- The conventional wisdom today says that it is a good time for investments. Do you feel comfortable working in today's situation?
- We see both the positive and negative sides in this situation. On the one hand, the demand for commercial real estate is not clearly known. There is a considerable quantity of the vacant premises, the rates are either decreasing or have stagnated, therefore it is very difficult to predict which investments will provide profits for us. The second negative factor is the banks - they have stopped financing projects. Today everything has to be constructed using our own money.
- But there are also the positive aspects - today one can enter a project with reasonable money. The entry prices have come down to reasonable levels. A while ago the entry fees and terms were way too high. The real estate sector was highly overheated and is just now coming back down to earth. By the way, in many segments objects are still overpriced.
- Which of the factors influence the price of real estate?
The major factors that influence price levels are demand of the final buyer (leasing and purchases have stopped) and availability of financial resources (banks have stopped financing); developers are forced to raise financial resources through the early sale of their facilities.
- Which projects is "Aton" working on today?
- The construction of the first stage of the World Trade Center in Nizhniy Novgorod has now been completed. In addition, we are taking part in the development of the second stage of the Class ‘A' office center near the Airport subway station and are also planning to commission it this fall. We have quite a few warehouse projects in partnership with ESPRO all over Russia, some of them have already been commissioned and some of them are still at the stage of construction.
- Now there is much talk about problem assets. Is this new market situation interesting for you?
Everything depends on the specific problems of the asset; if it is a business center hastily re-built from a former factory, located somewhere in the industrial zone, then this kind of asset is of little interest to us; but if it is a quality facility with a well thought-out concept, but the bank has stopped financing for it, we are ready to consider it.
- What do you think of the distressed assets appearing in the property market?
It has been a matter discussed for over a year now, but I have heard nothing about any actual transactions. The primary source of distressed assets, may become the banks, if due to regulative (special instructions of the central Bank) or financial (problems with refinancing of banks in the West) reasons they are forced to put up for sale some unfinished facilities they acquired in lieu of loan repayments, but as long as the world financial authorities invest enormous financial resources in the banking systems, there will be no mass release of the distressed assets, and hence, no sharp decline in prices.
-Therefore, you are saying that we shouldn't expect that very soon the banks will start dumping real estate at below cost prices?
- Yes, I strongly believe that anything of high quality will not be placed on sale, because there are not enough high quality objects and these their owners will wish to retain. Some old refurbished factories will be put on sale. Earlier developers looked only at which site they could obtain and what was the maximum density allowed at on that plot of land. These two parameters defined the configuration of all objects, but for an investor the most important thing is to own an object that is competitive in the long term. Buying and object, the investor wants it to generate profits for the next 10-15 years.
- Who do you think can earn money on the problematic assets, and how? What are the prospects in this direction?
As was demonstrated this past year, it does not make sense to expect that high-quality assets, at low prices, will appear in the market; in principle there are very few investment-attractive facilities in the market. So it is unreasonable to hope that the prices of these high-quality facilities will be reduced, and there is no point in buying low-quality development projects even at low prices. A poor location and lack of adequate parking can hardly be compensated for with a low price, so the choice will not be simple.
Even if they appear, only those who have readily available financial resources will be able to take advantage of the good opportunity, and currently there are very few such players in the market.
- What do you think about purchasing unfinished objects, a lot of them have appeared in the market recently?
It all depends on the location and concept of the facility, but very often a partially built facility has serious shortcomings, which are either expensive or not possible to fix and they do not allow it to become an investment grade facility. On the other hand, unfinished facilities have already, as a rule, all the permits and it may well be worth buying them.
-Such things as original architecture, panoramic views, complex technical systems are often considered as unnecessary excesses. What do you think about this statement, is the main thing that tenants look for today only price and a simple set of functional characteristics?
- Everything depends on the class of tenants. If you are a firm just starting out with an average budget, the certainly your choice will be based on price and functionality. But there are many firms for which employees represent the majority of the expense budget. Consulting, audit, finance, software. In these areas people are the main active and productive force. In business there are various segments, each with its own requirements. When a firm starts to earn more money, it wants to improve its workplace conditions. And even today, despite the crisis, most companies, which have been in the market a long time, are looking for savings on many things, but they still prefer to have a good office, if this can be achieved.
- But are there that many tenants seeking Class 'A' premises outside of Moscow?
- We counted on the fact that Nizhniy Novgorod is a large industrial cluster, its maintenance requires high-quality service, often of world-class caliber; these are the tenants we count on. Many companies did not seek to open offices here, because there were no offices meeting their requirements. WTC is not just a business center, it is part of the WTC (World Trade Centers) network on the basis of which international economic and trade cooperation is developed.
- Why did you decide to work in the class 'A' segment?
- It was a straight forward choice. We are a fund that invests into real estate. In accordance with our business model we need to sell our product to the western investors, and western investors are not interested in buying Class 'B' and 'B-' offices. One good example we saw in 1996 when the first western fund came to Russia - the Fleming Family & Partners. They managed to find only two objects that met their quality requirements.
- And what kinds of institutional investors are, in general, represented in the market today?
There are practically no institutional investors, the large Western funds are focused on the European and American markets, which also have undervalued assets, and where the market risks can be better forecasted. Large Russian industrial groups are working on their assets and are resolving issues related to their own refinancing, most of the banks have similar problems. A small number of Russian and foreign funds and small profitable companies have available resources for investments, but they are able to invest only in a limited number of small projects.
- It is hard to imagine that when the retail turnover reduces by 40% and the bank credits are not available, someone still has funds available for investments.
In the pre-crisis time, the value of assets has reached unprecedented heights, and many were able to sell their assets and projects very successfully; some companies have saved their money to make a future expensive purchase, but due to the crisis abandoned it, so that the money to invest can still be found.
- Tell us what is the reason that direct investors are practically absent in the market?
The fact that direct investments are still are not widespread is connected with several factors. First of all, today many players have lost a considerable amount of money. They had big plans and large debt loads. Certainly our market has many strong players, but they used debt leveraging and bought too many assets - and thus stretched themselves thin. And now that the market has fallen, they find themselves in very difficult situations. This is the reason for the absence of investors in our market. In addition to this, it is important to remember that development is a very difficult area for investments,those who have tried it, have probably lost money many times. The general contractor earns money from the construction process, developer from the organization, and an investor earns money on the results, so if the project is not tightly controlled, there will be no earnings for anyone.
For instance, the World Trade Center construction project in Nizhniy Novgorod was supervised by about four different specialized structures and even with such supervision there appeared deviations in the budget, reducing the profitability of the project.
- Can you provide us with more details on what made you choose this form of investment in real estate, as a direct investment real estate fund?
It is connected with the development logic of the ATON IG, our investment group traditionally specializes in providing financial services, including services for capital management, we develop and provide our customers with various tools to invest in various assets; the line of these instruments, in accordance with international practice, should include a fund to invest in real estate for the diversification of risks.
- What do you think is the advantage of investing in real estate through private investments funds, for an investor?
As mentioned above, development is an extremely complex business and today it will become even more complicated. The investor must have a qualified intermediary representing his interests; unfortunately, the interests of developers and investors very often differ, and investors have no leverage over the process. In addition, the fund invests in several projects at a time, which allows for diversification of risks associated with the implementation and commercial potential of the projects.
- Which business strategy has been chosen by the Aton Group to meet today's challenges? Have you done a lot of revisions because of the crisis?
- We have a well-defined strategy: we select objects for investment, we are open for partnerships. Nothing has changed for us, the only thing different today - is that we have much more experience.
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