Investor’s Backstage Life

Investors declared a time-out Major funds that succeeded in gathering a load of projects found themselves hostages of the situation that developed over the world markets. For instance, Immoeast AG 2009, found itself in the worst situation in all of its history. “Since the revenues from leasing have decreased and the new facilities are being leased out with great difficulty, raising new funds from investors, is presently most problematic. Traditional investors will come back only once the leasing market begins recovering. Furthermore, most of the institutional investors were made up of Western funds. They are phasing down their activities as they are also experiencing difficulties in raising new capital and debt financing. Furthermore, they have a better grasp over their own domestic markets, which are also more stable,” says Andrey Dovgal, Real Estate Investments Director, Aton.

The major objective of institutional investors nowadays is to complete those projects that have been initiated and to raise the profitability of the existing ones. “The priority for funds is to demonstrate to their investors how they will handle the crisis, how they will manage their existing assets,” indicates Natalia Tischendorf, National Director, Russia & CIS, Financial Markets and Investments, Jones Lang LaSalle.

All of the Western institutional funds that we surveyed indicated their intention to continue work in Russia, where they have already many ties. The only thing that changes is the actual tactics. For instance, London & Regional Properties continues managing facilities and is completing construction of new ones, and in 2010 is geared up to once again begin investing. Alfa Capital Partners already has four facilities that it manages in the office, retail and housing segments, and also participates in development projects. On the whole, as noted by Alla Tigner, Head of the Client Relations Department, Quinn Group, the major trend on the market is consolidation rather than expansion as it was in the past. In the meantime new business models are being adopted. As indicated by Andrey Dovgal, the purchase of the mortgaged assets from the bank in the form of a restructured loan appears in today’s environment rather attractive for his company. He believes that in 2010 more of such transactions will be completed.

The banks are fulfilling their civil duties The banks are going through some rather difficult times. They are burdened by mortgaged properties and have suffered some serious losses due to the crisis. There is talk that they have cleared their least attractive assets by transferring them to their sub-divisions. As noted by Pavel Cherepanov, Managing Partner, Baltic Property Trust, when describing the actual condition of the banks, “they are investing in the future by safeguarding their cash flow and ownership structures.”

Notwithstanding the above-said, the banks are leading among the depleted investors. Sberbank in particular has purchased the Southern Port Business Center for $300 million. BIN Bank has acquired series of assets that belonged to Horus Capital. Don-Stroy assets and a controlling stake in Sistema-Halls were transferred to VTB Bank. Nevertheless, skeptics say that the major banks are mainly fulfilling a political assignment for stabilization of the national economy. Oftentimes banks are forced to continue investing in the development industry, otherwise ongoing construction projects will never see an end and there won’t be anything to sell. And hence, most of the bank’s inherited assets are more like a burden than a successful acquisition.

The lesser part of the market is taking advantage of the situation in their own interests and is successfully working with collateralized obligations and buying out distressed assets. Those that are most active here are banks that were mainly involved in real estate IPOs. Deutsche Bank created a special investment fund solely for this purpose. “We are involved in structuring debt obligations, putting together complex transactions. The fund was created specifically for distressed assets. There is presently a requirement for capital which means that transactions won’t disappear. We are funding loan obligations. And we are interested exclusively in independent buildings, ideally luxury offices,” explains Alexander Ponomarenko, Head of Illiquid Credit Obligations, Direct Investments and Real Estate Assets, Deutsche Bank.

Renaissance Capital got involved in debt restructuring as well. “It appears that this will be a major concern on the market for the next five months. I don’t think that the given process will drag on. Debt restructuring does not signify an influx of new capital, and consequently once the debt loads have been restructured, the companies will possibly require raising additional capital through debt instruments. This will become easier following the restructuring of loans, since the level of urgency of the debt load will decrease and the company’s potential will increase with regard to external investors,” assumes Jeppe de Boer, Managing Director, Renaissance Capital.

Shady players In perspective of the overall chaos that descended upon the market, the initiative has been inherited by certain players that were hardly noticeable. They are small investors including some financial institutions and private individuals. Most often major transactions are made solely for internal corporate use. The best example is the acquisition of BC Luch by RAO UES. Strictly speaking, such acquisitions cannot be regarded as investments, but are widely spread. Private equity represents about some 7% of the market. However, exact figures are hard to find. Details regarding a series of transactions aren’t being disclosed and any of them may have been concluded by some closed structure or private entity. As a matter of fact, the public at large is still interested as to who is the mysterious buyer of BC Severnoe Siyanie from Alfa Group.

The portrait of a typical private investor is an individual from another economy sector, who succeeded in retaining some wealth prior to the crisis. Part of these players are investing on their own, others have no precise strategy and operate indirectly through funds. Real estate isn’t considered today as the best investment, but diversified portfolios carry some 15% of real estate. Especially since the situation is most appropriate for private equity. “For small corporate investors, the situation is most favorable: there are some small facilities (offices, retail centers, exclusive apartments) that can be bought at very good prices. And even more attractive are investments for end-users: it’s possible to buy or rent an office or store at very good rates,” says Andrey Dovgal.

It is most interesting that small investors are operating in the regions as well, where according to the big players there are no real business opportunities. And the interest is not only in operational facilities, capable of generating revenues, but also in uncompleted projects. “From December 2008 onwards a series of our clients, who had until then showed no interest in the development business, but recognized as financial structures, approached our company with a classical request for the acquisition of uncompleted constructions: housing, offices, retail in the inner city Rostov-on-Don, with a total area of 4,000 sq m, with land ownership, and for uncompleted real estate facilities subject to transfer on a contractual basis,” accounts Michael Habner, Managing Partner of the Rostov-based Habner & Kosov: Commercial Real Estate. New faces It’s possible to single out a small group of professional investors who remain operational this year as well. They are generally funds created relatively recently that had no opportunity of gathering too many assets yet. One of them is the Finnish investor Sponda that entered the Russian market in 2007. In 2008, the Russia Development Fund, created by Investment Management Group was closed. The fund chose a rather rare tactic of acquiring stakes in companies and projects in the real estate field. The Baltic Property Trust was doing quite well in its own environment. “We are one of a few funds that continue operations. Our edge is that we are a closed fund and rather successful with regard to its last acquisitions (Global City, Country Park),” shares Pavel Cherepanov. He also indicates that the present environment in Russia is close and familiar to North-European investors. There was a similar collapse in the real estate market of Scandinavia in the early 90’s. It was very difficult. This model is familiar to Scandinavians and we are here to stay.” “There haven’t been too many transactions to date. The average is about $40-100 million. There are several reasons for this. Certain players were geared towards mid-size transactions from the beginning, such as VRT.

There are also some Western funds that have accumulated a substantial amount of assets that ought to be placed in Eastern Europe, but are starting with some small acquisitions. The market is still at its lowest point and everyone is most cautious,” concludes Andrey Dovgal.