The Cold War ended in the early 1990s, of course, but recent events suggest we have entered a new era, dubbed the “Cold Peace” by some commentators. Witness the recent murder of former KGB officer Alexander Litvinenko in London last November. The British government wants to extradite Russian suspect Andrei Lugovoi, who met Litvinenko—a critic of President Vladimir Putin—on the day he was poisoned by a dose of radioactive isotope polonium-210. However the Russian government refuses to comply with the request to extradite Lugovoi, who insists he has nothing to do with it.
Political obfuscation, military cover-ups, and, yes, murder, seem to be par for the course in modern-day Russia—and regularly make headlines in the press. However, shenanigans in real estate are yet to feature…until now.
As our sister magazine Private Equity Real Estate covers in this month’s issue (page 4), the Moscow headquarters of oil firm Yukos was put up for sale following the imprisonment of billionaire founder Mikhail Khodorkovsky. Now it has emerged that a previously unheard of company called Prana has bought the office and other assets for around $3.9 billion (€2.9 billion)—quadruple the starting bid.
The fantastical purchase price and events surrounding the sale have raised so many questions and remain so secret that Russia’s Federal Anti-Monopoly Authority wants to know the identity of the buyer. In a fit of annoyance, the authority has said it would ban the deal if the beneficial owners are not revealed.
The Russian daily newspaper Kommersant suggests Prana is linked to Vladimir Esakov, a prominent board member of Russian gas monopoly Gazprom, but no more information has been forthcoming.
Considering that hundreds of investors reportedly bid for the Yukos building, the sale has done nothing to inspire real estate investors in Moscow, or in the country’s secondary and tertiary cities for that matter.
A significant chunk of Moscow real estate is not in private hands, but rather remains under the ownership of Russian municipalities who are desperate to derive value from their holdings. But how can anyone have faith in doing deals with a public body for land in a market where a mystery firm is able to pay quadruple the asking price for a high-profile asset?
At a recent conference on Russian real estate investing, the lack of transparency, the difficulties in completing due diligence and the unfortunate continuation of a “bung culture” in the public sector regularly came up. One delegate even suggested that envelope payments should simply be “absorbed” during the investment process.
As the reputable practitioners say, the best deals should not require that kind of risk and the good news is that deals are getting done. In one of the most recent examples, Hypo Real Estate underwrote the purchase of a shopping center in Moscow.
In a country where real estate is still woefully underprovided, the savviest investors seem to be pursuing strategies to develop property. One leading Wall Street bank is preparing to bring in a ready-made real estate team from a financial institution, which will be spun off into a separate company. A private real estate fund will own the company while the real estate assets are owned by a separate vehicle; the development company will eventually get floated on a stock exchange in Europe or New York.
This may be the model for others to follow. It certainly sounds a lot better than bidding for existing prized office assets against unknown forces who seem able to pay anything for bricks and mortar.