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. Last Updated: 07/27/2016

AFI Avoids the Worst Of Developers' Woes

AFI Development chief executive Alexander Khaldei considers his company a survivor on Moscow's devastated real estate scene, but he has lost some of his swagger.

Last year, Khaldei, who co-owns the Russian developer with Israeli billionaire and diamond dealer Lev Leviev, was sitting on a portfolio of some of Moscow's most prestigious projects, which were valued at nearly $6 billion.

Now, he has scaled back his development projects from 34 to concentrate on three flagship central Moscow ventures that make up the lion's share of his portfolio, which was valued by consultants from Jones Lang LaSalle at $2 billion at the end of 2008.

The Moscow property market has seized up as the businesses that occupy the city's sleek new Class A office space slash their staff and some companies pack up altogether, filling the business newspapers with sale and bankruptcy notices.

"Where are they going? Those offices are emptying out. We feel the effects of it too," Khaldei said in an interview.

"We try to be flexible, cutting rates a little bit to try to keep our tenants, so our turnover is small. But on the whole, there is a lot of empty office space on the market."

Office rents, he said, have fallen by 20 percent, while apartments have been steadier, falling 10 percent to 15 percent.

He said the $2 billion valuation of his portfolio was too low.

"But considering what is happening with developer structures, we can't prove otherwise. The market is at a standstill, not because we aren't building anything but because there is no demand," Khaldei said.

"Developers need to go on holiday. There is no demand. If there is no demand, it doesn't matter what you build. It can be a shack or a palace -- if you can't sell it, you can't get a return on your investment."

Before the crisis, AFI was selling offices as fast as it could build them. It continues to rent its own premises from a rival, with Khaldei's corner office overlooking the building he had planned to occupy, which is now leased to a Wall Street bank.

That office building is part of its intricate Tverskaya Zastava project, a plan to renew the grubby and crumbling neighborhood around Belorussky Station at the old northern gates to the city, now a traffic bottleneck.

With cash in short supply and demand scarce, AFI is pursuing Tverskaya Zastava and two other flagship projects -- the Mall of Russia in Moscow's new financial district and an apartment building across the river from the Kremlin.

The company will write down assets "within reason" in an earnings release for the fourth quarter of 2008 -- when the credit crisis hit Russia with full force -- to be issued March 17, he said.

While the Moscow real estate scene has been heavily focused on its more leveraged developers, AFI Development had about $370 million on its balance sheet at the end of the third quarter and "long, comfortable credit lines" with no debt immediately due.

Khaldei was sniffing the air for blood last year, hoping to acquire crisis victims with his cash pile. But the company returned cash to its shareholders last year instead and now sees potential in managing assets seized by banks for debt.

"Banks are the biggest owners of real estate right now. They can't sell off all that collateral. There are no buyers on the market, so it would be logical to put it under experienced developers' management," he said.

"We could take on, say, five sites from a bank, get them into shape and finish them on schedule so that finished buildings were ready for the end of the crisis."