The Russians are coming?

In July it was reported by the Prague Research Forum that the only office building completed in Prague in Q2 was Tetris by an anonymous Russian investor. ‘Anonymous’ seems to be a word that is often found in the same sentence as ‘Russian investor’, and this perhaps explains the wariness of Central European companies and institutions when it comes to getting involved with them. And “Who are they?” and “Where does their money come from?” are questions that have taken on an added urgency since the debacle of the credit crunch and the subsequent tightening of EU financial regulations. In other Russian-related news, at the end of June Platinum Properties Group (PPG) debuted on the main trading floor of the Warsaw Stock Exchange. The majority shareholder of the Warsaw-based developer, with a 59.17 pct stake, is Righteight Holdings Limited, an SPV company fully-owned by MB Capital Partners, which is itself controlled by Russian investors Igor Babaev and Sergey Mikhailov. Gustaw Groth, the chairman of the management board of PPG, however, claims that Russian companies do not deserve their reputation for having a lack of transparency. For him the issue is more a difference in corporate culture. “Business relationships in Russia are more similar to the US than to Europe. They tend to be based on long-term relationships developed over many years, involving handshakes over deals on a personal basis. Even in large, global firms the decision-making process tends to be very personal. In Russia it is very important that people know each other for a long time and can do business with each other. So the US mentality and approach is much easier for Russians. In Europe, on the other hand, committees and due diligence is more the norm – decision-making processes are more formal and diverse. Across the EU, and recently in Poland too, the value of personal relationships has been much depreciated – when two friends are doing business together it arouses negative feelings. But in Russia, if you don’t know the person, then you don’t do business with them – at least without a personal recommendation,” explains Mr Groth.

Tetris the first block to fall into place?
Despite the completion of Tetris, the scale of Russian investment in CE real estate projects has so far been negligible. But a change might now be in the offing. According to Vladimir Sergunin, the director of business development at Colliers International in St Petersburg, Russians are now currently planning to invest around EUR 1 bln in Western Europe and EUR 0.5 bln in the CE annually. “I would rather split the Russian investors in Central Europe into three main groups,” says Vladimir Sergunin. “Core investors – retail and offices – who are interested in truly core assets with high quality tenants, centrally located with a stable institutional cash flow, zero vacancy, etc.; another group that is looking for anything with value-add potential; and a third one – private investors, mostly focused on hotel investment with a stable cash flow – pension investments. Yields in the CE are 6–7 pct, but in Russia they are about 9–11 pct. So why are they investing in the CE at all? The answer is very easy – they are looking to diversify, and are prepared to do so despite the lower yields. Also, banking financing is much cheaper in the EU than in Russia, so the yield on equity could be close to the Russian one.” He lists TPS as a company among the first group, active in retail in Russia and Ukraine, but now looking for new markets, such as Warsaw and Prague; as well as Lenhart Global, which might be counted among the second, value-add group of investors looking at the CE region after its purchase of a EUR 300 mln mixed-use project in Munich; and in the third group, there is Kazan-based Pioner, which is no longer looking at St Petersburg and Moscow for tourism-based investment but at less competitive markets. He goes on to outline the different strategies of such potential investors: “When it comes to retail, they are interested in core product in city centres; while the hotel investors are much less professional – composed of individuals looking to invest for their pensions, typically around EUR 20–50 mln. They are not interested in speculative acquisitions. This amount is much lower than a typical commercial investor might be looking to invest in the CE, which would be anywhere between EUR 50 mln and EUR 300 mln. But such companies are doing their best not to advertise their purchases, as they often have offshore financial structures, or for various similar reasons,” claims Mr Sergunin.

Shares not bricks
Gustaw Groth of PPG, however, is not of the opinion that there is going to be a wave of Russian investment in CE real estate any time soon: “Margins are too low in Poland for Russian real estate companies to consider investing in projects here – and prices are ridiculously low compared to what can be obtained on the Russian market. Better business can be done in Russia.” According to him, the product they are interested in is not real estate but shares – and they are not looking to make money in Poland in this way. “Russian firms want to test out how well such a listing is received by the market,” he explains, “so the product they are offering to the wider market is not real estate, but shares. But the question is: which is the most optimal market to be listed on? The WSE is new and visible, and it is nearer and cheaper than London, but there are pros and cons. Our shareholders also trade on the LSE, so they are diversifying onto several different markets. This is in line with the general trend for people who have made money in Russia to diversify abroad.” But it is not just diversification that they are looking for, but the credibility that comes with a listing on European markets. “If someone forms a company and lists on a stock exchange such as Warsaw, then it is their desire to be transparent – they have to disclose the source of their capital and cannot be anonymous,” adds Mr Groth.

Moving in the opposite direction
Which of these points of view about any imminent influx of Russian investment is the more valid remains to be seen. But in the case of PPG, there has already been some movement in the opposite direction. The company is currently bringing its managerial experience to Russia by developing the large-scale Svetly Dali residential and commercial complex (420,000 sqm is to be built over seven years) on the outskirts of Moscow. “If we look at their market, what do they lack?” asks Gustaw Groth of PPG. “The same as us about 15 years ago: qualified, experienced people and management. They have good designers and engineers, but not the new breed of management for the type of companies that have been set up recently. In Poland we are about ten years ahead in terms of management. We understand the situation in Russia, and our expertise in this field is not so old. We can find our way in the management landscape there more easily.” If he is right, in the future it will be more a case of companies from our region developing projects in Russia – and not the other way round. When it comes to the hospitality sector, however, it does seem that the Russians could be looking our way. Lukas Hochedlinger, the Austrian managing director of hotel investment consultant Christie+Co has been in contact with Russian investors who are taking an active interest in the product in this region. “The Russian investors we are dealing with are looking either for trophy assets or ‘safe bet’ investments in the capitals of the region, such as in Prague or Budapest. They seem to be less interested in Romania, the rest of Hungary or Slovakia – the investment markets in these countries are very slow at the moment. Apart from Prague, they are looking more at cities in other Slavic markets, such as Warsaw and Kraków. Russians like countries with which they have historic or cultural ties. That is why Hungary, besides the economic and political uncertainties in the country, is less appealing to them,” he explains. When it comes to resort properties, Mr Hochedlinger stresses that they are more interested in mountain locations – but not those in the CE region: “The ones we have talked to are only interested in more exclusive locations outside the region, such as in the Tyrol and St Moritz – where the Kempinski hotel was recently bought by a Russian investor. But when it comes to Montenegrin and Croatian coastal resorts there is more interest, as Russians are more familiar with these locations from having been on holiday there,” he says. In Bulgaria, where Russians were active a few years ago in coastal apartment projects, the hotel interest is low, according to Lukas Hochedlinger. They are now looking to invest in safer and more stable locations or emerging markets like Montenegro. “Bulgaria was of interest to them a few years ago, but is now rather a mass holiday destination, so it is not appealing any more. And there is limited interest in places where they don’t go on holiday, like the Baltic coast.”

Who, what and why?
This brings us back to the other question, just who are these investors? “Most are equity buyers. They are cash-rich individuals who don’t need finance. Some so called high net worth individuals will be looking to invest about EUR 20 mln; ultra-high ones have wealth significantly higher than this. Oligarch Yelena Baturina has bought a five-star hotel in the Tyrol and in the Czech Republic, for example. But there are no Russian investment funds doing this – these are mainly individuals who made the fortune over the last ten years. They are looking for a nice four-star hotel in Prague or Vienna, or interested in investing EUR 3–4 mln in an Alpine ski resort they can also show off to their friends,” says Lukas Hochedlinger. There is one other question about the Russian riddle wrapped in a mystery inside an enigma: why has there still been so little Russian CE investment, even in the hospitality sector, which they do actually seem to be attracted to? According to Mr Hochedlinger, this is not so much due to the legal perspective, which differs from country to country, but is more down to the attitudes of the local vendors: “You don’t hear about all the transactions that are taking place, but in some places the locals don’t want hotels being sold to Russians. Sellers have also been demanding high prices once they know that Russians are interested, but the Russians are becoming more aware of what the prices should be. However, vendors keep on expecting 50 pct higher prices from such buyers, and this is maybe why more transactions haven’t taken place,” he explains.