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Russian Real Estate Market Overview
Presented by
Real Estate Opportunity in Russia & CIS
May 2004
I. Market Opportunity
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Market Opportunity
Industry poised for institutionalization
CRITICAL MASS
One of the largest,
quickly growing and
most sustainable
industries in Russia
VALUE & EXIT
Coming institutional
capital will boost asset
values within several
years
ATTRACTIVE
MARKET
OPPORTUNITY
LEVERAGE
Sophisticated
financing solutions
became available over
recent years
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CAPITAL GAP
Large capital gap
between supply and
demand in real estate
market
Strong Market Fundamentals
Large, quickly growing and sustainable industry
Moscow Office Market: Stock & New Construction
Shopping Center Stock vs. Other European Cities
Source: Noble Gibbons
Source: Colliers International
Moscow Office Market: Vacancy Rates
Moscow Office Market: Rental Rates
Source: Colliers International
Source: Colliers International
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Positive Macro Outlook
Strong economic fundamentals and political stability form basis for further growth
 Sustained Economic Growth:
– GDP growing over 5 consecutive years;
– Stable budget;
– Reducing inflation and stable currency rate;
– Growing per capita income and consumer spending.
 Political Stability:
– New consensus leadership;
– Vital reforms initiated (tax, pension, judicial, protection of shareholder rights, etc.);
– Commitment to further reforms and free market.
Nominal GDP
Inflation Rate
Source: State Statistics Committee
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Market Momentum
The right time to gain exposure to Russian real estate
 Industry overlooked by domestic and international investor groups:
– Few professional institutional investors in the asset class.
– Investment supply/demand gap in Russian real estate market.
– opportunity to gain a leading market position.
 Investment grade projects and existing properties command substantial yields.
 More assets becoming available from various players.
 Not yet fully transparent market:
– Access to attractive opportunities depends on local experience and track record.
 Suitable real estate debt financing now available to institutional players.
 Further decline in Russian market risk estimates and institutionalization of the
industry will boost values within foreseeable future.
 Improving legal systems.
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Multiple Exit Options
Liquidity grows as a result of more sophisticated exit options
 Dividends: Substantial and sustainable cash flow proceeds generated by real
estate assets start recouping investors’ capital immediately after an investment
and/or necessary operating improvements are made.
 Recapitalization:
The newly available debt financing options enable a
sophisticated real estate investor to return most of investors’ capital via
refinancing. More appropriate capital structures also improve current yields and
facilitate the return of capital.
 Domestic Institutional Buyers: The emerging class of domestic institutional
investors, such as pension funds, insurance companies and private groups, lacks
investment options and will move into the asset class.
 International Buyers: Real estate is one of the primary options for leading
international investors seeking exposure in Russia. Decreasing country risk will
facilitate this trend.
 Sophisticated Structures: High quality portfolios managed by professional,
Western-style sponsors can be packaged and listed in REIT-type vehicles
domestically or internationally.
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II. Investment Market
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Asset Class Return Characteristics
Attractive risk/reward parameters across various investment strategies
 Acquisitions – Incoming yields of 10-14% for investment grade properties:
– Class A, premier location.
– High quality tenant list.
– Professional management systems.
 Enhanced Strategies – Incoming yields of 15-20% that can be enhanced through:
– Refurbishment and incremental development.
– Repositioning and operating improvement.
– Sophisticated use of leverage.
 Development – Still provides speculative returns:
– Commercial developments deliver returns up to and beyond 30%.
– Residential market is booming and provides essentially unlimited upside.
Institutional Investors’ Dilemma:
Shortage of existing investment grade assets forces institutional
capital into more speculative investment areas.
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Fundamental Issue of the Industry
Though profitable and growing, industry suffers from shortage of “smart” money
 Property developers and construction companies lack access to sufficient
financing to absorb their substantial project flow. Newly developed commercial
and residential space is pre-sold prior to completion.
 Most owners of significant property portfolios has historically focused on sourcing
assets and also lack capital to improve them.
 Commercial banks have substantial financial resources, but do not have expertise
to develop real estate finance business.
 Financing is required in the form of both equity and debt.
Solutions
Opportunity Funds
REIT-like Structures
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Opportunity Funds
Attractive market fundamentals brought new types of foreign investors
 Provide foreign investors with exposure to high quality real estate assets.
 Normally, structured as closed-end vehicles.
 Do not rely upon sponsors’ existing property portfolios (“blind pool” funds).
 Upon allocation of investment capital, have ability to access public markets.
FUND
SPONSOR
SIZE/
STATUS
LEGAL
FORMAT
STRATEGY
Fleming Family &
Partners Russia
Real Estate Ltd.
Fleming
Family &
Partners
$60mm/
closed
Private closed
end
partnership
Acquisition of existing Class
A commercial buildings in
Moscow with emphasis on
trophy status
Eastern Property
Holdings
MCTrustco
$35mm/
closed
Swiss listed
company
Targeting existing and
development office and
residential projects
Torus real estate
fund
Torus
Investment
Managers
$90mm
target/ not
closed
NA
Focus on Moscow and St
Petersburg
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REIT-like Structures
Provide financing and securitization alternatives for real estate industry
 Legal Format: “Closed Real Estate Mutual Fund” in accordance with 2002
Investment Fund Act # 156.
 Portfolio Requirements: 40% to 90% of the fund’s assets need to be comprised
of real estate assets or equity in construction companies.
 Regulation: Focus on protecting investors’ rights.
– Mandatory licensing of the fund’s management company by the newly created Federal
Financial Markets Agency (FFMA).
– All transactions involving the fund’s assets need to be approved by a Specialized
Depository (licensed by FFMA). Ownership rights for the investment units are registered
by a Specialized Register (licensed by FFMA).
– The funds portfolio need to be appraised by a licensed appraiser on annual basis.
 Liquidity: Legal format provides an option to list the fund on a domestic stock
exchange. Investment units can also be used as a quality collateral in the
construction industry financing schemes.
 Existing Players:
– Concordia Asset Management: $10mm fund listed on MSE.
– Management Consulting: $32mm fund.
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III. RCF’s Real Estate Activities
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RCF Highlights
 Specialized Russia-focused investment banking firm.
 Created in 1994, RCF established itself as one of the foremost financial advisors
to Russian companies entering international capital markets.
 Facilitated over $1 billion of debt financing in the form of syndicated loans, bonds,
and commercial paper.
 Professional staff includes 28 employees located in offices in New York, Moscow,
and Geneva.
 Moscow office provides a range of integrated investment banking solutions,
including organization of debt, equity, and project financing.
 New York office carries out private and public placement of securities:
– Registered Broker-Dealer with the NASD,
– Registered with the SEC,
– Member of the Securities Investor Protection Corporation (SIPC).
 In-depth industry expertise in Telecommunications, Financial Services and Real
Estate and Construction
 Over the last 2 years, executed over 10 investment banking transactions with total
transaction value in excess of $120 million.
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RCF’s Construction Financing Vehicle
Financing and securitization mechanism for real estate and construction industry
Real Estate Assets
Construction Process
Construction
company
Investments
“Closed Real Estate Mutual Fund”
Unit Purchase
Banks
Insurance
Companies
Individuals
Private Investors
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Pension
Funds
Institutional
Investors
RCF Real Estate Fund
 RCF Real Estate Fund is an institutional investment vehicle focused solely on real
estate investment opportunities in Russia & CIS.
 Sponsored by RCF Group, one of Russia’s leading specialized investment banking
firms.
 Benefits from the sponsor’s unique local resources, such as established network
of relationships and proprietary transaction flow.
 RCF’s dedicated real estate team has unique combination of Russian and
Western experience:
– Managed institutional Russia-focused real estate funds since 1996.
– Invested in excess of $50 million in more than 10 real estate and private
equity transactions in Russia & CIS.
 Fundraising Status:
– Target Size: $100 million
– Completing the pre-marketing campaign.
– Group of strategic anchor investors identified.
– First closing planned for 2nd Quarter 2004.
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Investment Themes
Based on market opportunity, sponsor’s capabilities and team experience
 Development & Refurbishment Projects
– Highly profitable, sustainable opportunities.
– Returns realized through efficient deal sourcing, project development and management.
 Speculative Opportunities with Shorter Investment Horizon
– Limited project term, but exceptional return characteristics.
 Acquisition of Quality, but Undervalued Assets
– Many existing assets suffer from temporary deficiencies.
– Flaws can be corrected under institutional ownership through professional asset
management.
 Joint Ventures with Strategic Partners
– Partnering with groups that can add specific value to portfolio investments.
– Sponsor maintains relationships with a number proven and potential partner groups.
 Sophisticated Use of Leverage
– Debt financing became common in the real estate market.
– Only available to professional institutional players.
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Transaction Sourcing
In opaque Russian market, access to the best opportunities is essential
 Access depends on the relationships and track record of collaboration with the
local authorities.
 Deal flow is proprietary and often exclusive.
 Partnering with established industry players to ensure proper incentives:
– Pre-agreed contracts at market terms.
– Partner co-investing with the Fund.
 RCF’s Existing Relationships:
– Leading Russian development and construction companies;
– Governmental agencies (State Committee for Housing Construction and Maintenance);
– Proven local partners in major regional centers;
– Established independent real estate agencies;
– Institutional and private investor groups with existing exposure to Russian real estate;
– Conglomerates with significant real estate portfolios;
– Leading banking institutions involved in real estate finance business.
 Active log of transactions readily available for execution.
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Hands-on Portfolio Management
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FINANCE
Efficient financial control
Optimal cash flows
Capital structure
Western financial reporting
STRATEGY
Focused portfolio development strategy
Disciplined investment process
Strict investment criteria
Promotion of corporate profile
HANDS-ON
PORTFOLIO
MANAGEMENT
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TRANSACTION MANAGEMENT
Pro-active portfolio management
Efficient deal partner incentives
Focused asset management
Clear organization structure
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LEGAL
Competent structuring
Effective legal control
Constant deal monitoring
Fund structure maintenance
Contact Information
RCF Group
Mr. Vadim Komissarov
Managing Partner
Paveletskaya Pl. 2-1, 12th Floor
Moscow, 115054, Russia
Phone:
Fax:
Email:
Internet:
+7-(095)-933-5454
+7-(095)-933-5453
[email protected]
www.rcfcap.com
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