2009 - CRE

In­talking­about­diversification­into­foreignprojects­we­can­say­that­today­this­is­more­of­anexception­than­the­rule.­According­to­Dmitriy­Katalevsky,­despite­a­few­successful­cases­thepresence­of­foreign­assets­in­the­portfolios­of­Russian­development­companies­at­the­momentis­a­rare­phenomenon.­The­relatively­low­levelof­
domestic­ Russian­ developers­ in­ overseasmarkets­is­due­mostly­to­the­high­investmentattractiveness­of­the­Russian­market­coupledwith­many­unfilled­niches­–­especially­in­theregions.­The­crisis­caught­many­local­developersin­the­process­of­active­regional­expansion­bysurprise.­It­is­possible­that,­if­not­for­this­crisis,­Russian­development­companies­would­haveexpanded,­within­a­few­years,­into­Central­and­Eastern­Europe,­the­Baltic­States,­and­possiblyinto­the­capitals­of­West­European­countries.­It­cannot­be­said­that­the­presence­of­foreign­projects­in­a­company's­portfolio­automatically­increases­its­value.­Everything­dependson­the­quality­of­assets­that­were­acquired­inthe­process­of­diversification­and­the­specificregional­features­of­the­project.­For­example,­a­Russian­developer's­portfolio­of­housing­projects­in­Spain­is­unlikely­to­help­him­to­safelysurvive­this­crisis.­In­addition­to­the­macroeconomic­risks­in­each­country­one­must­also­take­
into­account­the­risks­of­establishing­relationswith­the­local­authorities­so­as­to­understandthe­social­and­cultural­characteristics­of­doingbusiness­in­a­particular­region.­
But­ the­ Russian­ commercial­ real­ estatemarket,­before­the­onset­of­the­crisis,­was­thefocus­of­Western­investments.­According­toexperts,­many­foreign­companies­are­reluctantto­diversify­their­portfolios­by­selling­Russianprojects.­Among­the­major­international­developers­that­are­present­in­the­Russian­marketare­Hines,­AIG­Lincoln,­and­AFI­Development.­Foreign­companies­came­into­the­Russian­market­primarily­due­to­the­high­profitability­ofreal­estate­here.­
In­ addition,­ many­ Russian­ and­ international­retailers­are­actively­expanding­in­thecountry.­As­an­example­of­foreign­chains­thatare­opening­up­here­we­can­name­the­shopping­
center­ projects­ being­ realized­ by­ likesof­IKEA,­Metro,­and­Auchan.­"The­investmentattractiveness­of­the­Russian­market­in­recentyears­has­remained­quite­high­in­comparisonwith­the­developed­markets­of­other­countriesso­we­have­seen­a­significant­inflow­of­foreigninvestment­in­recent­times.­However,­with­thestart­of­the­global­financial­crisis­the­activity­offoreign­investors­in­Russia­has­slowed­down,"says­Ruben­Alchudzhyan,­managing­director­of­
Praedium­ONCOR­International.
Reducing­the­risks­
As­is­well­known,­the­greater­the­diversificationin­investment­projects­the­lower­the­risks­to­theoverall­portfolio.­Portfolios­of­companies­whichhold­a­variety­of­assets­in­various­economic­segments­are­the­least­exposed­to­risk.­In­fact,­if
#06 (112) / 16–31.03.09
the­value­of­some­assets­goes­down­it­is­offsetby­other­assets.­
According­ to­ Dmitriy­ Katalevsky,­ diversification­has­two­main­dimensions­–­strategicand­financial.­The­strategic­dimension­involvesdiversification­into­a­new­sector­where­a­company­may­profit­from­entering­that­segmentof­the­market­or­if­it­is­able­to­gain­a­sustainable­competitive­advantage­in­the­new­sector.­There­are­many­academic­studies­which­confirmthat­diversification­into­similar­enterprises,­i.e.diversification­into­related­industries,­is­morebeneficial­than­diversification­into­completelynew­segments­due­to­the­economies­of­scalewhich­
can­ be­ achieved­ by­ using­ the­ sameresource­in­several­spheres.­From­this­perspective,­a­development­company,­having­experience­in­the­construction­of­commercial­centersfor­example,­can­successfully­diversify­into­theresidential­sector­using­its­experience­in­designdevelopment,­
its­ relationships­ with­ contractors­and­its­own­skilled­labor­and­managementpool,­as­well­as­making­use­of­its­hard­won­goodreputation.­
The­ financial­ aspect­ of­ diversification­ isequally­important­and­represents­a­desire­tospread­the­risks.­Diversifying­into­different­projects­makes­one­less­dependant­on­each­phase­of
­ Portfolio­diversification­is­a­sure-fire­method­of­minimizing­riskand­its­role­is­growing­during­this­crisis­when­safe­strategies­whichare­aimed­at­minimizing­possible­financial­losses­are­enjoying­thegreatest­demand.
construction,­a­specific­market­segment­or­thegeographical­location­which­allows­the­company­to­significantly­reduce­the­impact­of­negativefactors­that­face­the­development­business­ingeneral.­The­desire­to­diversify­risks­seems­to­beone­of­the­main­reasons­for­significant­growthin­announcements­last­year­of­new­mixed-usedevelopment­projects,­combining­office,­retail,entertainment­and­hotel­real­estate­under­oneroof.­It­is­very­likely­that­those­companies­whichhave­in­their­arsenal­a­variety­of­assets­andthat­are­different­in­structure,­grade­and­sector,­are­today­the­least­susceptible­to­financialfluctuations­in­the­market.­Nevertheless,­withthe­onset­of­the­crisis­the­investment­abilityof­the­majority­of­companies­began­to­declinesharply.­Investing­in­new­projects­today­is­a­veryrare­phenomenon­indeed.­According­to­Ruben­Alchudzhyan,­despite­the­fact­that­diversification­of­assets­is­a­major­tool­that­companies­useto­minimize­risk­at­all­times,­we­are­now­seeing­areverse­phenomenon:­because­of­limited­accessto­credit­many­developers­are­freezing­projects,dropping­their­regional­expansion­plans­andavoiding­development­in­new­real­estate­segments­–­instead­they­are­focusing­on­only­onearea­of­activity,­and­limiting­the­geographicalscope­of­their­operations.­For­example,­largewarehouse­developers­such­as­Eurasia­Logistics,­
Megalogix­ and­ the­ Multinational­ Logistics­
Partnership­(MLP)­have­announced­a­slowdownin­their­regional­expansion­plans­and­have­frozen­a­number­of­projects.­The­exceptions­are­those­few­companieswhich­have­their­own­uncommitted­funds.­These­players­find­this­an­opportune­timeto­invest­these­funds­in­potentially­inter
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esting­properties,­in­good­locations­and­atreduced­prices.­According­to­Dmitriy­Katalevsky,­the­onsetof­the­crisis­has­focused­the­attention­of­investors­and­developers­on­projects­that­generatestable­cash­flows.­First­of­all,­properties­withstable­cash­flows­in­the­portfolio­of­a­development­company­help­to­maximize­the­enterprise'sattractiveness­as­a­borrower:­banks­prefer­towork­with­such­companies­when­it­comes­togranting­loans.­Secondly,­one­can­say­withoutexaggeration­that­those­developers­who­ownsuch­properties­are­much­more­likely­to­survivea­crisis­–­and­in­the­worst­case­scenario,­thedeveloper­is­able­to­sell­some­of­these­assets­toobtain­financing­and­therefore­make­it­througha­difficult­period.­
Success­in­diversity­
We­all­know­the­saying:­"Don't­put­all­your­eggsinto­one­basket",­which­best­explains­how­diversification­works.­According­to­Marina­Rezvovoy,all­markets­from­time­to­time­will­have­theirups­and­downs,­and­the­real­estate­market­is­noexception­and­in­general­these­occur­at­different­times­in­different­segments.­That­is­why­the­existence­of­a­diversifiedportfolio­which­is­effectively­managed­and­haswell­allocated­resources­will­make­a­companymore­stable­and­as­a­consequence­will­increaseits­chances­of­survival­even­in­the­most­adverseconditions.­"At­present,­many­companies­haveprofile­
and­ non-profile­ assets­ which­ enablethem­to­reduce­their­risks­in­times­of­recession.­This­is­normal­practice­and­is­a­good­way­to­survive­times­of­crisis,"­considers­Vitaliy­Yefimkin.­
Andrey Nesterenko /
Андрей Нестеренко,
Capital Group
Diversification­of­the­portfolio­is­a­methodof­investment­risk­reduction­even­in­times­of­crisis.­However,­according­to­Ruben­Alchudzhyan,due­to­limited­financial­resources­there­has­beena­significant­decline­in­investment­activities­onworld­markets­today.­Therefore­those­companieswhich­have­their­own­capital,­at­a­time­whenmore­and­more­properties­are­being­put­up­forsale,­are­able­to­take­advantage­of­the­currentsituation­
and­ obtain­ new­ assets­ at­ reducedprices.­­­
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