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. Last Updated: 07/27/2016

Hines to Invest $100M in Moscow Real Estate

International real estate firm Hines plans to invest about $100 million in Moscow development projects in the next two years, said Lee Timmins, senior vice president of the company and head of its Moscow office.

The projects the Houston-based company is planning to invest in are a class A office building inside the Garden Ring valued at $50 to $70 million, a start on a 10- to 15-hectare business park that could cost $100 million to $150 million in up to seven years of development, and an extension to Hines' existing Pokrovsky Hills elite suburban development, he said in an interview.

The investment will be funded from an $850 million emerging-market fund that Hines has formed with TCW, a group of companies providing investment management services. The fund has 62 institutional limited investors, mostly pension funds, mostly from the United States, but including some from the Middle East and Far East, he said. The fund aims to make an annual return of more than 20 percent on equity, he added.

Hines already knows who it wants as tenants — the 260 multinationals and large Russian companies that it already has as tenants in eight elite Moscow projects that Hines is involved in.

"We have a pretty good feeling for what our clients are looking for," Timmins said.

The timing of the investment plans coincide with the burgeoning Russian economy, he said.

"We believe that Russia has turned the corner," he said. "We believe there will be more direct foreign investment and more multinationals participating in the economy, and as that happens, we believe that our clients will have greater interest in this marketplace.

"They will demand real estate, and we mean to provide that real estate to them," Timmins said.

While many other developers put together a deal and then try to finance it, Hines has capital on hand before deciding on an investment, he said.

"We believe that is why a lot of companies that came to town had grandiose plans and then either stalled, stopped or have not be able to finance the projects," he said.

"Once we make the commitment, as in the case of Pokrovsky Hills, even though we had the 1998 Russian crisis we kept building and finished the project," Timmins said. "Because our capital is private capital and we have a long-term view, we feel we can ride the bumps of the emerging markets like Russia. We find that most of our tenants value that quite a lot."

Land has already been bought for a central class A office building, which is to be from 20,000 to 30,000 square meters in size, he said, declining to release more information but saying an announcement would be made on that project in the next few months.

Hines is involved in negotiations with a landowner for land for the business park in the west of the city that is to feature three- to seven-story, single- and multi-tenant buildings, he said.

"The whole point is to achieve rental rates that are 30 to 40 percent and maybe as much as 50 percent below class A central-city Moscow rates," Timmins said. "We think that as certain types of tenants consolidate their Russian operations, they will look for space that is class A, but not necessarily in the center and not necessarily high-rise."

Hines and the Anglo-American school have invested about $130 million in Pokrovsky Hills, a suburban residential development next to the school in the northwest of Moscow. The 15.6-hectare project's first two stages, featuring 150 units and also funded by the emerging-market fund, are fully leased, he said.

A third stage of another 60 units is under construction and is due to be completed later this year, he added.

Construction of further stages involving investment of about $50 million each is expected in the next three to four years, he added.

Sergei Riabokobylko, partner at Stiles & Riabokobylko, an associate of international real estate consultants Healey & Baker, said Hines' investment would serve as a positive signal to other Western investors. Hines is a market leader, and market analysts closely watch its investments, he said.

"It will raise the bar for developers," he added.

Chris King, director of business development at Colliers International, said Hines' move is very positive for the real estate market.

"The foreign investment market, at this early stage, is in need of a serious player who has the experience and the capital to make a successful project a reality, and we believe Hines has both," he said. "I think it makes sense that a company that has successfully worked in Russia, completing and managing several projects, is best positioned to take the next step in larger scale investments."

King said a 20 percent return on equity is achievable in the Russian market.

"Many developers who are active here have done it. With this percentage, however, comes certain risks, and when gauging risk, you can look at the track record of company that is investing. Do they have the staying power, expertise and financial backing to make serious and long-term investments? Hines definitely does," King said.

Mark Stiles, partner at Stiles & Riabokobylko, said Hines would likely be successful in expanding its relationships with existing tenants.

"Most everyone will continue to do business with those who provide a good product for a fair price. Hines is no exception and will surely build on the relationships they have already established," he said in an e-mail interview.

Riabokobylko said that central-city net class A office rents range from $480 to $540, and if Hines can achieve the savings it plans for its business park, it will likely have tenants even before the park is finished. Several Stiles & Riabokobylko clients are already looking for such premises, but Moscow has nothing like that currently, he said.

Timmins said Hines has real estate assets of $10 billion and manages property valued at $3 billion to $4 billion for third-party clients. Founded in Houston in 1957, Hines has offices in 60 U.S. cities and 14 countries, he said.

Its projects in Moscow, some of them in partnership or on behalf of other groups, include Pokrovsky Hills, Ducat Place II, Gogolevsky 11, Novinsky Garden, Park Place Moscow, Donskoi Posad, Star City and a project with LUKoil, Timmins said.