2009 - CRE

Oleg­Mikhailovsky,­Manager,­Advisory­Team,­
PricewaterhouseCoopers­Russia
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The­capital­debt­markets­are­to­a­certain­extent­closed­for­the­durationof­the­crisis­and­will­consequentlyremain­so­for­quite­some­time.­These­circumstances­
were­ far­ from­ pleasant­ formany­
developers­ which­ made­ extensiveuse­of­such­loans.In­many­cases­the­ratio­between­debtcapital­and­the­property­owner­could­reachsome­
60-80%.­ Such­ a­ funding­ structurecould­only­survive­in­times­of­low­interestrates­and­stable­growth­in­the­value­of­realestate­but­proved­deadly­upon­the­sharpcrisis­in­the­banking­sector.­For­most­Russian­developers­the­crisisproved­a­major­challenge­but­at­the­sametime­allowed­to­fully­review­the­businessmodels­and­financial­strategies­of­companies.With­the­propagation­of­the­crisis­itbecame­
clear­ that­ only­ strong­ marketplayers­would­survive.­The­capacity­of­acompany­to­preserve­its­business­greatlydepends­on­how­quickly­it­can­adjust­to­acomplex­situation­and­whether­it­makesthe­right­business­decisions.
It­ should­ be­ noted­ however­ thatregardless­of­the­fact­that­the­situationrequires­fast­decision­making­processes,market­
players­ must­ not­ only­ exploreshort-term­
scenarios­ but­ also­ mid-­ tolong-term­planning­prospects.Decisions­on­clearing­parts­of­a­business,­
selling­ specific­ assets­ and­ staffreductions­
cannot­ lead­ to­ a­ situationwhereby­
circumventing­ a­ default­ at­ agiven­point­and­a­company­ends­up­in­anon-competitive­situation­and­a­portfolio­deprived­of­its­best­projects.Many­developers­are­presently­adopting­
all­ possible­ short-term­ anti-crisismeasures:­
staff­ reductions,­ rigid­ planning,­cuts­to­marketing­budgets­and­clearance­of­secondary­assets.­These­measuresallow­to­solve­short-term­liquidity­issuesbut­will­hardly­help­in­the­identificationof­long-term­funding­for­most­development­projects.
We­ believe­ that­ the­ only­ acceptablealternative­to­debt­financing­for­the­timebeing­appears­to­be­private­placements,i.e.­raising­private­funding­in­exchangefor­equity.­The­chances­of­raising­privatecapital­remain­relatively­high­for­developers­with­high­quality­projects­at­various­stages­of­completion.­Practically­allprivate­investors­are­presently­skepticalabout­real­estate­projects.­Their­interestcan­only­be­aroused­by­the­quintessenceof­all­projects­on­the­market.
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In­ order­ to­ raise­ private­ capital,­ adevelopment­company­must­not­only­havea­highly­desirable­portfolio,­but­also­meetsome­specific­requirements.
­ While­ in­ pre-crisis­ times­ theserequirements­weren’t­fully­respected­andmany­investors­would­close­their­eyes­ontheir­fulfillment,­today­they­have­becomepractically­mandatory.
Raising­ private­ funding­ in­ exchangefor­equity­is­a­rather­standard­procedureaccepted­by­all­parties­in­a­M&A­transac-
tion.­It­is­assumed­that­a­company­willprovide­
qualified­ information­ regardingits­corporate­structure,­present­completed­projects­and­also­a­Business­Plan­withan­incisive­planning­perspective­based­onrealistic­scenarios.At­the­present­time,­in­order­to­successfully­
introduce­ share­ capital­ ontothe­market,­the­following­requirement­isof­the­outmost­timeliness:­the­companymust­be­well­prepared­and­the­transaction­has­to­be­carried­out­at­the­highestpossible­
level­ of­ professionalism­ whichimplies­
the­ presence­ and­ assistance­ ofprofessional­financial­and­legal­consultants.A­significant­aspect­in­the­process­ofraising­
private­ capital­ is­ the­ financial,taxation­and­legal­due­diligence­procedures.­Due­diligence­allows­for­a­full­disclosure­of­all­financial,­taxation­and­legalinformation.­
Financial­ forecasts­ will­ serve­ as­ thebasis­for­estimating­the­present­value­ofthe­
company.­ Consequently,­ the­ qualityof­the­submitted­forecasts­and­financialinformation­
will­ considerably­ assist­ theseller­
in­ affirming­ his­ positions­ on­ thevalue­
and­ principal­ terms­ of­ the­ transaction­
during­ all­ negotiations­ with­ thepotential­purchaser.
All­ parties­ of­ the­ shareholding/private­
capital­ can­ be­ divided­ into­ twokey­groups:­financial­and­strategic.­Thefinancial­
players­ consist­ of­ numerousprivate­investment­funds­(Private­Equity­
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Real Estate Opportunities
in Times of Crisis
­ The­modern­day­market­situation­in­Russia­has­considerablychanged­many­sectors­of­the­economy.­The­real­estate­industry­wasthe­sector­that­suffered­the­most­from­the­negative­impact.
Houses).­They­are­interested­in­acquiringcompany­shares­for­a­specific­time­frame­(usually­4-5­years),­and­subsequently­sellit­
to­ a­ strategic­ investor,­ another­ fundor­
issue­ an­ IPO­ (a­ theoretical­ possibility­
considering­ today’s­ economic­ situation).­
A­ buy-back­ scenario­ is­ also­ possible.­Financial­investors­may­propose­adecent­
valuation­ through­ various­ debtand­
private­ capital­ markets­ but­ theyare­
the­ most­ demanding­ with­ regard­ tofinancial­analysis,­the­quality­of­informa-
tion­provided­and­the­profitability­of­thegiven­project.
Certain­ development­ companies­ canrely­on­the­interest­of­some­major­international­strategic­players.­
Many­ real­ estate­ sectors,­ such­ ashotel­
chains,­ construction­ of­ housing,warehousing­
facilities­ and­ major­ retailcomplexes­in­the­regions,­will­regain­theirformer­relevancy­as­soon­as­the­presentcrisis­
comes­ to­ an­ end­ and­ their­ valuewill­grow­substantially­at­the­first­signsof­revival.
We­ believe­ that­ the­ following­ trendin­
transactions­ with­ private­ and­ sharecapital­is­presently­unfolding:­while­previously­most­developers­were­striving­tosell­
over­ 50%­ of­ the­ quota­ for­ a­ quickcash­out,­today­selling­a­major­share­ofthe­business­is­no­longer­attractive­dueto­the­lower­market­valuations.
Nevertheless,­ we­ should­ not­ forgetthat­even­if­a­minority­share­of­a­business­is­being­sold­it­should­not­representless­than­25%­+­1­share­which­will­providethe­investor­to­exercise­specific­power­ofcontrol­in­the­purchased­business.­On­the­other­hand­the­absence­of­debtcapital­forces­the­sale­of­minority­packages­
in­ order­ to­ finance­ those­ projectswith­the­utmost­potential.­We­recommend­in­such­cases­a­transaction­
structure­ whereby­ the­ minorityshare­can­be­sold­at­a­market­price,­andat­that,­to­foresee­­provision­for­buyingout­a­greater­share­in­the­equity­in­con-
sideration­of­the­future­growth­of­financial­indexes­and­the­cost­of­this­buy-outcan­
bring­ the­ owners­ of­ the­ business­ aconsiderable­upside­in­the­medium-termprospect.­
Such­ a­ transaction­ structureusually­
provides­ for­ a­ call­ option­ onbehalf­of­the­selling­party.Many­players­with­private­capital­haveassumed­
a­ wait-and-see­ attitude,­ especially­amongst­financial­investors­–­theyhave­to­come­to­understand­how­the­valueof­
many­ companies­ will­ be­ affected,­ by­
­­ Many­developers­are­presently­adopting­all­possible­short-term­anti-crisis­measures:­staff­reductions,­rigid­planning,­cuts­to­marketing­budgets­and­clearance­of­secondary­assets.­These­measures­allow­to­solveshort-term­liquidity­issues­but­will­hardly­help­in­the­identification­of­long-term­funding­for­most­development­projects.
how­much­they­will­depreciate­and­thenthey­will­pick­and­choose­and­acquire­themost­
attractive­ assets­ that­ were­ not­ solong­ago­in­great­demand.­
The­ level­ of­ activity­ amongst­ thefinancial­and­strategic­players­will­renewitself­once­companies­have­reached­a­certain­bottom­which­may­happen,­accordingto­many­market­players,­by­the­beginningof­the­second­quarter­of­2009.­
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