Guiding Lines: In Line to be Sold

Despite the geopolitic and economic situation, leading world rating agencies, such as Moodys, Standard Poors and Fitch, have not changed the rating of Russia in investment reports. On a background of the world crisis the Russian real estate market continues to remain profitable. "The Russian retail real estate is currently one of the most attractive to foreign investors," assures Irina Strizhova, director of marketing and sales at Liedel Investments Limited. It is clear: retail real estate in the Russian Federation is one of the few assets that provides stable and high income at a level of 20-30 per cent.

Despite the Russian-Georgian conflict, the negative reaction of the West and the falling share market, in her opinion it would be wrong to expect a collapse in the real estate market or a sudden end to foreign capital. Probably, in the future, investment will be redistributed slightly, but funds invested in retail real estate in Russia will remain there for now, Strizhova is assured.

Meanwhile the situation has become difficult for Russian developers. Small players are going bankrupt and selling their assets. Second echelon companies are surviving for now by making serious efforts. Large companies, have successfully proven to continue to develop projects, but at what price?

The cost of a loan has became noticeably high. Depending on reputation, portfolio of projects, etc, interest rates for development companies on credit have grown by 2 per cent (refinancing) and 3 per cent (project financing).

The maximum sum of credit has also changed. "It has become practically impossible to borrow more than $100 million. Only a few banks in the Russian and international market are prepared to give such loans. For many developers now in general there comes a moment of truth," shares Evgeny Semenov, director of the department of investments and capital markets at Knight Frank.

In the opinion of Alexander Osipov, head of the consulting department at Astera, in connection with the world financial crisis, investment in commercial real estate in general and in retail in particular has fallen in volume. The majority of foreign funds are withdrawing money from Russia, and some banks have suspended financing projects. The remaining foreign investors are studying all aspects which can affect profitablility more carefully, the expert considers.

In particular, the criteria for the quality of premises has become tougher. Shopping centers designed three or more years ago, in terms of architectural design solutions, are not attractive objects for investment. At the same time in view of the absence of projects for development in the West large players, taking advantage of the situation, invest in Russian projects. For example, more recently one of the largest world developers - Canadian company Cambridge Ivanhoe - has obtained the Vremena Goda shopping and entertainment center on Kutuzovsky prospekt. And American pension fund Developers Diversified Realty Corporation and German developer ECE have created a joint venture and have begun three projects in Russia, two of which are planned to be constructed in Tolyatti and one in Yaroslavl.

The number of transactions between Russian players that have taken place recently are few, says Natalia Oreshina, general director of Art Properties, and it is difficult to name a large one.

On the Russian market we expect to see a redistribution of players; mergers and acquisitions of companies or the joint development of premises as happens in many countries is possible. And the number of realized projects (from those announced prior to the beginning of the crisis) will be significantly less than planned, says Oreshina.

In particular, so-called first-developers who bought land plots up to the crisis to construct a shopping and entertainment complex on them, will sell them and pay off loans.

The position of developers with good reputations, who have had successful and fruitful cooperation with banks for some time, and those who are connected with raw material manufacturers are more stable. They, according to Osipov, will continue to find money for the development of projects.

Some developers will start to pay attention to new formats of retail real estate still absent in Russia.