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. Last Updated: 07/27/2016

Suburbs Seen as the City's Way Forward

If you are a real estate developer operating in Moscow's red-hot market, you had better have a full land bank, says Denis Davidko, first deputy general director and chief financial officer of Open Investments.

And if you want to avoid the risk of a potential downturn in the residential market in and around the capital, then don't build apartments of the type that would compete with the existing stock of Soviet-era housing.

"We build our strategy in the segments that were absolutely nonexistent -- detached single family homes or detached minitowns," Davidko said in an interview.

"It's the concept of a brand new lifestyle, which is very much favored in the West but is almost nonexistent here."

Open Investments, controlled by metals magnates Vladimir Potanin and Mikhail Prokhorov, became the first Russian developer to float in 2004. It has just raised some $591 million in its latest round of equity fund raising.

That cash will enable Open Investments to close the agreed purchase of 10,000 hectares, increasing its land bank to nearly 16,000 hectares -- enough to keep it in business for years to come.

Open Investments has paid low prices to acquire land and as it develops projects the value of its land has risen by five to 10 times, Davidko estimated. The company is betting that Moscow will evolve into a vast metropolitan area as residents of the densely populated capital -- 98 percent of whom live in apartments -- seek more space in suburbs that have yet to be built.

And even as property values tumble in the United States, Davidko sees Russian buyers, who have grown cash rich thanks to a commodities boom, continuing to support valuations for detached homes that have nearly trebled in the last four years. Residential buyers spent $20 billion in Moscow last year and $15 billion in its environs that together are home to 25 million to 30 million people, he estimated.

"All those export revenues of Russia are being converted somehow into the disposable income of Muscovites," said Davidko. "That makes the market very resistant to downward pressure or volatility. If people invested their own cash, it wasn't their last cash."

Open Investments is targeting arterial routes to the north and west of Moscow that stand to benefit from road upgrades -- especially a stretch of the main Moscow-St. Petersburg highway due to be completed by 2014.

Open Investments, which has commercial property interests in Moscow, has no strategic plan to extend its reach across the country. But it has gained a foothold in Sochi, where it is building a 200,000-250,000 square-meter waterfront residential complex and looking at other projects there.

Open Investments boosted its net asset value to $1.9 billion as of June 30, up nearly 2,500 percent since the end of 2003, and the company is thinking about taking on debt to improve the efficiency of its capital structure. It already has credit facilities with several banks lined up for acquisition finance, said Davidko.