Though you may not have heard of it, the privately owned Russian bank in question—Otkritie Financial Corporation—is not a small-time player.
However, to readers of the Wall Street Journal and Financial Times, Otkritie’s partners in the real estate project will probably be more familiar. Starr Capital International is the New York-based private equity firm run by Maurice Greenberg, the former chairman of American International Group. Old Lane is the hedge fund founded by former Morgan Stanley pro Vikram Pandit; it has recently been acquired by Citigroup, where Pandit is now heading up the alternative investment division. Artha Capital, the other hedge fund in the consortium, is also well known on Wall Street, while Deutsche Bank probably needs little introduction.
The group has decided to commit $132 million in equity to develop four 11-story office blocks and a hotel complex with 170 rooms, for a total of 1.1 million square feet in the Paveletskaya area of Moscow. The neighbourhood, located in the south central part of the city, has seen its fair share of development already.
According to Otkritie, however, it is not the size of the project—though it is big by most standards—or the location that makes it interesting. Rather the significance lies in the “new way” projects are being financed in Russia. A spokeswoman for the Russian bank says that up until now, the bank had financed all of its projects itself. But under this new arrangement, the bank acquired the project, inveted the foreign investors and brought in a special credit lender in the shape of Deutsche Bank Global Commercial Real Estate Group to underwrite construction. All of them will participate in the profits of the development.
Though Russia is awash with domestic capital looking for a home in real estate, there is a shortage of money for development projects, according to real estate pros actively engaged in the region. Domestic capital can be more expensive than foreign money, which has enabled European banks such as Hypo Real Estate and Eurohypo to take up some of the slack. The Paveletskaya financial model, though, appears to take things on to another level.
“The main purpose in the unique structuring of this project is to create an evolutionary new methodology for attracting Western investors to large-scale investment projects in Russia,” declared Vadim Belyaev, general director of Otkritie.
It takes a certain kind of investor to willingly participate in such ventures. Hedge funds are used to riskier investments and Greenberg is no stranger to placing bets in emerging markets. In April, for example, he launched a joint venture with CITIC Securities to target investment opportunities in China.
With more and more investors clamoring to enter markets like Moscow or Shanghai, the model utilized in the Paveletskaya project could be the first step towards more sophisticated financing—and more deals getting done. At the very least, it is another milestone in the steady development of the Moscow property market.
P.S. In the July/August issue of Private Equity Real Estate magazine, we take an in-depth look at the latest trends in the Russian real estate market, from investing in development platforms to the opportunities found in Russia’s second city, St. Petersburg. Get your copy today.