Guiding Lines: Greedy Foreigners Are Coming
Foreign real estate investors and operators seeking to work and make money in Russia, including those who pursue long-term investment projects, have recently been given a new opportunity. Fleming Family & Partners (FF&P) has established Fleming Family & Partners Russia Real Estate Development Limited. Its managing partners – Moscow-based and foreign professionals – plan to raise $300 million through an IPO on the London Stock Exchange, with a view to finance office, industrial and retail development in Moscow, Moscow Region and big cities across Russia. In total, the team plans to launch projects worth $1 billion in this country.
To finance its projects, FF&P also plan to raise bank loans. The new fund will launch a new product, involving on the one hand higher risks, on the other – higher returns. The fund will be public, unlike private funds, financed by institutional investors.
Hitherto, all deals on the market were made by funds (the so-called yield funds), focused on acquisition of completed developments, where risks are lower. FF&P pursued the same policy in the first years of its operations in the capital, when the funds established by the company acquired the class A business center at 11 Gogolevsky Boulevard at $25 to $30 million in 2003 (the building was developed by Credit Suisse First Boston in 1998) and an office and retail center at 3/9 Lesnaya Street from Sino Real Estate at approx. $20 to $30 million in 2005.
Raven Russia is another foreign fund active in Moscow and other Russian cities since 2005. The fund has pledged to invest a total of 500 million pounds in Russian real estate ($800mln). In July 2005, Raven Russia raised 153 million pounds, or over $266 million, through an IPO of a 30 percent stake in the company on the London Stock Exchange. Other funds were raised through bank loans. The acquisition by Raven Russia of the Krekshino terminal under construction near Moscow, from the National Logistics Company, or NLK, which is part of RosEuroGroup, at $110 million, became the deal of the year – the first-ever investment deal local warehouse market has seen whereby a foreign fund secured a property under construction on condition that the development will be finalized and put up for rent.
Moreover, in October 2005, RosEuroGroup sold a 38 percent stake in NLK, which is a part of RosEuroGroup, to Citigroup Venture Capital and Germany’s DTB. The U.S. Moore Capital purchased a 20 percent stake in RosEuroDevelopment. The most significant deals in the office sector in 2005 to 2006 included, in addition to FF&P’s acquisition of the 3/9 Lesnaya complex, the sale of George Plaza to Amerop Investment Fund.
Other parties to deals in Moscow real estate are developers, holdings and banks. In 2005, the investment firm Coalco sold a plot measuring 120 hectares along with a ready-made project for development of a warehouse terminal to investment and development companies Capital Partners, ICD International and Lone Star Ventures. Capital Partners has launched construction of Domodedovo Logistics Park on the site. Property analysts estimate the deal at $350,000 to $450,000 per 1 ha.
Another freehold secured by Capital Partners is a 35-hectare site where the company is raising Pushkino warehouse facility. In 2005, Capital Partners refinanced the loan issued by Kazakh banks to finance the development. Nowadays, the project is funded by Germany’s Eurohypo, which has offered more favorable conditions to developers. The German bank has issued a mortgage loan at the annual interest rate of 4 to 5 percent, as compared to a construction loan provided earlier by Kazakh banks at the rate of 12 to 13 percent.
Unlike European creditors, Russian banks still cannot afford such low rates. Market operators says that major mortgage lenders actively seek opportunities for issuing loans on the security of real property, but so far there is but a handful of projects in this country meeting their requirements.
As regards the warehouse sector and keen interest in warehouse development on the part of foreign companies, some assume that Russian developers are more focused on office and retail markets where returns are higher and payback is shorter. Western firms, on the contrary, take interest in warehouse development as they have cheap capital and are quite satisfied with rates of 11 to 14%. The average annual rate of return on warehouse investment is estimated at 16 to 18 percent while in Europe it stands at 8 percent.
Analysts at Russia’s Central Bank and the Statistics Committee report that in 2005 foreign investment in Russia reached $13.1 billion. In addition to the traditionally attractive oil sector foreigners have been showing increasing interest in commercial real estate, according to the experts. Investment funds’ interest in real estate operations and acquisition of real properties is a normal practice in Europe, where titles to most real properties are held by investment funds.
Foreigners are becoming increasingly active in Russia as returns on real estate projects soar. Besides, there are macroeconomic factors, such as Russia’s plans to join the WTO as soon as 2006 or 2007. The WTO attaches special importance to creation of favorable investment climate in the Russian Federation, requiring the government to adopt legislation guaranteeing favorable conditions for external investors. Once Russia joins the WTO its financial sector will be governed by the General Agreement on Trade in Services, which covers ‘intellectual’ and financial services.
The key objective of the GATS is to eliminate obstacles impeding free access of service suppliers to national markets and put an end to discrimination against companies with foreign participation. The trade in services is defined as the supply of a service, in particular, “through commercial presence in the territory of any other Member”, the agreement reads. That clause will make it possible for foreigners to launch and acquire companies in Russia, regardless of their legal status.