct investment foundation entity for working in Russia representatives, announced recently that real estate wasn’t in their focus.

Most real state analysts have three reasons to explain the investors’ behavior: lack of financing to establish a foundation, expensive loans and notorious shortage of quality sites. IC Finam’s analyst Maxim Klyagin brings up one more reason: “Western foundations seem to be very scrupulous in having their strategies approved by their shareholders. So, any changes in the economic fundamentals plunge their plans into the land of uncertainty. With a different investment horizon of 3-5 years as compared to their Russian colleagues, they focus not on rent income, but on the dramatic increase in the site/project value”.

We all know that the market economy has changed. And this change has not been for the better: office rental rates have dropped almost twofold, vacancy rates have reached 30–50%. Real estate capitalization has been decreasing as well. Mr. Klyagin thinks that for some sites it has dropped to 30%.

Justin Berry, CB Richard Ellis Head of Investment Services, says that Europe looks more attractive than Russia: “On the other markets, foreign investors can find projects with appropriate balance of risk and profitability”. Take central London as a good example, says Mr. Berry. There are some mouth-watering projects, as the exchange rate between pound and euro is very low. On top of that, 10-year bonds have record low yields. This is a clear indicator of comparatively low interest rates on loans.

The list of factors goes on and on, with transparent real estate legislation, established and transparent taxation system. Russia becomes an outsider right from the start. How do we know that? In the third quarter of 2009, according to Jones Lang LaSalle’s latest survey, the London real estate sector saw 1,1 billion euro of investors’ money compared to 660 million euro in Russia.

“At the same time, the most active group of investors on the Russian market is local players: foundations and private investors,” - explains Natalia Tishendorf, JLL’s Capital Markets and Investment Director in Russia and CIS.

Quality Comes First There are some investors who do believe in Russia. British Fashion House in partnership with GVA Sawyer is on a purchase spree of land plots for the construction of 10 shopping malls in Russia. the investors hope to get a fair return on their money and are seeking the land overvalued prior to the crisis. In some areas such plots now cost 3 to 5 times less. The UK-based Raven Russia which established its foothold in the country in 2005 is finishing all its projects. Hungarian TriGranit Development saw its plans slightly corrected by the crisis, but is also active on the Russian market. “We have focused our resources solely on the projects in central Moscow and are now paying more attention to quality: its concept, design, subcontractor and tenants”, – said Marianna Romanovskaya, TriGranit Development Deputy General Director.

Justin Berry says that there are investors on the market who are looking for a possibility in Russia. “Foreign investors are constantly looking for quality land plots”, – confirms Natalia Ivanova, AFI-Development representative. And she knows what she if talking about: as a developer, her company is in contact with investors in the fields. These guys have simple search criteria: ready-touse buildings with reliable tenants and profits. There is one which is sold at precrisis prices. Result – investors are hard pressed to find such projects as they are almost non-existent. Only middle and low-quality projects are sold at low prices and nobody wants them.

Developers who are not pinched by the liquidity crisis want real market prices for good projects. “Quality projects are scooped up by banks as loan collaterals. It is unlikely that they start selling them out when the market has not started to pick up yet”, – says Maxim Klyagin. The market witnessed the first collateral sale deal in October. Alfa Bank said goodbye to BC Severnoye Siyanie. Experts priced the deal at $85–90 million. Prior to the crisis it cost twice more. Its new owner is a Russian company. Natalia Tishendorf thinks this is a very interesting time for foreign investors to access the local market. “This deal set a capitalization benchmark rate”. Analysts are sure foreign investors will regain interest in the Russian market in the months to come. Mr. Berry adds that by the year 2010, investments earmarked for the Russian market will grow in net value as compared to this year. “With the prices on the established West-European markets going up again investors will turn to Eastern Europe and Russia”.

Ms. Tishendorf agrees that Europe has become very pricy, while the Russian banking system is convalescing and lease interest rates are stabilizing. “First of all, under such circumstances investors will consider property in Moscow and Saint Petersburg, - says Mr. Berry. It is more liquid and easier accepted by banks if you need a loan.” Mr. Klyagin recalls one more option for investors, including foreign ones: they can purchase the shares of Russian publicly listed companies: “Developers’ shares now have good growth potential and positive dynamics.” Troika Dialog’s Sales Manager Igor Prokhaev advises clients to pay closer attention to developers’ shares. Their price can rise dramatically in the middle-term perspective, – thinks Mr. Prokhaev. The worst is over for developers, concluded the expert. Natalia Tishendorf adds: “Those investors who came to the Russian market 3-4 years ago and lost money during the crisis still remember the times of growth.”