While foreign investors are cautiously eyeing up the market and signing a few rather modest deals, Russian entrepreneurs are actively buying up functioning real estate businesses, and at times with astounding bravery and sweep. One way or another, both Russian and foreign investors are now on the lookout for worthy investments om the market.

1. Deal of the century

The entrepreneur Boris Mints, co-owner of the Otkritie Financial Corporation, purchased five business centers from the developer Horus Capital. According to experts, the total price of this purchase exceeded $800 million, taking into account credit obligations. That makes this the largest transaction not only in 2010, but in the entire history of the Russian commercial real estate market.
The five business centers that changed ownership, with a total area of almost 190,000 sqm (GLA of around 160,000 sqm), are located in various districts of Moscow - Stanislavsky Factory, Gamma, Avion, Krugozor and Lefort. The areas of all these buildings are 99% occupied. At the time of the sale, all objects were mortgaged to a German bank, Aarealbank. The outstanding debts to the bank were around $600 million. According to the newspaper Kommersant, back in September 2010, the deal being discussed was for about $200–250 million, plus taking over the liabilities on all debts. As of today, according to a source close to one of the parties, the deal has been finalized at a “market price”.
The investor said he was not planning to resell the business centers in the near future. He wanted “to own and collect the profits”. Horus Capital belongs to a member of Federation Council, Sergei Gordeev, who was the previous co-owner of Rosbuilding, a major player in mergers and acquisitions market. These projects went to Mr. Gordeev after Rosbuilding’s liquidation and a division of assets between him and his ex-partner, Alex Tulupov. “The outstanding debts were not the main reason for the sale of assets, as it would have sufficed to sell just a few of the objects. Mr. Gordeev is curtailing his business dealings in Russia, seeing that his term of office as a senator is coming to an end,” a source close to Mr. Gordeev explained to Kommersant.

2. Warehouse sells at unexpected price

In August the British investment fund Raven Russia signed a contract for the sale of the 28,000-sqm fully let A-grade warehouse complex Baltia to Cyprus-based Casebre Holdings Limited.
Raven Russia actually sold its Russian subsidiary company Kulon Estate along with its Baltia warehouse asset. The complex lies on a 5.1-ha site in the Moscow province, 7 km west of Moscow along Novorizhskoe Motorway.
According to Ivan Potekhin, Managing Director of Espro Group, which acted as a developer in this project, the warehouse complex Baltia was commissioned in December 2005, at which time it was acquired by Raven Russia.
The net operating revenue of Baltia in 2009 came to $3 million. The transaction amount was roughly $42 million. As reported by Raven Russia, the company sold the property with a 48% markup against the warehouse appraisal done on December 31, 2009.
Glyn Hirsch, the company’s senior executive director, believes that “since the time of its acquisition in 2005, the given property has demonstrated an excellent return on investments, generating stable cash flows.”
“The buyer made such an attractive proposal that we could not turn it down,” said Igor Bogorodov, spearheading Raven Russia’s representative office in Russia.
Experts believe the sum of the deal was too high. Ruslan Suvorov, vice president of Giffels Management Russia, believes that the money raised for Baltia was very attractive for the seller and well above the market average. “This bid can be explained by the investment quality of this industrial property, which boasts a very good location and tenant mix. This is a unique object on the market,” he points out.
Daniel Renault, director of corporate finances at MLP, thus commented on the transaction: “I thought the price was slightly higher than the market: either the market has been recovering faster than we expected, or the price is overstated. At any rate, this is a landmark transaction for the market, since it will trigger reappraisal of warehouse assets in Moscow and may entail appreciation of the appraised value of other properties.”

3. Largest retailer continues to expand

In September X5 Retail Group N.V., Russia’s largest retailer, announced the acquisition of 16 Ostrov stores.
The retail chain Ostrov was founded in 1995; its proceeds in H1 2010 amounted to 1.5 billion rubles VAT inclusive. The total sum of the deal including the arrears came to $38 million. The deal gave X5 100% of the holding Ostrov-Invest, which included 16 shops in Moscow and Moscow province with the cumulative sales area of 12,300 sqm. About half of this space will be integrated into a supermarket format and the rest into a discounter format.
X5 Retail Group N.V. (LSE: FIVE, Moody’s – “B1”, S&P – “BB-”) is Russia’s largest retail company in terms of sales volume, operating under Pyaterochka, Perekriostok and Karusel brands. At the moment of the deal the company was running 1,514 stores in Moscow, Saint Petersburg and other regions in the European part of Russia, Urals and in the Ukraine. The company’s multi-format network integrates 1,135 Pyaterochka stores in the “soft discounter” format, 275 Perekriostok supermarkets, 62 Karusel hypermarkets, and 42 convenience shops.

4. Warehouse sells at a discount

In July the Austrian investment company Immofinanz sold to Sberbank (the largest Russian bank) a portion of Tomilino Logistics Park for $39 million, which is approximately 40% lower than the market price, according to experts.
The deal can be deemed lucrative for the Austrians, given that Immoeast, a structure of Immofinanz, invested a little more than 60 million euro in the construction of the entire warehouse complex. The experts of Cushman & Wakefield estimate the equitable sale price of Tomilino at $1,000–1,200/sqm, which is almost 40% higher than the price of the deal – $735/sqm. The Russian warehouse real estate market is only beginning to brisk up, the experts opine. At the time of the deal a long-term lease to these areas was signed with a single company (Rolf) which takes up half of the complex, reported Igor Kazimov, director of the industrial and warehousing real estate with Penny Lane Realty. In his opinion, Sberbank will be able to sell its share for double the price in the growing market in 2011–2012.
Tomilino is a multifunctional logistics center located in the Moscow province, only 7 km east of Moscow on the territory of 140 hectares. The floor area of the blocks put into operation nears 330,000 sqm; overall 680,000 sqm is to be built. The object of the transaction is a 53,000-sqm section of the warehouse complex acquired by Sberbank for its own needs.
Margit Hermentin, helming the corporate communications and investor relations of Immofinanz, assured RBC daily that her company was not going to sell its other warehouse assets – in particular its project in Saint Petersburg. “We actually decided to focus now on retail real estate, but this concerns Moscow alone,” she explained. Among the assets of the Austrian fund are four shopping centers in Moscow: two Golden Babylon malls, Fifth Avenue and Rostokino.
“The aim of the given investment is creating a unique and world’s only archive and logistics center in Tomilino outfitted with state-of-the-art automated documents safekeeping systems,” commented the briefing service of Sberbank. “Owing to the fact that the Center will be located outside of the city, Sberbank will save significantly on infrastructure upkeep. At the present time the bank archives are kept in 60 different buildings in Moscow; according Sberbank will attain to additional savings thanks to their centralization.”

5. Inteco sells its frozen project at Moscow City

In November, Inteco, owned by former Moscow mayor wife Elena Baturina, sold half of a major mixed-use project at Moscow City to its partner Snegiri Group.
The project anticipates construction on a 169,000-sqm skyscraper on a 2.5-ha parcel in Moscow City complex. The multipurpose facility will include an urban square with the Moscow Wedding Palace, underground parking, office space, and retail areas. The project was frozen following the onset of the financial crisis; the monolithic framework of the shopping mall has been erected and the piles have already been driven for the structure of the future office section.
The project belongs to City Palace; prior to the deal Snegiri and Inteco held a 50% stake each in this company. The deal was initiated in early 2010, said Inteco spokesman Gennady Terebkov. He says that Inteco has exited from the project “to consolidate essential resources for its core business activity, namely housing construction.”
Experts estimate the transaction at $35–40 million – this is the worth of Elena Baturina’s investments in the project. If we divide $40 million by half of the MFC area it comes out that Inteco sold the project at the price of $473/sqm. Prior to the crisis 1 sqm in such a project would have cost $1,000, believes Andrei Zakrevsky, senior vice president at Knight Frank.

6. Office for one’s own needs

In February the Russian insurance group Sogaz bought the Volna business center from the investment and industrial group Eurasia. The 19,200-sqm business center is located on Academician Sakharov Avenue. The amount of this transaction exceeded $140 million.
“In our estimation the price of $140 million was more than adequate at the time of sale,” said Maxim Zhulikov, leading expert with the office real estate department at Penny Lane Realty. “From market evaluation perspectives, the seller completed this transaction on extremely beneficial terms. We should note that in 2006 Eurasia bought the business center for roughly $120 million. As of today, an optimistic selling price of this property is $120–135 million, given that over these years the sales market has grown by 10–20%.”
Sogaz board chairman adviser Alexei Smertin said that the Volna business center was purchased for the company’s own needs. The company is not going to let any office space in the center. By now all structures of Sogaz Group have already moved into the new building. The company leased its previous office outside of Moscow.

7. Shopping center sold for debts

In January, Tashir, a Russian development group, repurchased the credit service obligations from Deutsche Bank collateralized with the retail center Europark. The $100-million loan was advanced by Deutsche Bank to Cyprus-based Blidensol on the warranty of the development company Centurion Alliance which was building a shopping center. The loan was collateralized with the 86,000-sqm Europark shopping center on Rublevskoe Shosse in west Moscow.
It was reported as early as April 2009 that Deutche Bank contemplated a credit default option. The loan service obligations were repurchased by a Cypriot company affiliated with Tashir for a sum close to $60 million, thereby taking over Europark as well. Tashir and Deutsche Bank declined to comment, stating it was a private deal.
“Europark is a quality neighborhood center boasting good location and good tenants,” commented Vladimir Pantyushin, Director of Economic and Strategic Research for Russia and CIS, Jones Lang LaSalle. “Its value is roughly estimated at $200 million. Therefore for Tashir this was an acquisition with a fair discount. I don’t think the developer will want to sell this asset in the near future. At the same time the interest of investors in retail real estate is rather high, so a possibility of this asset’s resale at a higher price cannot be altogether excluded.”

8. Hotel with outlook for growth

In February the Norwegian investment company Wenaasgruppen bought the Sheremetyevo Hotel from a company affiliated with MB-Finance. The deal was estimated to be worth about $44 million.
The 27,000-sqm, 300-room hospitality center is located near Sheremetyevo Airport. “This was one of the first public deals in the hospitality segment after the crisis,” said Marina Usenko, executive vice president of Jones Lang LaSalle. “The deal was to the benefit of both parties. The seller is not a professional hotel investor and became the hotel owner and manager almost by accident. Therefore the sale of a non-core business was a reasonable decision for the owner. For the investor this acquisition was a very deliberate investment, since the hotel boasts excellent location in close proximity to Sheremetyevo international terminals.”
Wenaasgruppen owns several hotels in the regions of Russia, but Sheremetyevo Hotel is the first property acquired by the company in Moscow. The hotel will be managed by the international hotel operator Rezidor Hotel Group which is the investor’s strategic partner managing all of its hotels in Russia.

9. First investment deal after crisis

In May the Russian investment bank VTB Capital bought the Capital Plaza business center from the development company Capital Group for about $180 million. The 14-story, 50,000-sqm building is located in central Moscow. Both parties emphasize that this was merely an investment transaction, since there are no credit relations between the developer and the bank.
“Real estate is one of the priority sectors in our investment strategy,” explained Timofei Demchenko, direct investments and special projects director at VTB Capital. ”The business center has been leased by leading Russian and international companies. Given that we managed to acquire the building on very attractive and mutually beneficial terms, we see serious value growth potential in the given asset.”
“A normal development cycle implies that sooner or later a building will be sold to an investor, and we are no exception,” reasons Petr Isaev, commercial real estate director with Capital Group. ”We look at the market and if all the factors (time, market situation, price and others) meet our expectations, we contemplate the sale of some or other property from our portfolio. At the same time we own and manage a number of buildings we developed, as this provides us with a stable cash flow and allows diversification of risks. In the upshot some of the projects are sold anyway, opening for us an opportunity to invest in new projects. At the present time the project portfolio of Capital Group in different stages of implementation exceeds 1.5 million sqm. Our final goal is getting maximum profit from our business activity.”
According to Mr. Isaev, the deal was preceded by an integrated due diligence (technical, financial, and legal) procedure which corroborated the serious potential of the given asset. “The Capital Plaza sale can be described as landmark in the office real estate market,” assures Mikhail Getz, Managing Director of Praedium Oncor International. “Prior to the crisis the amount of this transaction could have reach $300 million, so this is an excellent investment.”

10. First deal cut by institutional investor

In June Akron Group, Austria’s largest investment fund, sold thе Bakhrushin House business center to the international investment fund UFG Real Estate. This was the first institutional investment deal in Russia since 2008. The sum was not disclosed but experts estimate it to be about $35 million. The 5,000-sqm class A Bakhrushin House boasts a prime location in central Moscow.
“Bakhrushin House was sold in the course of Akron Group’s restructuring of its portfolio in Central and Eastern Europe,” said Stefan Auch, Managing Director. “This does not mean, however, that Akron is withdrawing from the Russian market.”
According to Mikhail Getz, Managing Director of Praedium ONCOR International, the demand for ready-to-use objects are now high on the part of investors, but most properties on offer do not meet their expectations.
Jones Lang LaSalle brokered the deal. “In the past 18 months the market has been dominated by buyers who purchase real estate for their own needs,” noted Thomas Devonshire-Griffin, Director of Capital Markets and Investments for Russia and CIS, JLL. “This is the first transaction from the beginning of the economic crisis, which resulted in asset acquisition by an institutional investor. Considering that UFG has gained tremendous experience on the Russian market, we can conclude that this deal heralds the dawn of stabilization and swelling inflow of foreign investments.”

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