Raven Russia has always had a long term perspective on the Russian real estate market. As a consequence our equity base and debt funding was structured for the long term. The financial crisis and subsequently the economic crisis has affected our business, but we remain in a strong position with $130 million of cash on our balance sheet and over $85 million of contracted rents from our property portfolio.

As a result of the economic crisis and the lower levels of bank finance and tenant demand we have slowed down our development program in the Russian regional cities. We have also taken a more cautious approach to development in Moscow and are concentrating on leasing the remaining vacant space in our portfolio of one million square meters of Grade A warehousing space.

Our focus is warehousing and at present this looks the most attractive asset class as tenant demand has increased and no new projects are currently being started. Over the next 12 months supply will reduce dramatically in Moscow and rents should rise as a consequence. I think the low point of the market has already passed in the warehouse sector. I think tenant demand is picking up and with capital constrained this will reduce the available supply in the market pushing rents up. On the investment side there is still a stand off between buyers and sellers and no real distressed sellers. This may change during 2010 but investors are still going to want paying for “Russian risk” especially where debt is scare.

Andrey Dovgal, Real Estate Investment director, ATON Investment Group

The market has changed quite a bit, rental rates keep falling, the vacancy rate is rising, but the most important thing is - the expectations have changed. Now it has become obvious to everyone that the market cannot absorb every property - and its recovery period will be delayed for 3-4 years. In these circumstances, we are focusing on the completion of previously initiated projects and projects with a high degree of completion.

We consider buying high-quality properties at final stages of construction and at a discount, but nothing suitable has been found yet. We are considering options for purchasing investments of distressed assets from the banks and the recapitalization of projects, but the banks can offer nothing really interesting for investors.

At the moment we are working with partners to place into operation the World Trade Center in Nizhny Novgorod – 17,500 sq m. In addition, we are proceeding with the next stage of the office and warehouse project on the 8th of March Street in Moscow.

By the end of 2010, we hope to see bank financing available and ruble loans possible at 11-13%. This will help revive the frozen investment projects. We are also expecting the resumption of mortgage programs being offered by banks, which will increase the demand for residential real estate. Perhaps by the end of the year we will start seeing investors willing to purchase investment properties, attracted by high rates of capitalization and depressed rental rates, but these may only be a few isolated transactions, as major growth in rental rates is not expected.

Roman Taptygin, Head of Aareal Bank AG

In crisis times, we have to pay more attention to risks. We see increased demands in respect to the ratios of borrowed funds to assets. We decided not to expand our loan portfolio, and focus on those projects that are already in there.

Naturally, our clients are feeling the effects of the crisis. Many people have problems with tenants, had to revise leasing rates and terms. Despite the fact that our bank has traditionally given preference to countries of the European Union, one of our biggest clients is a Russian company. This shows that Russia is a priority market for us. Aareal Bank AG entered the Russian market with a conservative approach.

We originally had stringent requirements on the ratio of borrowed funds and the value and quality of the assets. We were not chasing super margins, and believed that the market had a place for everyone. The crisis has shown that the model adopted by our bank was the correct one. Concentration on one market and work only with top-end customers - are our main principles. Currently, we are continuing work on the Ritz Carlton project. In 2006, a consortium consisting of Merrill Lynch Capital Markets Bank and Aareal Bank, signed an agreement with Capital Partners for refinancing the under construction Ritz Carlton hotel in Moscow for 160 million euro. Together with the Euro Hypo Bank, we provided a loan of 380 million euro to finance the construction of the Metropolis REC - one of the most successful projects that came on the market during the crisis.

Tomas Dukala, Vice-President, Morgan Stanley

The strategy followed by our Russian office is based on our understanding of the global situation as a whole. Real estate is a strategic direction for Morgan Stanley. Morgan Stanley real estate business may be divided into three components: real estate investment banking, real estate lending and real estate investing. Real estate investment banking is our key business line. We provide investment banking services to clients, work on attracting equity, debt financing, M&A transactions, we trade derivative products, and we structure various joint ventures and funds. Depending on capital market conditions, we focus on various products. For example, 2007 was a great year for the real estate IPO market, at that time we worked on the largest European IPOs, including Russian companies like PIK Group, AFI Development, RGI. On the other hand, in 2008 and 2009 we focused more on M&A and restructuring. Real estate lending business has not been very active in Russia, however we did manage to lend to Russian development companies, which we believed were successful. Real estate investing is part of our Investment Management business. Morgan Stanley is managing over EUR 50 billion in real estate funds. In Russia, our Special Situations Fund has acquired minority stakes in several existing and successful development companies such as RGI, RBI, and RosEvroDevelopment. All three areas of our activity are in demand in the real estate market. However, we are very keen on real estate investment banking, where we are seeing strong pick up in activity of our clients, where specialist real estate investment banking/ capital markets advisory is critical. On the investing side we have been focusing on ongoing management of our portfolio, At the moment, Russia is not a priority for our real estate lending business, however risk assessment is changing.

In June 2009, Morgan Stanley and Marshall Capital Partners created a joint business, Mayak Corporate Real Estate (Mayak), to provide services to the owners of non-core real estate portfolios. Mayak is a company that will provide real estate asset and portfolio management services. The company will be focused on non-core assets of large corporations and real estate owners. In Russia, we can see a big market for asset management services, and an opportunity to provide valueadded services, which would result in increasing values of portfolios. Today, we see demand in the mass residential housing segment raising once more. In the business-class residential segment, everything depends on the construction stage. Retail real estate in Russia is always in demand. Of course, here everything depends on the location and quality of the project. After all, new retail centers are being opened today. Maybe they are not filled to 100% capacity, but nevertheless they operate successfully. The situation with office real estate in Moscow is a lot more complicated. We believe that demand will come, but we must wait. The hotel segment in Moscow, I believe, is also a successful niche.

At the moment we are definitely in a recovery mode in Russia, and are already observing slight increases in prices for residential real estate. Soon improvement in fundamentals should reflect in increases in NAV valuations of real estate companies and increased interest from investors. At the end of the day, real estate is a great way of investing and preserving capital.

David Geovanis, Managing Director, London & Regional Properties

Our strategy has always been based on the diversification of our asset portfolio. We have invested in all real estate segments, including warehouses, offices, retail centers, hotels. We invest at various stages of project development – starting from greenfield up to construction and successfully operating facilities. We prefer to diversify our portfolio in geographical terms - we have projects in Moscow, St. Petersburg and the regions.

Currently, we continue to operate existing assets, we continue to build, and we keep looking for greenfield projects. In the first quarter of 2010, three new projects will come onto the market. Two of them are retail centers (in Kaluga and Penza). Both projects are in the fit-out stage and by March 2010, everything will be ready. The third project is a Hilton hotel in Novosibirsk.

L&RP is quite aggressively searching for additional projects. I believe that in the first quarter of 2010, the company will buy 2-3 new assets.

As you can see, we do not give preference to any particular real estate segment. We believe that the most attractive segment today are the already operating properties, because they carry no real estate development risks. Previously, it was very difficult to buy such properties because they were very expensive. Now prices have fallen by half, so the purchase of ready properties has become more real.

However, there are very few investment transactions on the market today. The main reason is the impossibility to obtain financing. In 2007 and before mid-2008 it was possible to get money from European and Russian banks in order to buy assets. Now – even though there are properties available for sale – there is no long-term debt financing, and if you want to buy, you must have your own equity.

In Russia, there are only two institutions giving out loans - Sberbank and Vneshtorgbank. But their interest rates are so high that it does not make any economic sense to borrow money for projects. If you want to purchase a building with a 13% yield, but the cost of debt financing is 17% - it loses all meaning. And Western funding practically does not exist. In the West, the situation is different - the banks have suffered large losses on mortgage transactions in the U.S., and in local markets, that in one way or another they have fallen under the control of the state. In Germany, for example, monitors from various government structures have been assigned to the banks. These, incidentally, do not want money going into the Russian market. They are doing everything possible to keep money inside their own economy and invest it to help the local markets. Thus, the state is simply prohibiting funds from being loaned out for investments in Russia. The second reason for the lack of transactions - buyers are worried about the capacity of tenants to pay their bills. Now the situation is such that the supply of Class A office premises is large, vacancy rate is about 20%, and this is making buyers nervous. If you are looking at buying a new office building filled with tenants, but on the other side of the street there is an empty office center, whose owner is trying to lure tenants away with lower rents simply to make the property generate at least some revenue – this would make you nervous as an investor.

Maxim Kunin, Managing Partner, IMG

For us the priority lies in residential housing investments. This is a fairly liquid market, so we are working with it. As for the commercial real estate segment, it is difficult to evaluate it properly - the market is very small, it is incorrect and dangerous to follow some tough strategies here. In all our transactions we look for a niche – we find some interesting projects and invest into them, even if traditionally we do not operate in this segment. For example, we find ourselves in some cities and see that there are no shopping centers there. In Moscow, we will not invest into retail, because shopping centers here are plentiful, this also applies to St. Petersburg, Kazan and Yekaterinburg. But if it is a small town, where this niche is not developed, but is potentially attractive, we are prepared to work there. If we rank commercial real estate according to its attractiveness, for us, in last place would be the offices. In the regions, no one needs offices these days. And in the near future it is unlikely that anything will change. In Moscow there are many offices, the rates are falling, increasing the level of vacant premises. The same thing is happening in St. Petersburg. Therefore, we are not interested in this segment. Although, from the perspective of a niche strategy of IMG, I do not exclude the possibility that we may invest into the completion of some office building on which a lot of money has already been spent, the property itself being potentially promising, but it needs some additional funding to finish. We look at each product individually. The fundamental reason for the small number of investment transactions today is the lack of good products on the market. The crisis has shown that no investment products as such exist here. In pre-crisis times, many investors believed in the rapid growth of the real estate market and invested in all kinds of projects. Today, they are paying for their mistakes. I believe that if our fund was not operating today in Russia, but another European country, we would not have problems with investing our capital quickly. Of course, here we have some options. I cannot say that there is no choice at all, but there should be much more of a choice.

The other day I was looking at a shopping mall that needed investment to bring it to final operations. It looked bad. However, given its the location, it could be very successful - the location was excellent. We started to evaluate our plans and understood immediately that the project was doomed. This was a five-storey shopping center, without proper entry elements, no elevators, a confusing layout... But the property was almost finished. Two years ago, the project would have been able to find the money – if not from an investor, than from a bank, and might have even operated successfully for a while, until some smarter developer built a "proper" shopping center nearby. But today this center simply will not survive. In this sense, the crisis is a very useful thing, perhaps now people will start making more or less professional products.

In addition to this fundamental reason, there are some more commonplace ones, for example, the lack of credit financing. Before the crisis, the market had two sources of capital. Western capital – marginal and in small parts, today this capital has abandoned Russia and it is unlikely to return, in any significant volume, in the near future. The other source was the local Russian capital coming from structures outside the real estate sector. That is, many companies having made their money in various industries, decided to invest their extra capital in the real estate market. The amount of this capital proved to be quite large, and it had a negative impact on the market – these investors were uneducated, and to some extent, they spoiled the market. These non-core owners lost a lot of money; they got burned by the real estate market, so they are unlikely to return here any time soon. There is now a void here. Some players who have the capital to invest, are now in an incomprehensible state of waiting, which I personally attribute to their lack of professionalism. 18 months ago, when the market was at its peak, they were buying, they were active, why then now, when the situation is simpler, the prices are lower, there are fewer competitors, are they so inactive?

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