People In The Know: Menu for Blue Chip Companies

What goals did Interros pursue by establishing OAO Open Investments?

As part of its plans to establish “blue chips” in promising industries within the domestic real sector Interros moved to consolidate its assets and projects in the commercial real estate market. Our goal is to capitalize on the unique opportunities of the real estate market in Moscow and Moscow Region and, afterwards, in other Russian regions showing potential by maintaining a portfolio of highly effective investment projects. The goal set before the management of the company is to become the leading real estate operator in Moscow, and subsequently, in Russia.

Does the fund welcome new investors, or are the investments in its projects made solely by Interros?

‘Fund’ is a vogue word today, but it has nothing to do with our company. By law Open Investments is an open stock company. As regards the investors, Interros initially invested $55 million in the company. The investment was effected partially in cash, partially by transferring completed real estate projects into the owners’ capital. First of all, Open Investments took over the class A business center at the Novoslobodskaya metro station and a 70 per cent stake in Novotel Moscow Centre, operated by the French company ACCOR. Also, Interros plans to invest $15 million following a secondary share issue of $60 million.

Interros took the decision to gradually increase company stocks, available on the open market, to 75 percent minus one share within 2-4 years. In our opinion, Interros needs to retain 25 percent plus one share to substantiate its long-term interest in the company’s growth. In order to expand the potential range of outside investors our company decided to list it on the RTS and MICEX stock exchanges.

We expect that external investors will account for 40 to 45 percent of the company capital within the current year. The funds will be used for the development of existing projects and the acquisition of new promising land plots.

Why do you think you’ll succeed in raising new capital?

I am convinced that the best answer to your question will be the actual placement of the company’s shares, following which we will issue a special statement as regards who are to become our shareholders. But on the whole our confidence is based on good business results. In 2003 the capitalization of the company grew 31%. Our total assets more than doubled per international accounting standards without additional capital injections.

The confidence stems from the fact that the demand for our stocks is enhanced because of who our company’s board members are. Apart from Interros employees there are two independent directors on the board. They are Yevgeny Yasin, head of the Higher School of Economics and Pavel Teplukhin, the president of the Troika Dialog asset management company. In future we plan to expand the board to seven members. Investors joining us this year will be able to nominate up to three candidates so as to create a well balanced board.

What return can investors expect on the shares of Open Investments?

For the time being real estate companies, although making up an expanding sector with good potential, are barely represented on stock market. We anticipate that the dividend yield of the investment will be around 7-9% per annum. The total effective return on investments is expected to be around 33-35% annually. In general, the Moscow real estate market is high-yielding at the moment, providing a 16-23% return on existing projects and 20-45% from the implementation of development projects.

In general we expect a considerable increase in capitalization. We believe that this will be attained by maintaining a high-yield and well-balanced investment portfolio, well diversified by geography and sector as well as a transparent and minorities-friendly corporate structure.

There are many companies operating on the commercial real estate market today, including those with large capital. The main problems investors encounter are largely connected with finding new construction sites and ensuring a high quality of construction. Why are you so optimistic about your plans for rapid growth and gaining a leading role on the market?

What we are talking about here is not rapid, but professional growth. Although it is often asserted that there are many players with capital on the market, judging by the major deals exceeding $30-40 million, I would not say that the actual number of such deals is that high.

How do the problems of acquiring new sites in Moscow affect the company’s operations?

When asked this question, I usually respond by recalling the following. At the beginning of the 20th century there were already no plots available in New York, all of them having been snapped up and occupied. Nonetheless, this market still has prospects.

Comparing Moscow with any other major city, you’ll see that we are standing at the early stages of development and there will always be business opportunities here. The Moscow market is very interesting. Those who work professionally, and address the problems and issues related to development projects have already been making good profits.

Our financial resources exceed the investments required for the projects being implemented today. That is why we are constantly considering new sites and we are ready to work on new projects. For instance, it would be interesting to get involved in real estate projects in other regions. We plan to expand our presence in the Moscow Region as it has great growth potential. We are interested in other regions as well. Today we are eyeing 5-6 Russian cities and we plan to launch a couple of projects there before the end of the year. I will not mention any particular city at the moment, as we will make an announcement as soon as we acquire the projects.

Will that happen this year?

This is what we would like. We are optimistic not just with regard to the capital and the Moscow Region, but also concerning the devolvement of real estate markets in other regions as well. We have started arrangements to acquire a title to one of the regional sites. This will take some time, so it is too early to speak of the beginning of a particular project.

What are the criteria used by Open Investments when selecting a project to take part in?

Our aim is to create a well-diversified portfolio of investment projects. As far as commercial real estate is concerned, our strategy is construction, leasing out and the sale of sites to institutional investors, mainly foreign ones. The top priority is development of class A and B office centers that meet international standards. We also consider investments in retail and entertainment centers to be attractive.

As for residential property, our priority is purchasing large land plots near Moscow for the construction of individual housing areas. They should be located within 40-50 km of the Moscow Ring Road (MKAD), preferably within 20-25 km, and must meet international requirements in terms of comfort, functionality and infrastructure. We are in the process of implementing our first such project at Pavlovo (14 km from MKAD, Istra district). The general contractor on the project is Southbrook UK Limited. We expect that there will be 200 A-class houses sold within the following 2 years for around $175 million. As of the first quarter of 2004 there were signed contracts outstanding for $54 million and the average sale price was $1,700 per square meter.

You hold a stake in Novotel. Do you plan to build any more hotels?

Novotel is a highly interesting and successful project. Novotel is a 3-4-star hotel, though Russian entrepreneurs may regard it as being higher. Over the past half year, up to 70 percent of the hotel rooms were occupied by guests on average.

There are no hotels in our portfolio this year, but we are open to any business opportunity. Our priority is 2- and 3-star hotels that meet European standards. This segment could provide a return of 20 percent as long as everything is organized properly during the construction and operation of the hotels. The supply of higher ‘4-5-star’ class hotels is sufficient at the moment, while the shortage of 2- and 3-star hotels is considerable. This is why the Moscow city government has launched program for the construction of 3-star hotels.

Interros have expressed interest in reconstructing the Rossiya Hotel. Will Open Investments oversee the project, and what is the size of the required investment?

Projects like Rossiya are potentially interesting for us. However, it may be carried out within some kind of tender or Moscow city act. The parameters of reconstruction must be defined first. Both the required capital and project structuring depend on whether a decision is taken on the demolition or reconstruction of the building. At the moment there are too many variables in this matter. I can confirm only our overall interest in the project but unfortunately it is impossible to define how much financing is required.

Quite a few commercial real estate funds were established in 2003. Is the increasing popularity of such forms of financing linked to the possibility of applying certain tax optimization schemes, or are they really more convenient than direct investments?

Open Investments is not a fund but a joint stock company. We are ready to raise capital in various formats. While addressing certain projects we are ready to consider borrowing as well as financing through specialized funds. Depending on the characteristics of a project under consideration, any form of financing may have its advantages.

We did not carry out a specialized analysis to find out how these funds can help us optimize taxes. This is not our business. Our mission is to achieve the maximum increase of business capitalization taking into consideration the general situation on the Russian real estate and stock markets. We are ready to interact with banks, provided that there will be bank loan financing available. If certain industry specific funds have enough available capital we are ready to cooperate with them as well.

The aim of the every structure is to satisfy the needs of existing shareholders. There are investors in the West and in Russia who need closed fund format for one or several projects. When the project is completed, the fund is disbanded and the funds are returned to investors who then start thinking about how to use them next. This is not our case. Our target audience includes professional portfolio investors both in Russia and overseas who are interested in liquidity and market quotes. They are interested in companies with an unlimited life span; they need dividends. This is why we’ve chosen to be an open joint stock company organization (OAO). Keeping in mind the pension system reform and the volume of funds expected to be injected into the stock market, such an organizational structure is the most suitable for Russian investors. And we are confident that this structure is optimal.

What are the investment plans of the company for 2004?

We plan to start construction of a center in Sheremetievskaya Ulitsa in north-east Moscow. The total cost of the project is estimated at about $60 million. The center will include theatres, retail areas, offices and a multiplex movie theater with 10 halls.

In 2004 the company plans to launch construction of an office center in Prospekt Akademika Sakharova, which will include the Rosbank headquarters. The overall cost of this project is around $170 million. Open Investments has signed a framework agreement with the international investment company Brunswick Capital on the joint implementation of the project. Three buildings with more than 132,000sqm of office space are to be built. One of the buildings will be occupied by Rosbank, which is participating in the project as well.

Our company also plans to build an individual housing zone analogous to Pavlovo in 2004.