02 December 2003 03:17
Private Investors Get In on the Action
With the first completed sale of its shares on MICEX last week, the Pervy (First) real estate investment fund, managed by Concordia Asset Management, became the first collective investment vehicle for private Russian investors looking for returns on the country's booming residential property market. The 320 million ruble ($10.8 million) closed real estate fund, launched in March, has since grown 34 percent and is currently worth 428.7 million rubles. Last week, four of the fund's 320 shares were sold on MICEX for 1.37 million rubles ($46,140), in the first deal of its kind in the country. A further eight shares were sold Monday for 1.34 million rubles. "The circulation of our fund's shares on the stock exchange makes it an instrument of liquidity for investors," Pavel Zyubin, general director of Concordia, told reporters last week. Pervy completed the first deal by a real estate fund in April, when it acquired a 21,000 square meter plot of land in Blagoveshchenka, 70 kilometers northwest of Moscow, for construction of cottages. The deal is worth around 54 million rubles. It has also invested in a 10-apartment "elite" block on Pozharsky Pereulok and the Viennese House on Plushchikha in central Moscow, as well as some 10,000 square meters' worth of residential construction in South Chertanovo, a southwest Moscow suburb. Pervy's exclusive interest in residential construction projects, as opposed to finished class A commercial properties, sets the fund apart from the other real estate investment vehicles that have appeared in Russia this year. Fleming Family & Partners, a private group owned by Scotland's Fleming banking dynasty, formed a $60 million fund for investing in class A office buildings in Moscow in May 2003. In early October the fund closed what was heralded as the first private institutional real estate investment deal of its kind in Russia -- acquisition of the office building located at 11 Gogolevsky Bulvar from Credit Suisse First Boston for roughly $30 million. The first publicly traded investment trust offering international shareholders exposure to the Russian real estate market was launched on the SWX Swiss Exchange in early November, raising $35 million. Two-thirds of Eastern Property Holdings' investment portfolio will be committed to existing high-quality properties, and the rest will go to new developments in the residential, commercial and industrial sectors. "The profitability of the Moscow real estate market is higher than anywhere in Western Europe," said Igor Branovitsky, the chairman of Concordia Asset Management. "In the West one can expect a return of between 10 and 15 percent. Here a similar project may yield as much as 30 to 40 percent," he added. And investment in construction is far more profitable than investment in existing properties. "There are no signs yet that a completed project may cost less than it does at its initial stages," Concordia's general director Zyubin said. "Pervy is the first example of private investment in real estate, where investors are expecting lower returns than when doing so directly," said Sergei Riabokobylko, founding partner of Stiles & Riabokobylko, which provides research and market analysis for EPH. Riabokobylko said that competition between the different investment funds currently operating in the country would stimulate better transparency and a higher quality of construction. Maxim Kunin, the head of the Fleming Family & Partners' real estate fund, agreed that the entry of new players into the market is beneficial, but added that investment in Russia's real estate is slowed down by the fact that, by law, the country's managing companies cannot invest pension money into real estate. "In the West as much as 10 to 12 percent of pension money is put into real estate. This is not yet the case in Russia," Kunin said. The creation of closed funds such as Pervy was impossible before a law allowing the formation of investment funds was passed in November 2001. Furthermore, "real estate investment funds are not commonly used as a result of the fact that the legislation concerning securities regulation in the real estate sector is not well developed," said Yekaterina Komarova, a Russian-qualified lawyer with CMS Cameron McKenna. However, the situation is likely to change following the passage of a new law on mortgage securities that came into force on Nov. 18. This law provides for the distribution of mortgage participation certificates by specially licensed commercial organizations, such as investment funds and non-state pension funds, Komarova added. Gerald Gaige, head of Ernst & Young's real estate services, said the arrival of real estate investment funds signifies that the three main obstacles of the 1990s -- the shortage of "reliable realty specialists," an almost complete lack of track record and the "absence of a legal basis" -- have either been removed or eased as the market has matured and the 2001 Land Code passed. .TX-..**********************************************
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