AAA Financing In Real Estate

Many of the trends that we have observed over the past 20 years on the Asia-Pacific real estate market are now being repeated in Russia. The scenarios for development of real estate in Korea, Singapore, and China have a great deal in common, but there are still constrasts to be drawn. How will the Russian market develop – according to European or Asian models? Jeremy Oates of the international consulting company, Knight Frank, explores this theme in detail.

The rapidly developing markets of the Asia-Pacific region have been oriented since the 1980s on the attraction of outside money – in other words, on the international investment community. The Russian market is now attempting to follow the same route, but despite certain admitted similarities, there is still a world of difference between Russia and the Asia-Pacific region. The Asian markets to a great extent are focused on the manufacture of the inexpensive goods required by large western businesses. The Russian market, on the other hand, is based in firm economic redevelopment and the presence of natural resources. If we examine the Korean market, we will see that the largest influx of investors occurred after the Asian economic crisis in 1999. Foreign funds such as Morgan Stanley and Limens were attracted to to this region by large revenues, buying property from the same companies in which they had previously invested through more limited joint stock arrangements. High quality office property was the first sector to enjoy significant popularity among international investors. This funds tried to secure a large flow of capital, but the basic reason for their arrival remained the chance to make up for earlier losses with higher revenues. The 1999 crisis hit Korea especially hard, but in doing so it altered the market to the extent that foreign investors are now making direct purchases in this market where, before the crisis, such transactions were banned. Today no such bans exist in this country. The relatively open Hong Kong market is also very attractive for investors, and the Asia-Pacific region is home to still other countries drawing investors with the promise of yields as high as 10%. This is a good sign for potential real estate investors.

The Moscow office property market presents us with a completely different picture. International funds are participating here only in the capacity of developers. This has a great deal to do with the undeveloped nature of this segment. The Russian real estate market lacks ready investment products and the commercial property products on offer for investors from local developers remain an unknown quantity.

An analogous situation can be observed today in China. Commercial properties in that market are also fairly low quality and are hardly likely to attract the attention of investors. Here, as in Moscow, a great deal depends on the location and format of the project and serious competition is developing for construction rights in specific positions. Generally, as in Moscow, foreign investors involve themselves in Chinese markets by creating a joint enterprise with local constructors.

The Indian market can also be compared to that of Chinese and Russian markets in that international investors working in India, as a rule, are also often forced to seek out local parners with necessary administrative ties and market knowledge to optimize construction expenditures. We more and more often observe that developers in developing markets are providing the necessary skills and experience to create worthwhile products and this is causing competition to intensify. In our view there is a transformation underway from collaboration to partnership and I am confident that this process will speed up in Moscow, especially as regards six figure deals.

Warehousing property has become the most attractive for investors on the Moscow market, since this segment was practically untouched until precently. If a company is involved in property development, there is a natural inclination for the company to work first in that segment of the market that it understands best. In the warehouse segment, the volume of money being dealt with is also larger. This has allowed the warehousing segment to surpass very quickly other segments of the market such as retail and office properties.

Several years ago Russia experienced a genuine retail boom. Now a staggering number of new projects are nearing realization, and the format and location of the properties is becoming more significant. As an unfortunate result, a large number of planned projects are postponing their entry into the market of perishing away completely. This is causing investors to approach retail with great cautuion. Even in Moscow there are regions where there aren’t enough shops, and there is fierce competition being felt among certain shopping centers in cities outside the capital. But on the whole there is not a large choice available for retail tenants in Russia at the moment, and accordingly they are going to whichever shopping center they find most attractive. The situation is quite different in developed markets. Since the supply of high quality areas in those countries is many times greater than the demand, the strong competition requires developers to seek out different means of attracting tenants to their projects. For example, in Dubai there were so many shopping centers built that now the large developers are forming their own specialized departments merely to find potential retailers to work on their properties. This is how Nakheel (the developer of Palm Island) and Emaar (the developer of the tallest tower and largest shopping center in the world) are doing business in Dubai. New players are being prevented from entering the market by specific barriers. The vendors of foreign goods, for example, must sort out shipping, customs, storage, and distribution questions. In India these problems are quite significant. The state is trying to defend the interests of local companies which naturally cannot compete with the large international corporations. These are the problems which Walmart, for example, might run into when it attempts to open operation in India. In time, of course, domestic consumption also changes. People travel more, brands become better known and preferred. One significant factor is the formation of a middle class. This process is visible now in both India and in Russia. The shopping process is becoming more about entertainment than about basic needs. Similar trends have been observed in China and Korea in recent years.

In the sphere of commercial real estate we also observe carbon copies of the picture in other areas of development. Market newcomers are looking for local partners and collaboration is bringing both sides attractive profits. The developers active in retail, however, have no real reason to rush into the Russian market. The market is starting to feature more and more of those properties which will be the most successful in terms of their unique concepts over time. However we are still seeing that the vast majority of developers are still working with traditional shopping centers. It maybe simpler for them to shovel more of the standard product onto the market, rather than think up something new, but this cannot continue for long. A conceptually new format, however, might not be easily accepted by the market either. The Korean project, Lotte Plaza, is a non-traditional structure which consumers may have trouble getting used to. A better attempt should have been made to adapt for the Russian market the formula by

which companies achieved so much success on the Korean market. This is why the shopping center had so much trouble attracting consumers and accustoming them to the unusual atmosphere and style. The marketing conception is one of the most important phases for any project. This is well understood by Asian developers. In Singapore, for example, the attraction of consumers to shopping centers led to a specialized program entitled, “Friday Late Night Shopping,” and one of the shopping centers, Mustafa Centre, began working on a 24 hour schedule. This is not a way out though. Consumers are bored by always going to the same shop. The customer’s loyalty and faith have to be earned. Retailers might find their situation improved if that can create a better portrait of their clients by gathering information about addresses, income level, and so on, and better responding to their feedback.

One more of the developing tendencies on the developing markets is the growth of multifunctional real estate projects. They will become even more popular as time goes on. For example, owing to the deficit of land in Hong Kong, integrated construction has become very widespread. The operation of shopping centers around business complexes and apartments is a tried and true development strategy. Multifunctional projects all balance out risks and share the revenue among the different categories of property. Recently the Russian market, like many others, has seen a large quantity of the multifunctional complexes, which suggests that the real estate market is ready at last to stand on its feet. This format maybe one of the most complicated forms of real estate and it requires excellent planning and design work, and even then it seems that far from every management company is able to operate these properties successfully. Nevertheless, the development of this segment in Russia clearly suggests that landlords and developers must manage their assets more effectively as the market transitions to a new level of quality