No Western Loans Left For Russian Real Estate 27 January 2009

Since the arrival of the first dedicated Western real estate lenders in Russia in 2003, an increasing number of property owners, investors and developers -- both local and foreign -- had been relaying on the availability of cheap Western bank finance for their real estate activities in Russia.

In particular, the growing activities of foreign investors were spurred by the availability of debt that provided leverage for their return and reduced their equity requirements.

At the same time, Western real estate lenders perceived Russia as a very promising emerging country, given the potential size of the market coupled with the low level of debt. In addition,

Real Estate in Emerging Markets

Russia, too, should merit high marks as an investment destination, with its massive oil reserves and increasingly wealthy consumers. Mark Weiss, president of JER Investors Trust, which has private equity funds in Russia and Georgia, noted that real estate development in Russia has not caught up with its growing middle class. He spoke about an "Ikea-like" store he visited outside of Moscow that had "100 registers, [all with lines] 10-people deep." With that kind of opportunity, you would think there's tremendous potential for retail development. The problem, he said, is funding. "We do development projects ... and the first thing to go [during a financial crisis] is funding for development deals.... There is no lending going on in Russia."

But the fundamental issue preventing many investors from going to Russia and many other markets, Zell said, is rampant corruption. "In Russia, they just steal [your company]," he noted, relating a story about one firm that was taken over by the Russian tax authorities, leaving its foreign owner with no legal recourse. "It's one thing to trade growth for rule of law, but another thing to trade growth for kleptomania."

Russia’s Prime Minister Vladimir Putin this week called on real-estate developers to maintain the rate of new construction

Just a few months ago, Moscow’s urban skyline was lined with revolving construction cranes. Today, the influx of capital into real-estate has come to a halt. Ekaterina Thain, from Knight Frank expects a sharp downturn.

“Most of the developers have huge borrowings from the banks, so they have to pay the money back. So if they want or don’t want they have to sell. Its not all of the developers but most of them.”

Fitch Rating sees Russia’s real-estate losing 20% to 40% of its value this year and anticipates a sharp drop in the number of new projects. Developers themselves, like Yury Sinyaev, Marketing Director at Konti, try to stay upbeat, saying real estate in top markets like Moscow is unlikely to become much cheaper.

Sir Norman Foster hit by big freeze in Russia

Foster has seven projects in Russia, which include Siberia’s first skyscraper—in the form of a giant, soaring crystal—in the oil-rich Khanty-Mansiysk region. Most of these projects now face difficulties that were not expected six months ago.

In Moscow, Russia Tower—planned as the tallest building in Europe—has been hardest hit. Ground broke on the $2bn project in September 2007, but in November the developer Russian Land, which is owned by billionaire and art collector Shalva Chigirinsky, said the project was being frozen because he couldn’t secure financing. Mr Chigirinsky has one of the finest collections of Fabergé table clocks.

Russian Land and Foster are also redeveloping the site of Hotel Rossia, a Soviet-era three-star hotel next to St Basil’s Cathedral on Red Square. However, the project has long been dogged by legal lawsuits put forward by Mr Chigirinsky’s competitors. Hotel Rossia’s demolition is almost complete, but now its woes have been compounded by the financial crisis, and work has come to a halt.

Five Rules to Live by in Russia's Real Estate Market

Russia in many ways was initially cushioned by the price of oil for the past six to seven months.... It saw itself as insulated and removed from what was going on in the world for the past 18 months. In our business, which is highly correlated with financing and highly dependent on development financing, we saw the first signs of the changes in the market at the end of [2007], when we realized that development financing would no longer be available. It was really only recently that things have started to creep up on Russia. Russia is right now still in a bit of a denial phase, going through the process of trying to understand what this really means for it.

The Russian government is also going through an understanding that this is going to be more protracted and more serious than initially perceived, [that] it has much more far-reaching impact in terms of the economy and in terms of the real liquidity in the economy. We are seeing a lot of signals today. Lending is completely frozen.

Pilgrim Russia Investment Fund

While corporate governance is largely an internal company issue, its quality is determined by legislation and other external forces — putting it on a wish list of reforms that foreign investors said the government should tackle as Russia is buffeted by the global financial crisis. Other priorities include court and tax reform, equal application of the law and support for small and midsized businesses. Progress in these areas, investors said, will allow Russia to emerge from the storm with a stronger economy.

"When you have a financial crisis, it is trendy to focus on the short term to overcome it," said Klaus Rohland, the World Bank's country director for Russia. "I encourage the government to pursue its long-term agenda side by side with the crisis."

Corporate governance has long been a hot-button issue, and minority shareholders have complained of unfair treatment since the 1990s. The complaints might be fewer these days, but the issue has not been laid to rest.

Crisis brings Russian, Arab investors to Bulgarian Real Estate market

The global financial crisis will serve to attract more Russian and Middle Eastern investors to Bulgaria's real estate market, according to the Russian online edition rambler.ru.

The reason for that is that the financial crisis is forcing the investment companies in Bulgaria to freeze or delay the execution of a number of real estate projects. The lower prices are expected to attract primarily Russian and Arab clients.

The article points out the value of recreation real estate deals in Bulgaria has already declined by 10%.

In addition, the Bulgarian Land Development firm is reported to have postponed two of its projects in the Black Sea town of Kavarna and the mountain resort of Borovetz. Black Sea Property has terminated the execution of a project in the sea resort of Tsarevo, whereas Bulgarian Property Development has discontinued its investments in the mountain town of Bansko.

The director of the Green Life investment company Nikolay Penlivanov is quoted as saying that a number of speculators were abandoning the Bulgarian real estate market.

Cyprus Puts Faith in Russian Property Buyers

Once a key driver of the country's economic growth, Cyprus' booming real estate sector has begun to slide. And while local buyers and a major government construction project offer some potential support, the market's biggest hope could come from much farther away, in the form of wealthy Russians looking to buy up island property.

Though Russians make up approximately 20 percent of Cyprus's foreign property market -- a relatively small percentage compared to the 60 percent share the British occupy -- real estate agents say Russian buyers are purchasing the island's most expensive properties, and doing so at far higher prices than most of their British counterparts.

"We've sold villas worth 5 million, 6 million euros recently," said Antonis Loizou, managing partner of Antonis-Loizou, a real estate agency based in the country's capital, Nicosia. "We've never had this sort of clientele before."

"There may be a reduction of [overall property] demand, but there may be an increase at the top end of the market," he said.