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27 Декабря 2010, 14:02
Rare but Sure
Since the end of 2008, the activity of Western investors in Russia has nearly ended. The real estate sector overnight turned from being a promising and lucrative place into an “inflated” and “overheated” sector. Foreigners began to find more challenging targets for their investments. Rare buyers were mainly the local banking and industrial groups. These started to take advantage of all the benefits of “the bottom of the market”, and started to acquire sites for their own needs at bargain prices. However, to say that investor interest has totally dried up, would be an exaggeration. Quality facilities in Russia may be scarce, but they are always in the spotlight. We present an overview of the most interesting transactions of the past year.
KanAm Grund Fund decides not to purchase the Citydel office building from the Tema Development Company The purchase of this property was announced in July 2008. Construction of the building was underway, and the fund planned to pay the developer after the work is complete. Both parties confirmed the transaction took place, and analysts say this purchase might become one of the largest deals of the day.
We should note that liberalization of the German legislation has allowed this investment fund to enter the Russian market. Before that, German funds could only purchase properties from their direct owners, while the Russian market follows a different practice, involving a chain of affiliate companies. In December 2007, BAFin (federal department for control over financial activities in Germany) removed the previous restrictions.
Anyway, two years after the transaction, German investors announced their decision to leave the project. According to Yevgeny Semenov, Director of the Investment Department at Knight Frank, this decision was due to economic reasons: the situation at the real estate market has changed drastically and the agreements achieved at the height of the market, in the beginning of 2008, nearly lost their value. This is a good business center, but the price is too high, another expert comments. Yevgeny Semenov says that such contracts usually stipulate a number of requirements, and it seems probable that KanAm Grund had a formal opportunity to leave this deal. KanAm Grund Fund decides not to purchase the Citydel office building from the Tema Development Company Certainly, KanAm Grund was not the first investor to purchase properties in an overheated market. “However, then investors believed the market to be stable and prices to keep growing,” says Alexander Ksendz. “Most likely, the reason for declining the purchase was the exuberantly high price, given today’s market situation, $600 million. Besides, the owner was not able to lease out all the premises at the moment the property was commissioned, which might have been one of the conditions stipulated in the agreement.”
Alexander Ksendz believes that the property was overvalued even before the crisis, as $600 million is too much even for an overheated market. We should note that the $600 million, which KanAm Grund reportedly paid for Citydel, still circulates among the real estate market participants, though the parties to the contract never made any specific numbers public.
Another expert believes the transaction amount was far less, about $350-400 million. With the crisis starting, the value of Citydel would have dropped even more.
NEO Consulting Group experts say that today Citydel costs no more than $280320 million.
KanAm Group Company, of which KanAm Grund Kapitalanlagegesellschaft mbH investment fund is a subsidiary, was founded in 1978. Its portfolio contains 126 projects with the total area of more than 4.9 million sq m. The company’s total assets are estimated at $12.11 billion. Its holdings include the buildings of Deutsche Bank AG in London and the U.S. Ministry of Justice in Washington.
A Norwegian company Wenaas Hotel Russia AS, owned by the Wenaasgruppen A/S investment fund, announces the purchase of the Sheremetyevo-2 hotel buildings The seller was MB-Finance LLC. The hotel is located near the new Terminal D of Sheremetyevo International Airport. In the future it will be managed by the Rezidor Hotel Group under the Park Inn brand.
This is not the first purchase of this Scandinavian company in Russia. Now Wenaasgruppen owns four hotels in St. Petersburg - the Pribaltiyskaya and Pulkovo (these operate under the Park Inn brand), Radisson SAS and the Sokos Hotel Olympic Garden. Another Park Inn hotel with 270 rooms is under construction in St. Petersburg. Another two hotels owned that Wenaasgruppen owns are located in Murmansk and Yekaterinburg (Park Inn). The hotel operates in the midrange category and has 293 rooms, a bar, restaurant, conference room and a banquet area. The total price of the transaction has not been disclosed, but market participants estimate that it was around $65 million.
The investment activity in the hotel sector has been close to zero recently. No one wanted to get involved, as this sector requires long-term investments. It is much easier to build an office or a retail center – you build it and rent it out even before it is finished and a steady income flows in. This was typical of the Russian market before the crisis hit. Only later on, it became clear that the golden tree no longer bears fruit - every fourth square meter of office spaces is vacant, things are not as clear as they once seemed. Now investors are starting to look at hotels. This is the only sector where there is a stable demand. The Moscow hotel rooms fund is almost fully loaded. Especially the mid-market hotels are in great demand. “This deal is a sign of renewed confidence in the development of the Moscow hotel real estate market,” believes Marina Usenko, Head of Jones Lang LaSalle Hotels-Russia.
The demand for budget-class hotels is so high that Stanislav Ivashkevich, Deputy director for Development of Hospitality Sector, Strategic Consulting and Appraisal at CB Richard Ellis, encourages the building of hundreds such hotels. Arild Hovland, Senior Vice President of Business Development at Rezidor Hotel Group, believes that the 5,000 new budget-class rooms, if they were opened in Moscow, would be swallowed up instantly. The paradox here is that cheap hotels are not profitable to build. The land is too expensive and administrative costs are huge. A vicious circle - the higher the cost of construction, the more expensive a hotel should be. The State could provide “long” money or cheap land, but so far neither of these have been provided, say the experts. Inside all the declared plans of Moscow Mayor, Yuri Luzhkov, there has been no support of the program. Almost all the land, offered on concessionary terms to investors, was unsuitable for development.
Sheremetyevo-2 may become a quality asset for investors - the hotel has been in operation for a long time, has a steady client base, and is located close to a transportation hub. Hotel was built back in the Soviet days – that is one minus. At that time, the standards differed from the international ones. However, the owner in the past few years has put a lot of money into its renovation. The rooms and common areas were modernized, and new up-to-date engineering systems were installed.
Sheremetyevo Airport has recently made efforts to catch up with its more developed competitor - Domodedovo Airport. It constructed and placed into operation a new terminal (which caused huge jams at the airport just before the New Year holidays) and built a direct railway line to the center of Moscow. All this, according to Marina Usenko, provides excellent opportunities for the development of the hotel business.
The British investment group Evans Randall has purchased the Silver City Business Center located on Serebrianichesky Quay
The deal was announced at the very end of 2009 around the time the business community was leaving for the Christmas holidays. According to Reuters, quoting Michael Evans - Head of the Investment Group, the amount of transaction totaled 190 million EUR (about $272 million). It is interesting that the seller, another British fund called RP Capital Group, has been working in the Russian market for just two years. Silver City was purchased from a Russian developer, Delin Development, in January 2008. The transaction amount was not disclosed back then, but analysts estimated it at $350 million (it took the third position in the most expensive transactions of the year). One can hardly call this investment of RP Capital Group a successful one. “Perhaps the investors started having doubts about the Russian real estate market,” that is the speculation of some market players on the possible reasons of such a sale.
Michael Evans, Head of the Investment Group, on the other hand, is full of optimism, “The Russian leasing market is becoming more stable and it even has certain prospects for leasing rates to start grow soon.” He believes that a big plus here is that largest leaseholders of Silver City (including Canon and Campbell’s Soup) have concluded long-term contracts – for five years and more. “I believe this transaction was attractive for the purchaser,” says Alexander Ksendz, Director of the Commercial Real Estate Appraisal at NEO Center Consulting Group. “The price of $3,000 per square meter of the total area does not seem expensive, even given the current crisis. I believe that this low price acts as a compensation for certain investor’s risks arising from the possible shortage of leaseholders in the nearest future.” According to the expert, about 10% of the areas are still vacant. He believes that the current leasing rate of $550-700 per sq m per year is competitive, though properties of comparable quality and location may offer $600-650 as well.
The deal was not the largest one, but also became one of the most unusual.
It is believed that in the future Evans Randall will try to attract private investors and sell them shares in this project. The Russian market has not yet seen such schemes. Experts say that this will hardly be of interest to Russian business class as everything depends on the capitalization rates, but for Western investors it may seem attractive. “It is a worthy property, almost fully leased (95%) and efficiently managed,’ another expert commented.
“But there was no real money exchanging hands in this case, and I would not call it a transaction as such, it is more in the nature of a re-packaging,” he says. It is very difficult to sell this property right now. That is why the following plan was developed: the property was given to Evans Randall, who will issue securities and sell them to investors. Only in such way will the owner receive real money. Such scheme is profitable for Evans Randall as it gets the property at a low price with a potential profit of about 15%, the expert believes.
CB Richard Ellis acted as a consultant in this transaction – this company also provides facility management services for the property. However, the company refused to provide their expert opinion on the nuances of the deal, referring to the confidentiality clauses in the contracts.
This transaction with RP Capital Group is not the first purchase made by Evans Randall. According to the company’s website, significant purchases of office real estate were made in the markets of England and Western Europe in 2006-2008. The list of the group’s purchases includes head offices of Commerzbank and Credit Suisse in London (127.5 and 452 million pounds accordingly), a representative office of Deutsche Telekom in Munich (270 million EUR) and the Gherkin skyscraper.
The British Fashion House in cooperation with GVA Sawyer announces plans to build 10 retail centers in Moscow and other Russian regions
This project became known to the public when Moscow streets became plastered with the most popular advertisements of the day - “For Rent”. Constant growth in the real estate market gave way to a slowdown and stagnation of the sector, with supply exceeding demand, and not the other way around. Most construction projects were suspended, credit financing ceased, and many leaseholders started asking for reductions. It seemed crazy to start new construction projects these days. However, experts at GVA Sawyer believe that discount stores may become the new growth segment in the crisis times. The company announced its decision to build 10 outlet centers in cooperation with the Fashion House. “Outlet malls are less sensitive to economic cycles and are able to generate good profits, as manufacturing companies try to sell off their previous season’s collections,” explained Cameron Sawyer, Chairman of the Board at GVA Sawyer.
Opponents of this idea doubt that such stores may take root in Russia. Anyway, the commercial impact will be seen only after such stores open. “We have already reached the half-stage mark in the construction of the first property in Moscow and plan to open it in the 4th quarter of 2011,” reports Fashion House.
Fashion House also notes that along with Moscow, they purchased another land plot in St. Petersburg. Investors keep silent about the amounts of the transactions, but Cameron Sawyer himself has repeatedly mentioned that prices for good land plots have barely fallen during the crisis. “Discounts were higher than usual, but this is confidential,” say the representatives of Fashion House.
How the situation develops in the future is not clear, nor is it clear whether the plans to build 10 retail centers will come to pass. So far the situation in the Russian investment and real estate markets is not too favorable. Meanwhile, GVA Sawyer is confident that the Russian market is ready for outlet centers. There is a great demand from some leaseholders and there are many investors with experience of working with outlet centers. And they are ready to participate in this project, says Kira Smirnova, Director for Strategic Development at GVA Sawyer.
Russia Development Fund (managed by IMG) purchases a 30% stake in Kvartstroy
The transaction took place in spring of 2009 and was one of the first transactions in the real estate market since the crisis began. Maxim Kunin, Managing Partner of IMG (Investment Management Group), noted that this was not an attempt to determine the so-called bottom of the market, but a full-scale investment strategy, as the fund expects to generate profits of around 35%. Darrel Stanaford, Managing Director at CB Richard Ellis, characterized the purchase of shares as the first deal which was not connected with crisis assets. Negotiations between IMG and Kvartstroy started even before the crisis. The parties used the following scheme: the developer made an additional issue of shares, which the fund subsequently purchased. Market players estimate that 30% of the shares of this well-known development company might cost more than $100 million. However, today this figure seems hard to believe. Yevgeny Semenov thinks that Russia Development Fund might have spent no more than $30 million. “It was a good transaction carried out at the market bottom. A smart investor seeing good prospects in a project of an experienced developer,” commented Mr. Semenov.
Maxim Kunin explained that his choice of partner was determined by the fact that Kvartstroy has extensive experience of survival in extreme economic conditions, having lived through the 1998 crisis in Russia and the difficult situation in Kazakhstan. Kvartstroy’s portfolio includes almost 3 million sq m of residential and commercial real estate at various stages of completion - in Moscow, Volgograd, Kazakhstan and Nizhny Novgorod.
We should note that liberalization of the German legislation has allowed this investment fund to enter the Russian market. Before that, German funds could only purchase properties from their direct owners, while the Russian market follows a different practice, involving a chain of affiliate companies. In December 2007, BAFin (federal department for control over financial activities in Germany) removed the previous restrictions.
Anyway, two years after the transaction, German investors announced their decision to leave the project. According to Yevgeny Semenov, Director of the Investment Department at Knight Frank, this decision was due to economic reasons: the situation at the real estate market has changed drastically and the agreements achieved at the height of the market, in the beginning of 2008, nearly lost their value. This is a good business center, but the price is too high, another expert comments. Yevgeny Semenov says that such contracts usually stipulate a number of requirements, and it seems probable that KanAm Grund had a formal opportunity to leave this deal. KanAm Grund Fund decides not to purchase the Citydel office building from the Tema Development Company Certainly, KanAm Grund was not the first investor to purchase properties in an overheated market. “However, then investors believed the market to be stable and prices to keep growing,” says Alexander Ksendz. “Most likely, the reason for declining the purchase was the exuberantly high price, given today’s market situation, $600 million. Besides, the owner was not able to lease out all the premises at the moment the property was commissioned, which might have been one of the conditions stipulated in the agreement.”
Alexander Ksendz believes that the property was overvalued even before the crisis, as $600 million is too much even for an overheated market. We should note that the $600 million, which KanAm Grund reportedly paid for Citydel, still circulates among the real estate market participants, though the parties to the contract never made any specific numbers public.
Another expert believes the transaction amount was far less, about $350-400 million. With the crisis starting, the value of Citydel would have dropped even more.
NEO Consulting Group experts say that today Citydel costs no more than $280320 million.
KanAm Group Company, of which KanAm Grund Kapitalanlagegesellschaft mbH investment fund is a subsidiary, was founded in 1978. Its portfolio contains 126 projects with the total area of more than 4.9 million sq m. The company’s total assets are estimated at $12.11 billion. Its holdings include the buildings of Deutsche Bank AG in London and the U.S. Ministry of Justice in Washington.
A Norwegian company Wenaas Hotel Russia AS, owned by the Wenaasgruppen A/S investment fund, announces the purchase of the Sheremetyevo-2 hotel buildings The seller was MB-Finance LLC. The hotel is located near the new Terminal D of Sheremetyevo International Airport. In the future it will be managed by the Rezidor Hotel Group under the Park Inn brand.
This is not the first purchase of this Scandinavian company in Russia. Now Wenaasgruppen owns four hotels in St. Petersburg - the Pribaltiyskaya and Pulkovo (these operate under the Park Inn brand), Radisson SAS and the Sokos Hotel Olympic Garden. Another Park Inn hotel with 270 rooms is under construction in St. Petersburg. Another two hotels owned that Wenaasgruppen owns are located in Murmansk and Yekaterinburg (Park Inn). The hotel operates in the midrange category and has 293 rooms, a bar, restaurant, conference room and a banquet area. The total price of the transaction has not been disclosed, but market participants estimate that it was around $65 million.
The investment activity in the hotel sector has been close to zero recently. No one wanted to get involved, as this sector requires long-term investments. It is much easier to build an office or a retail center – you build it and rent it out even before it is finished and a steady income flows in. This was typical of the Russian market before the crisis hit. Only later on, it became clear that the golden tree no longer bears fruit - every fourth square meter of office spaces is vacant, things are not as clear as they once seemed. Now investors are starting to look at hotels. This is the only sector where there is a stable demand. The Moscow hotel rooms fund is almost fully loaded. Especially the mid-market hotels are in great demand. “This deal is a sign of renewed confidence in the development of the Moscow hotel real estate market,” believes Marina Usenko, Head of Jones Lang LaSalle Hotels-Russia.
The demand for budget-class hotels is so high that Stanislav Ivashkevich, Deputy director for Development of Hospitality Sector, Strategic Consulting and Appraisal at CB Richard Ellis, encourages the building of hundreds such hotels. Arild Hovland, Senior Vice President of Business Development at Rezidor Hotel Group, believes that the 5,000 new budget-class rooms, if they were opened in Moscow, would be swallowed up instantly. The paradox here is that cheap hotels are not profitable to build. The land is too expensive and administrative costs are huge. A vicious circle - the higher the cost of construction, the more expensive a hotel should be. The State could provide “long” money or cheap land, but so far neither of these have been provided, say the experts. Inside all the declared plans of Moscow Mayor, Yuri Luzhkov, there has been no support of the program. Almost all the land, offered on concessionary terms to investors, was unsuitable for development.
Sheremetyevo-2 may become a quality asset for investors - the hotel has been in operation for a long time, has a steady client base, and is located close to a transportation hub. Hotel was built back in the Soviet days – that is one minus. At that time, the standards differed from the international ones. However, the owner in the past few years has put a lot of money into its renovation. The rooms and common areas were modernized, and new up-to-date engineering systems were installed.
Sheremetyevo Airport has recently made efforts to catch up with its more developed competitor - Domodedovo Airport. It constructed and placed into operation a new terminal (which caused huge jams at the airport just before the New Year holidays) and built a direct railway line to the center of Moscow. All this, according to Marina Usenko, provides excellent opportunities for the development of the hotel business.
The British investment group Evans Randall has purchased the Silver City Business Center located on Serebrianichesky Quay
The deal was announced at the very end of 2009 around the time the business community was leaving for the Christmas holidays. According to Reuters, quoting Michael Evans - Head of the Investment Group, the amount of transaction totaled 190 million EUR (about $272 million). It is interesting that the seller, another British fund called RP Capital Group, has been working in the Russian market for just two years. Silver City was purchased from a Russian developer, Delin Development, in January 2008. The transaction amount was not disclosed back then, but analysts estimated it at $350 million (it took the third position in the most expensive transactions of the year). One can hardly call this investment of RP Capital Group a successful one. “Perhaps the investors started having doubts about the Russian real estate market,” that is the speculation of some market players on the possible reasons of such a sale.
Michael Evans, Head of the Investment Group, on the other hand, is full of optimism, “The Russian leasing market is becoming more stable and it even has certain prospects for leasing rates to start grow soon.” He believes that a big plus here is that largest leaseholders of Silver City (including Canon and Campbell’s Soup) have concluded long-term contracts – for five years and more. “I believe this transaction was attractive for the purchaser,” says Alexander Ksendz, Director of the Commercial Real Estate Appraisal at NEO Center Consulting Group. “The price of $3,000 per square meter of the total area does not seem expensive, even given the current crisis. I believe that this low price acts as a compensation for certain investor’s risks arising from the possible shortage of leaseholders in the nearest future.” According to the expert, about 10% of the areas are still vacant. He believes that the current leasing rate of $550-700 per sq m per year is competitive, though properties of comparable quality and location may offer $600-650 as well.
The deal was not the largest one, but also became one of the most unusual.
It is believed that in the future Evans Randall will try to attract private investors and sell them shares in this project. The Russian market has not yet seen such schemes. Experts say that this will hardly be of interest to Russian business class as everything depends on the capitalization rates, but for Western investors it may seem attractive. “It is a worthy property, almost fully leased (95%) and efficiently managed,’ another expert commented.
“But there was no real money exchanging hands in this case, and I would not call it a transaction as such, it is more in the nature of a re-packaging,” he says. It is very difficult to sell this property right now. That is why the following plan was developed: the property was given to Evans Randall, who will issue securities and sell them to investors. Only in such way will the owner receive real money. Such scheme is profitable for Evans Randall as it gets the property at a low price with a potential profit of about 15%, the expert believes.
CB Richard Ellis acted as a consultant in this transaction – this company also provides facility management services for the property. However, the company refused to provide their expert opinion on the nuances of the deal, referring to the confidentiality clauses in the contracts.
This transaction with RP Capital Group is not the first purchase made by Evans Randall. According to the company’s website, significant purchases of office real estate were made in the markets of England and Western Europe in 2006-2008. The list of the group’s purchases includes head offices of Commerzbank and Credit Suisse in London (127.5 and 452 million pounds accordingly), a representative office of Deutsche Telekom in Munich (270 million EUR) and the Gherkin skyscraper.
The British Fashion House in cooperation with GVA Sawyer announces plans to build 10 retail centers in Moscow and other Russian regions
This project became known to the public when Moscow streets became plastered with the most popular advertisements of the day - “For Rent”. Constant growth in the real estate market gave way to a slowdown and stagnation of the sector, with supply exceeding demand, and not the other way around. Most construction projects were suspended, credit financing ceased, and many leaseholders started asking for reductions. It seemed crazy to start new construction projects these days. However, experts at GVA Sawyer believe that discount stores may become the new growth segment in the crisis times. The company announced its decision to build 10 outlet centers in cooperation with the Fashion House. “Outlet malls are less sensitive to economic cycles and are able to generate good profits, as manufacturing companies try to sell off their previous season’s collections,” explained Cameron Sawyer, Chairman of the Board at GVA Sawyer.
Opponents of this idea doubt that such stores may take root in Russia. Anyway, the commercial impact will be seen only after such stores open. “We have already reached the half-stage mark in the construction of the first property in Moscow and plan to open it in the 4th quarter of 2011,” reports Fashion House.
Fashion House also notes that along with Moscow, they purchased another land plot in St. Petersburg. Investors keep silent about the amounts of the transactions, but Cameron Sawyer himself has repeatedly mentioned that prices for good land plots have barely fallen during the crisis. “Discounts were higher than usual, but this is confidential,” say the representatives of Fashion House.
How the situation develops in the future is not clear, nor is it clear whether the plans to build 10 retail centers will come to pass. So far the situation in the Russian investment and real estate markets is not too favorable. Meanwhile, GVA Sawyer is confident that the Russian market is ready for outlet centers. There is a great demand from some leaseholders and there are many investors with experience of working with outlet centers. And they are ready to participate in this project, says Kira Smirnova, Director for Strategic Development at GVA Sawyer.
Russia Development Fund (managed by IMG) purchases a 30% stake in Kvartstroy
The transaction took place in spring of 2009 and was one of the first transactions in the real estate market since the crisis began. Maxim Kunin, Managing Partner of IMG (Investment Management Group), noted that this was not an attempt to determine the so-called bottom of the market, but a full-scale investment strategy, as the fund expects to generate profits of around 35%. Darrel Stanaford, Managing Director at CB Richard Ellis, characterized the purchase of shares as the first deal which was not connected with crisis assets. Negotiations between IMG and Kvartstroy started even before the crisis. The parties used the following scheme: the developer made an additional issue of shares, which the fund subsequently purchased. Market players estimate that 30% of the shares of this well-known development company might cost more than $100 million. However, today this figure seems hard to believe. Yevgeny Semenov thinks that Russia Development Fund might have spent no more than $30 million. “It was a good transaction carried out at the market bottom. A smart investor seeing good prospects in a project of an experienced developer,” commented Mr. Semenov.
Maxim Kunin explained that his choice of partner was determined by the fact that Kvartstroy has extensive experience of survival in extreme economic conditions, having lived through the 1998 crisis in Russia and the difficult situation in Kazakhstan. Kvartstroy’s portfolio includes almost 3 million sq m of residential and commercial real estate at various stages of completion - in Moscow, Volgograd, Kazakhstan and Nizhny Novgorod.
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