Guiding Lines: In Search of Russians

In the past three months alone it became known of three new operators. The investment company Europolis launched 17 years ago by the EBRD and Austria’s Investkredit, and UK’s Parkridge Group, a development company involved in construction of homes, offices, storage facilities and shops across Europe widely announced their plans. The third one, but clearly not the last arrival, was the Hungarian investment company TriGranity Development Corporation, which has pledged 5 billion euros for their projects in Russian real estate.

Thus, even judging by the most modest estimates the total amount of funds international investors are set to put up for local projects is nearing $15 billion. In comparison with those ambitious plans, the first acquisitions by Fleming Family & Partners Russian Real Estate Development (FF&P) of two class A offices in central Moscow in the years 2004 to 2005 seem trifling. In those days analysts estimated those deals at $50 to $60 million. FF&P itself has apparently decided not to waste their time on trifles and is set to spend over $1 billion on Russian real estate.

Albeit unpretentious in their initial deals, FF&P had chosen a proper timing to enter the market. Three years ago it was still possible to secure annual returns of at least 25% here. These days, times are changing and real estate projects bring returns not higher than 15% per year, but even such prospects are still tempting compared to Europe’s stable returns of 3 to 8%.

But nowadays international investors incur twice as many risks having to put up their cash for something that has not yet come into being. That is, in construction.

Those who will surely benefit from the international investors’ being forced to launch construction projects here are Russian developers. Foreigners realize that their projects in Russia will fail without support from a local partner. Vying for building plots on their own, making deals to secure titles to plots of land through deals which often lack transparency (suffice it to recall the U.S. company ProLogis’ decision to give up its operations in Russia after it had failed to acquire a freehold in Moscow countryside on lawful terms) and spending years on securing permissions from various government bodies to pursue their construction projects are seen as barely attainable tasks. Local operators, on their part, have long learnt to cope with such difficulties, having accrued invaluable experience of dealing with any administrative matters. What they lack is cheap credits and international know-how. But that is exactly what international investment funds and developers have to offer them.