Private Equity Investments in Russian Real Estate

UnknownDmitry Churin
Over the past few years we have witnessed private equity investors starting to focus on investing in Russian real estate in addition to investing in industry, media, technology, consumer goods and services. The interest of private equity investors has transformed from just watching prices for real estate grow to making considerable investments in this market. Today private equity funds are actively investing in real estate projects: hotels, golf courses, warehouse facilities, shopping centers and more.

Although private equity investors are prepared to face certain risks, investing in property has always been considered a secure investment. And with Russia's prices in the real estate market, these investments can be regarded as quite profitable, too.

With the aim of a successful and fairly quick exit, private equity funds enter real estate projects at the early stages. Although more risks are involved at this stage, it means that private equity investors become more familiar with the local market, business environment and rules. They can adequately assess the potential risks and problems that can occur and are capable of handling them. For example, purchasing land may be an issue when the project takes the investor outside the city limits where land is often zoned as agricultural: Current legislation prevents companies with a majority of foreign investment from owning agricultural land and it often takes time and effort to rezone such land. Also, for a number of reasons (including personal safety and taxation issues), local sellers often tend to structure their deals in a manner that may not be perfectly transparent for Western investors. For example, they may prefer to sell the shares of an offshore company that in turn controls the project company in Russia rather than enter into an asset deal or sell the stakes in the Russian company itself.

Vladislav Zabrodin
It is not necessary for private equity funds to participate in these projects from the very beginning to the very end. On the contrary, they may enter the project at an early stage to secure the rights to it, introduce a transparent system of management, develop a concept and exit the project prior to developing the design documentation or obtaining a construction permit. They can sell the project either to development and construction companies or to other private equity funds that might not be prepared to take these risks at earlier stages.

For example, exiting a development project on a plot of land at the stage when the rights to this land have been secured suggests that the price of this exit will be significantly closer to the market value of this land than in the beginning of the project.

Certain private equity funds show that they can be efficient and are prepared to work in accordance with local standards and business practice.

Efficient private equity investors who have learned to play by local rules, have considerable knowledge of the local market and are prepared to enter into projects at early stages have good chances of finding and developing new attractive projects. These projects can then be brought up to meet Western standards for transparency and efficiency, which gives these efficient private equity investors good alternatives for exit: They can either sell the projects (or the project companies) to institutional investors, or they can create a "secondary market" for bigger private equity investors.