Reo mk preso 23 01-08 exodus development real estate ferro vienna brief

PANEL SESSION: The complexities of the development sector What does it take to stay ahead of the competition?

Developing in Russia and other CIS markets - are there enough projects in the pipeline?

By Michael Klimusha

VP, Corporate Finance

FERRO-STORY Group

CELL. MTS: + 985 643 05 77

CELL. BEELINE: + 903 618 20 15

STAT. TEL: (+7 495) 744 56 11 EXT. 346

www.ferrostroy.ru

add. e-mail: [email protected]

“Buy land. They do not produce it anymore”.

Mark Twain

Developing in Russia and other CIS markets – ARE THERE ENOUGH PROJECTS IN THE PIPELINE?

ARE THERE ENOUGH PROJECTS IN THE PIPELINE?

We think YES. THAT’S WHY:

DEEP RESTRUCTURING OF THE ECONOMY: FROM CENTRALIZED INDUSTRIAL / RAW MATERIALS TO MARKET ECONOMY

ECOMONY IS STILL ON THE CONTINOUS (5TH YEAR) RISING LINE THANKING TO HIGH RAW MATERIALS PRICES AND POLITICAL STABILITY, additional factors: Olympic games)

YOUNG MARKET – “REAL ESTATE” AS A DEFINITION APPEARED IN RUSSIA ONLY IN 1990-ies

FUNDAMENTAL DISTORTIONS IN REAL ESTATE PROGRESS DURING SOVIET ERA, TOPPED BY SHOCK TURBULANCES OF TRANSITIONAL ECONOMY IN 1999-ies. SOVIET CULTURE OF CITY DEVELOPMENT DURING 1920-90-ies WAS CONSERVATIVE, MISER, AND DRAMATICALLY DIFFERENT FROM CAPITALIST WORLD PATTERN

DESPITE TO CERTAIN YIELD COMPRESSION, PREMIUMS TO INVESTORS ARE STILL ATTRACTIVE

REAL ESTATE MARKET IS CURRENTLY BECOMING MORE SYSTEMATIC AND BETTER ORGANIZED (ETHICS, CORPORATE GOVERNANCE, CAPITAL & CAPITALIZATION, LEGISLATION, DEVELOPMENT, NON-QUALIFIED PARTICIPANTS are gradually squized from out of the market mostly due to the liquidity problems, TECHNOLOGY AND SKILLS, QUALIFICATION OF LOCAL PERSONNEL AND MANAGEMENT? )

GOVERNMENT IS SMOOTHLY TAKING LARGER LEAD IN THE MARKET

3

LAND INVESTMENT PROFITABILITY: UK

LAND (UK)

370 %

S&P 500

110 %

NASDAQ

109 %

FTSE All Shares

56 %

FTSE 100 (

51 %

10- years return: 1994-2004

200410TH YEAR OF CONTINUOUS LAND PRICE GROWTH ALL OVER THE CAPITALIST WORLD

IN UK, LAND GROWN IN PRICE FOR

370%

Source: Ferro Stroy , UK Land Investments Group, Bloomberg, Reuters, N?ASDAQ, NYSE 4

200612th OF CONTINUOUS LAND PRICES GROWTH ALL OVER THE CAPITALIST WORLD

During 2000 - 2006, Russian land grown in price 1 by

700%

RUSSIAN LAND INVESTMENT: BETTER THAN THE DIAMONDS

OR RUSSIAN LAND IS THE BEST INVESTORS’ FRIEND

LAND (Russia) 1

700 %

Crude Oil350 %

Gold

150 %

Diamonds

21 %

6 –years (2000-2006 гг.), price dynamics

1. So during last 6-7 years land grown in price all over developed world, whilst Russia more than double average growth rate..

2. And this goes with the fact that Russia occupies 1/6 of the globe’s dry surface.

Ист.: UK Land Investments Group

LAND (UK) - period of 1994 - 2004

370 %

1 – усредненный показатель по фактически состоявшимся коммерческим сделкам по всем категориям земель

5





ECOMONY IS STILL ON THE CONTINOUS (5TH YEAR) RISING LINE THANKING TO HIGH RAW MATERIALS PRICES AND POLITICAL STABILITY, additional factors: Olympics,




REAL ESTATE MARKET IS CURRENTLY BECOMING MORE SYSTEMATIC AND BETTER ORGANIZED (ETHICS, CORPORATE GOVERNANCE, CAPITAL & CAPITALIZATION, LEGISLATION, DEVELOPMENT, NON-QUALIFIED PARTICIPANTS are graduallly squizzed from out of the market mostly due to the liquidity problems, TECHNOLOGY AND SKILLS, QUALIFICATION OF LOCAL PERSONNEL AND MANAGEMENT?)


7

Office Density, м2/ 1 person Retail Density, м2/1000 persons

8RUSSIAN REAL ESTATE MARKET IS JUST FLEDGING

Moscow

Frankfurt

Stockholm

Paris

London

Milan

Average

19.3

13.7

6.0

5.3

5.0

3.5

0.8

594

1 111

667

397

572

619

163

Warehousing Density, м2/1000 persons*.

Yield, Office, %/annum * Yield, Retails, , %/annum * Yield, Warehouse, %/annum

Moscow

Frankfurt

Stockholm

Paris

London

Milan

5.5 (1.3)

5.0 (1.2)

5.25 (0.6)

4.88 (0.67)

4.75 (0.53)

12.5 (6.3)

5.0 (0.8)

5.38 (1.58)

5.88 (1.23)

5.06 (0.85)

5.06 (0.84)

12.0 (5.8)

* - in brakes = discounted by international sovereign risk

7.75 (3.55)

5.38 (1.58)

5.88 (1.23)

5.75 (1.54)

7.25 (3.03)

12.0 (5.8)

Moscow

Budapest

Prague

Warsaw 830

770

610

260

* - categories A, B.

Ист.: Deutsche Bank, Rennaissance, UBS

Not satisfactory saturation of the market platforms further sound growth rates for 3-7 years.

Despite to the yields compression, good premiums for investors are still there.

8

Администратор

Housing Density, м2/ 1 person.*

9RUSSIAN HOUSING

Russia

USA

France

Germany

Sweden

Canada

Av. Europe

70

43

40

40

40

35

20

68 mln m2 of housing / annum in Soviet Russia only (not all USSR) – by that time major volume of post-war resurrection construction was already complete.

In 2000-07 housing construction rose to 37 mln m2 / annum after dramatic drop and suspension in 1990-ies .

Based on depreciations charts, simple reproduction volume shall be at 58 mln m2 / annum.

Source: Rosstat, Deutsche Bank, Minpromenergo RF, Minpromregionrazvitiya RF

* - this quotient is seriously overestimated for Russia as official data on Russian housing include premises which would not be considered housing-class in the West. On the contrary, denominators part (population) is underestimated as it does not include legal and non-legal immigrants. We consider level of 15 m2 / person be more realistic.

Statistical Committee of EU classification mean “overinhabited” any apartment with more than 1 person per room – typical for Russia.

Government sets target of 32 m2 housing / citizen. To hit the target, construction shall rise from 40 mln m2/ year to 80 mln m2 / year from 2010 on.

Interesting fact: Moscow is taking only 65th place in Russian rating of housing density (out of total of 89 regions).

In fact, Russia is country of millions of homeless or quasi-homeless people, living in obsolete and premises with share of fully depreciated housing close to 70%.

Unsatisfied demand for housing is estimated at 1 bln m2. At current construction rate of 40 mln m2 / annum it will take 25 years to satisfy. The specialists say that demand will grow to 3 bln m2 by 2012.

9

Администратор











10

11ABSENCE OF DOWTOWNS

Practically no Russian cities, except Moscow, have downtown area in international understanding.

In Moscow, downtown was traditionally coinciding with historical part of the city, almost like in London prior to Canary Wharf project completion. As the territory has a number of limitations for massive complex development, new offices were dispersed and not bound by through-by infrastructure. The situation in Moscow is starting to change as Moscow City project successfully moves on, following best practices of complex large projects development.

The rest of Russian cities do not have downtowns as such, due to Soviet guideline and style. In new Russia, serious investors who would undertake projects of such scale and complexity in regional cities are still rare.

That’s why, in Russian cities, downtown is represented by historical and local authorities administrative buildings concepnration = square + citihall + concert hall + park + industrial areas starting straight on.

No downtowns in Russian cities except Moscow, possibly SaintPetersburg soon.

No systematic approach to complex downtown areas in Russian cities except Moscow and SaintPetersburg yet.

11

WHAT IS DOWNTOWN?

Town, is fact, is an aggregate of human gravity centers bound by infrastructure.

А downtown, by international practice, is a city in the town – multifunctional complex which includes offices, retails, hotels, expo and congregation halls, recreational areas, residence, parking.

It does supposes smart infrastructure, good location, not necessarily next to historic center but more important close to water massive, good landscape esthetics. It must have a stamp of respectability and prestige: best real estate, best tenants, best goods, best foods, best people.

So, downtown can be called as aggregate of real estate gravity centers for people who appreciate and can afford quality and related comfort.

12TO DEVELOP DOWNTOWNS ON THE TERRITORIES OF RELOCATING INDUSTRIAL AREAS

Elite residence

PLUSes MINUSes

Industrial zones are located in geographical centers of Russian cities, often in historical parts, with good basis for infrastructure development.

Demand for elite housing is growing, supply lags behind, big deficit accrued.

Good economics for developer.

Large territories of industrial zones – creation of huge elite residence district can bring the market down.

Ecological renovation costs may be material.

Retail Deficit of quality supply

Good economics

Строить порционно

Территории промзон велики, строить моллы в центре города неэффективно

Строить порционно

Офисы Дефицит качественного предложения во всех городах, включая Москву, особенно класса А.

В промзонах крупных предприятий, как правило, решена проблема транспортной доступности (подъездные ж/д и а/м пути на подвоз сырья и вывоз готовой продукции, которые могут быть переформатированы)

Хорошая экономика

Строить порционно, только класс А

ЛогистикаКак правило, промзоны тяжелого машиностроениея расположены на участках с хорошими геологическими условиями, благоприятствующими строительству подземных сооружений.

Рост спроса и дефицит предложения наблюдается во всех городах. Хорошая экономика.

Использовать центр города для строительства наземных складов неоптимально (неэффективное использование земли, проблемы с логистикой)

Предусматривать возможность строительства подземных складов, обеспечивающих работу наземных сооружений

SOLUTION

Компания, которая будет владеть крупными площадями промзон либо в центрах, либо на перифериях городов, должна выбрать концепцию создания downtown-ов, т.е. строительства деловых многофункциональных центров - кварталов, отвечающих международным стандартам, т.е. по сути, стать единым девелопером деловых частей соответствующих городов.

Практически отсутствуют

12











13

3 month18 month6 month6 month

Value adding & Profitability$ mln / Ha

TOTAL

Agricultural land Housing land (with plug-in permission)

Land with construction permit

Building completeLand with last-mile infrastructure

sale

Land Development Project Development Constructor Realtor

WHAT

WHEN

Land with construction permit & infrastructure

Profitability CostProfitSimultaneously

source: McKinsey & Co.

SAMPLE

WHO

6 month

0.3

0.30.3

>100%

100% 0.4

0.4

100%0.20.1

>200% 0.50.3

100%

0.3

1.5

<25% 0.1

0.1

100%

2.7

2.0

4 month

75%

Х %

2 month

RUSSIAN REst MARKET: VALUE ADDING CHAIN

Circa 3 years

14

15

DEVELOPMENT COST (MOSCOW)Class А Office$ / m2 GBA (incl. VAT), market price

Land works (100)

Cement (360)

Metals (180)

Engineering (w/o Electricity) (240)

Electricity (60)

Labour (240)

Land & Documentation * (1 193)

TOTAL (2 373)

• CONSTRUCTION PERIOD, months: 24

• GLA/GBA: 70%

• min IRR (for discount): 12%

•COST OF m2 GLA: $ 4 377

TOTAL discounted at min IRR rate

(3 064)

- Level Movement Forecast

Source: Ferro Stroy, Deutsche UFG, Open Investments,

Most successful developers do know how to minimize this component, pressing it down to 100-300 $ in best cases.

* In todays. Moscow this components is offered on the market at 1000 – 2000$/m2, average of 1500$/m2. Major sellers are, of course, “Dogs on the Hay” (see “WHO IS WHO” slide) . Interesting enough, these offer prices are almost not differentiated by categories of REst, i.e. offices of A Class, offices of B Class and residential projects are offered at similar rates

SAMPLE

15

16WHO IS WHO ON RUSSIAN REst MARKET

NIGGARD KNIGHTS

DOGS ON THE HAY

BREED BULLS

SLEEPING ELEPHANTS

FAIR

PO

TE

NT

IAL

NA

V V

AL

UE

CAPITALIZATION

Capitalization chances are poor, but NAV of projects in owners is potentially over 300-500 $ mln.

Can’t haul serious projects on their own, not enough expertise & capital. Usually hard to sell their projects as unable to define fair price and are scared to underprice. That’s why, they usually do not sell 100%, but up to 50% share in the project to have upside. As time goes and pressure grows, they are more willing to cash out.

Have better knowledge of the market than Dog on the Hay. Often they are old, small to medium construction companies.

Owners of REst assets in range of 5 -100 $ mln good for development.

In principle, never have beeen and never will be professional players in REst.

No money for development. Have a pity to sell, look for the well-capitalized partners.

As time goes and pressure grows, strive for cash out.

- Suggested tactics towards the Group

BUY ASSETS + BUY PLAYERS

BUY ASSETS

BE THERE

Professional players.

Good resource base . Good background balanced with current portfolio and pipeline.

Well capitalized.

BUY ASSETS. CREATE JVs

Well capitalized, but do not specialize in REst development.

Have a plenty of extremely interesting assets with huge potential. Often, are willing to negotiate JVs with professional players.

Extremely interesting strategically.

Everybody wants to be a Pedigree Bull.

For acquisitions, especially by western investors, Niggard Knights are the most interesting targets, as in most of the cases they have relatively good reputations on the market, mostly as old construction companies. With reputation goes opportunity to acquire interesting project, though now this relation diverges. In any case, e.g., Sistema GALS and AFI in due time were serious to infrastructural projects, which let them to establish accreditation with the City Administration. In this way or another, all current public developers undergone similar stages.

Many Niggard Knights are going their own Bulls’ way already.

Dogs on the Hay are very specific and numerous type. There is a certain share of sane owners here which are prepared to sell interesting assets.

It is highly recommended to buy out 100% assets from them straight, as in most of the cases any JV become hard burden for acquirer (conflicts, etc.).

Sleeping Elephatns are the systemic keepers of the biggest land and other REst assets for development. Moajor Elephant is, of course, the State itself, as directly, so through government owned blue-chips.

In this sense, situation is very similar to, say, the Western Europe..

• Government, in general

•Gazprom

•RZhD

•Aeroflot

• other

Adult

•AFI

• PIK

• Sistema HALS

•RGI

•Other .

Young

• RBI

• BIG

• Leader

• LEK

•Etc.

Source: FERRO-STROY 16

17

CAPITALIZATION

NAV,

CURRENT ORPOTENTIAL

Sistema HALS

AFI

Open Investments

MirlandRGIRBI

PIK 11 400 / 8 800

М’$

940 / 85590 / 94

1 300 / 1 0003 200 / 2 000

5 700 / 3 200

ТММ (|Ukraine) 870 / 400XXI Vek (Ukraine) 400 / 200

Targets for M&A*

Summary current value of assets owned by this segment counts for trillions dollars, today.

Non-developers are not included into analysis . Still, it is worthwhile to mention that such large corporation as Russian Railways (RAO RZhD) , Russian Energy Systems (RAO EES), Gazprom and other are: (1) well capitalized; (2) owing or controlling huge real estate massive eligible for redevelopment. At the end of the day. Like in the most of the world, the largest real estate owner is Government. But it is still hard to classify such players as developers.

These must grow

Exceptionally lucky will grow up

Most participants will leave the markets, either voluntarily or not

_

GlavmostStroyDonStroy

MCG

MIRAX

ST Development

The number of small player swill not decrease, but share of each of them will.

On other hand, though the number of large players will not increase dramatically, the market share of each of them will continue to grow.

– will capitalize soon

WHERE TO BUY A COMPANY OR ASSET

Source: FERRO-STROY 17

Sale or

18

VA CHAIN

PROFIT DISTRIBUTION

60% (IRR 50% - 300%)

34% (IRR 21% - 140%)

10%5% (IRR 9% - 12%)

Investment Pre-Development

RUSSIAN REst MARKET: VALUE CHAIN & WHO IS WHOMany little players are dreaming to sell up 50% of the project at this stage to financially valuable partner who will take further care of financing and project management routine.

Construction

ConceptBuy land Documentation Development rent Management

1%

Leaders: well capitalized, structured, managed , skillful, progressing. Usually, go all the way through the chain. First steps of the chain generate major profit, further steps do reputation, volumes and stability in cash flows.

Industry Specialised Players: construction co.s, realtors, local lawers, tc. Do know the market specifics, so are tended to take part in early chain steps. A massive of little “ no name” players attracted by

the margins.

Usually, do not plan to move much further through the chain, look for selling 30-60% in project.

Western Funds

Pure Realtors Pure Constructors

Ист.: анализ рабочей группы

WHO’S WHO?

19

INDUSTRIAL ZONES

Ист.:Правительство г. Москва, Департамент земельных ресурсов Правительства г. Москва

As per the city hall data, there are 66 industrial zones in Moscow, or over 4 000 enterprises which occupy nearly 20 000 hectares of city land.

INDUSTRIAL ZONES REDEVELOPMENT HAS STARTED NOT ONLY IN MOSCOW:

• Though Moscow makes the process the most systematically and consistently: the city authorities approved industrial relocation program as early as at the beginning of 1990-ies. The struggle is on.

• Cheboksary: several industrial factories have decided to relocate themselves from city center to suburbs to build multifunctional commercial centers on the currently occupied locations.

• Rostov-na-Donu: city authorities are actively pursuading industrial enterprises in the city line to move to suburbs in accordance with new city General plan. Otherwise, city will rise the land lease rates.

• Kemerovo: factories are moving to suburbs.

• Tyumen: industrial units are moving outside the cities in accordance with new General Plan.

CURIOUS (though very rough) ARITHMETICS: by amateur’s way, if to take potential density of construction equal to 20 000 sq. m. / hectare (near to average in Moscow) then volume of future buildings new sq meters which can be created on contemporary Moscow’s industrial zones is

400 000 000 sq.m. If to multiply these meters by hypothetical market price of $4 000 / sq. meter, then we have amount of

$1 600 000 000

20WHY RUSSIAN INDUSTRIAL ZONES ARE ESPECIALLY INTERESTING FOR DEVELOPMENT

FundamentalsHistory: the Soviet economy had natural resources – industrial orientation, in the circumstances of intensive industrialization. . Supremacy of proletarians was state doctrine . The new city were developed by industrial needs: (1) natural resources deposit start; (2) factory build in area of deposit; (3) city for workers is build around the deposit and factory . Industrial enterprise supply the city with electricity, water, heat, subsidizes social infrastructure, operates logistical supplies. Transport systems of the city is also build to serve dual function – for the city and for the factory. The model was effective in full mobilization of national resources , especially during WWII, when tremendous facilities and human resources of industry were to be relocated fast to new locations. Between 1917 and 1941 the number of cities grown three times.

Besides, the modern definition Real Estate was introduced to Russian vocabulary only in 1990-ies.

Исторические, идеологические и культурные предпосылки: основная масса российских городов построена по принципу средневековых городов или античных городов-государств. В центре города: большая площадь (на ней раньше казнили, объявляли новости, проводились массовые гуляния, парады и т.д.) и здания органов власти (администрации). Если на Западе от этой концепции постепенно и полностью отошли к началу XX века, то в России концепция была законсервирована тем, что в начале прошлого столетия основной политической доктриной была провозглашена диктатура пролетариата, и город стал тесно ассоциироваться с промышленным производством: в городе – рабочие (в селе – крестьяне). Рабочим были «нужны»: конечно, прежде всего - завод, а потом и большой концертный зал, центральная площадь, и здание городской администрации.

Текущие макроэкономические предпосылки: экономика России продолжает диверсифицироваться от промышленно-сырьевой к сервисно-производственной модели. Это усиливает развитие городов, но не развитие промзон, которые в них находятся. По сравнению с советским периодом растет производительность труда: заводам не нужны такие большие территории, как раньше.

Текущие предпосылки

Основное развитие рынка недвижимости ближайших 5-7 лет придется на российские города, и не только Москву. Формируется рынок земли, индустрия девелопмента. Продолжается урбанизация экономики, сокращается доля жителей сельской местности. Земля дорожает, особенно в городах, особенно пригодная для строительства. Объемы потребностей промышленных предприятий в объектах недвижимости существенно сократились. Усиливается экологический фактор.

Таким образом, в России сложилась уникальная ситуация с промзонами: их много, многие находятся в местах крайне интересных для девелопмента недвижимости, они не нужны промышленникам для основной деятельности в таком объеме, как раньше в результате сокращения производства и/или роста производительности.

20

ГЕОГРАФИЧЕСКИЙ ФОКУС НА 5 ЛЕТ

РАСТИ ВМЕСТЕ С НАИБОЛЕЕ ПРИВЛЕКАТЕЛЬНЫМИ РЫНКАМИ, ОПЕРЕЖАЯ ТЕМПЫ ИХ РОСТА ИСПОЛЬЗУЯ КОНКУРЕНТНЫЕ ПРЕИМУЩЕСТВА, ЗА СЧЕТ РОСТА ИЗНУТРИ И ЗА СЧЕТ ПРИОБРЕТЕНИЙ МЕСТНЫХ ИГРОКОВ.

ЗОНОЙ ИНТЕРЕСОВ ЯВЛЯЮТСЯ ТОЛЬКО ГОРОДА С ЧИСЛЕННОСТЬЮ > 100 тыс. чел.

ПРИОРИТЕТ № 1: Европейская часть России до Урала включительно, Украина

• Самая высокая плотность городского населения (53 млн. чел/2.8 млн. кв.км) *

•Самая высокая степень урбанизации

• 84% розничного оборота

• Основная масса офисных рабочих мест

ПРИОРИТЕТ № 2: Южная Сибирь

• вторая по величине плотность городского населения после Европейской части (7.3 млн. чел./2.7 млн. кв.км.) *

• высокий платежеспособный спрос

• большое количество городов промышленного типа

• 12% розничного оборота

ПРИОРИТЕТ № 3: другие регионы России

• низкая плотность населения (10 млн. чел./11.5 млн. кв.км.) *

• низкий уровень доходов

• низкая деловая активность

• низкая доля офисных рабочих мест

• всего 4% от розничного оборота

* - только города с населением > 100 тыс. чел.21

22

• Государство, представленное различными органами государственной власти и местного самоуправления, Вооруженными силами, отдельными государственные предприятия,

•Неэффективные предприятия, в основном бывшие государственные;

•Научные и образовательные организации;

• Различные религиозные и общественные организации;

• Спортивные и культурные организации;

•Частные компании и организации, не имеющие экспертизы по недвижимости;

• Владельцы «по случаю»,

• Несостоявшиеся девелоперы.

Практически все вышеперечисленные земли не используются, либо используются не оптимально, по ряду причин:

•Коммерческое использование земель не является основной деятельностью землевладельца;

•Не достает профессиональных знаний;

•Есть другие коммерческие интересы;

•Некоммерческие мотивы (напр., политические или религиозные).

При этом, большинство собственников были бы заинтересованы в коммерческом использовании земельных ресурсов при наличии специалиста, имеющего безупречную репутацию и обладающего достаточным уровнем профессионализма.

ГДЕ ПРИОБРЕТАТЬ ПРОЕКТЫ (продолжение)

Неоптимальные владельцы

Использование возможностей, предоставляемых непрозрачностью и неразвитостью рынка, и включение в коммерческий оборот части не используемого земельного фонда, предоставляет на сегодняшний день наибольший потенциал для создания стоимости.

Ист.: анализ рабочей группы 22











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Reo mk preso 23 01-08 exodus development real estate ferro vienna brief

Real Estate

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