What is your assessment
of the commercial real estate market today in Moscow?
Three main issues which are still constantly being
raised by our investor-, owner- and occupier clients
are mainly focussing on initially political - ,
economical stability and growth as well as previous
lack of confidence.
Concerns as stated, were critically eyed by our
different clients and were the initial but severe
- market barriers. Additional concerns often mentioned
were and still are in regards to overall reforms,
starting with land - tax- banking reforms, etc.
On the economical side, we have and still are identifying
some very promising issues, e.g. GDP growth, overall
investment, inflation rates and unemployment rates,
all of which are certainly pointing in the right
direction. Federal budget execution is reasonably
healthy, going down a bit in 2003 and 2004. The
surplus is for obvious reasons going to decrease,
e.g. repayment of country debt scheduled for 2003,
which most of us have been fearing since 1999: Largest
portions of country Debt had been restructured and
there is sufficient additional surplus available
to coupe with the outstanding amounts.
Tax and other reforms tend to cost large sums of
money but the most important issue is that sufficient
funds are made available, and moreover relevant
and very important reforms are being pursued ambitiously
on highest levels. .
Looking at the Foreign Investors, it is good to
see Cyprus - making up around 18% of total FDI.
What this is, is of course repatriation of funds,
clearly indicating the regaining of confidence of
local investors in their own market. Capital flow
has increased while capital flow offshore, abroad,
has decreased in Q1-Q2 by about 80%, which is extraordinary.
Fitch, Standard & Poor and Moody's seem to have
good confidence in this market, including Kazakhstan
having just received investment rate status less
than two months ago. Moscow is being discussed,
yet it might take another 12-15 months prior to
achieving this status.
The second point was in regards to the political
climate, whereas President Putin is well regarded
locally and especially abroad: He has at least one
legislation to go, meaning that we will be secured
for at least another 5+ years.. The Duma elections
recently took place, allowing for additional two
or more years to go, as well as the mayor's elections
whereas we might as well have some further steadiness.
Overall the political platform should be reasonably
stable for about another 6++years. the political
front has never been this stable and promising since
many year..
Initially investors - occupiers and developers were
expanding towards the east via countries like Poland,
Hungary and Czech Republic and often the Moscow
market had been compared with activities in the
Central European region.
Which initially was an entry door into Eastern Europe
for most investors, banks, financial institutions
and developers prior to making their entry into
this market, has changed by now.
Corporations and Institutions are now coming directly
to Russia, often no longer via first entry into
CET. Yes, EU accession seems to be in place and
in order in the Central European Territory, but
the overall market climate environment and future
growth forecasts are of course not as promising
as we are experiencing in this part of the world.
In regards to overall potential and growth prospectus,
we are sharing the views of our clients, and agree
with the fact that we shall start to draw comparisons
with cities such as Paris and London and step away
from markets such as Prague, Budapest or even Warsaw.
Moscow is ranked this year as the second most
expensive city in the world to live in, after Hong
Kong, and the most expensive city in Europe. One
of the key factors in this ranking was the cost
of rental prices for private housing. Do you think
that those prices may discourage foreign firms from
moving over and establishing their operations in
Russia?
There are so many different statistics, and, yes,
Moscow often has ranked among the top third of numerous
different statistics. In recent years however, partially
driven by additional supply of the different goods
and increased diversification, overall cost of living
has become more reasonable and especially the quality
of housing improved significantly.
Comparing however prices to other markets, e.g.
London, Paris, etc. I still believe that costs are
reasonable competitive, especially considering the
enormous upside and further potential that Moscow
has to offer over the next years to come.
The truth is Moscow is not a inexpensive market,
however as we see more investors bringing their
goods, prices will have to become more reasonable.
Looking at this from an investment standpoint, risk
and rewards have to coincide., Investors are currently
being offered, initial running yields, unleveraged
of 13-1 % and around 25 to 30 % IRR on development
projects. It is obvious that we will not keep yields
and return for many years at this levels, which
is in order with other developing markets, and a
decrease in returns is inevitable, especially with
more and more liquidity coming to the market.
There is a good book on why Russia will never be
America and they sort of summarize and bring it
down to the actual cost basis: construction costs,
oil costs and delivery distances; pipelines, delivery
and the logistics behind it. It is obvious for instance,
that and excavating costs at twenty/thirty degrees
below zero compared to other markets, make it more
slightly costly.
There are different elements: yes, it's more expensive,
the country, the climate, the distances: it's true
but, again, rewards are much higher. America is
still attractive as an investment market; that's
part of the reason, why we don't see many American
investors here today because yields in the US are
still in the range of up to 8.5% with a leveraging
possibility of up to 85%, which automatically has
a bottom line effect on the IRR's in such more liquid
markets.
JLLS helps foreign companies come and establish
themselves, find place here in Moscow. How did JLLS
establish its Moscow office and how has it developed
in this brand new, very young real estate market?
JLLS entered the market at an early enough stage
to be one of the early players. The initial establishment
has been created not via organic growth but via
a merger, an acquisition of a local company in order
to not only establish a presence, but also to find
an already operational, functional outlet with market
exposure, experience and a professional approach.
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Back then, there was already a profound demand
for many different real estate serices. We are
a real estate advisory and investment firm. We
are not a brokerage house, we are not state surveyors,
we are advisors to the leading owners, occupiers
and investors.. We have a, separate organization
LaSalle Investment Management, with about 23 billion
USD under active management.
Generally, we position ourselves in this market
with success and true value add, quality delivery,
in-depth strategic consulting including actual
implementation.
What makes us different here is the in-depth local
experience and knowledge, coupled with the global
umbrella and competence. Most of our line managers
and mid- level-managers, are Russians and often
have foreign MBA's from the US and other European
Markets.
It is an immediate value, having the necessary,
process in your mind and prepared, the mechanism
on implementation mapped out and the logistical
issues covered. . Often one of many differences
between us and some other advisory firms, is that
we actually do have the expertise and know how
and not just he theoretical knowledge.
Especially in Moscow I have not seen over the
last 10 years, many companies who can full-heartedly
say that they are able and capable of providing
services at highest level, other then ourselves.
To what extent do bureaucracy and regulations
hamper company's real estate operations in Moscow
compared to other cities in Europe?
The current land code stipulates a forty-nine
year lease with an option for another forty-nine
years and to own if change of legislation takes
place. We are talking effectively of a ninety-eight
year lease like we often have in the States, in
London, in Germany and in Central Europe.
Do people have problems with that in those markets?
Generally not. It seem as if this is just one
out of many issues. There are, however, potential
problems if you talk about institutional investors
in the form of e.g. Open Ended funds.
Funds strategies clearly stipulate and outline
investment targets and strategies. Clearly indicating
whether you can or can not invest in long term
lease or free holds. I personally do not believe
it is a too much of a worry in the long run, of
course, there is no practical experience in regards
to prolonging a forty-nine year lease, as it simply
has not happened until today the land code, currently
is at federal level, which will have to be passed
on to and amended to the local, regional and city
levels. For partially understandable reasons,
the city would like to receive a constant cash
flow on land receivables in form a long-term lease
agreements. I However in order to create an overall
attractive investment climate, it is essential
to work with the interests of the different parties,
with the different investors and institutions
who are interested in assisting, investing and
further developing this city and country.
Knowing Putin's overall approach of ruthlessness
in pursuing the economy, I am certain that it
will be put through in the next twelve to fifteen
months; I'm very optimistic.
How does JLLS helps its clients tackle issues
such as these?
My answer has two parts:
We are, among many other initiatives, working
now on a project called the 'Governors Ring Project'
, which is based on mainly land outside the MKAD,
being the equivalent of the M25 around London.
. IN simple terminology, areas within the MKAD
belong to the city and land outside of it belong
to the regions, in this case represented by the
regional Governor Mr. Gromov We have initially
analysed about twenty-five land plots ranging
from five to a hundred and fifty hectares. Prepared,
investigated them, researched them and started
to offer them for 'sale' to largely foreign investors
in form of international retailers.
We have successfully implemented those transactions
with the different operators, developers and investors
and I would be glad to discuss this more in-depth
if contacted separately on this issue.
Please note that we can talk about this, but
can not write about this!!!
Having trustworthy people doing this research
for you is very important. What type of backgrounds
does your staff have?
Our Moscow office is based on four main business
activities;
The office department which includes an Agency
group as well as a Occupier advisory and Development
advisory group. We as well have attached to it
the light industrial / warehousing, green and
Brownfield departments.
The retail department, is primarily focused on
high street retail, like Arbat, Tvetrskaya, etc..
Shopping centres, like the Kursky Vokzal, as well
as Hypermarket development and marketing. Within
this group we probably have an overall market
share above 60%, and have advised some of the
leading retailers currently on the market, e.g.
Auchan, Ikea (160,.000m2), etc.
The third part is our Strategic consulting group,
which encompasses valuations, feasabitly studies,
investment, analysis, best use ananlysis as well
as global consulting for investors, developers
and occupiers.
Fourth would be our Capital market team, including
but not limited to investment sale and acquisition,
debt - equity and JV structuring for investments
in either exiting assets or developments.
Most of our staff is highly educated corporate
finance individuals, MBA's. Most of which were
in the top 2-5% of their classes in Europe as
well as the States.
What made you move to Moscow?
Initially I came over with a different intention.
I came over with the diplomatic service of the
German embassy, the diplomatic corps and, already
at that time, in the early 90's, Moscow apparently
had more to offer to me. It did seem to me more
interesting and, eventually, I've made my way
into real estate advisory and investment and I
must say there has not been one moment when this
market appeared dragging, boring or not challenging.
We at Jones Lang LaSalle are sharing and supporting
the upside and extremely positive views of our
owner-, occupier - and investment clients. We
are looking forward to continue in being our clients
chosen estate expert and strategy advisor, guiding
and supporting them through the challenges and
opportunities ahead.
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