Russia is still managing to attract international capital for real estate investment, notwithstanding recent criticism of its controversial election process. While Moscow protestors mocked Prime Minister Vladimir Putin in the biggest anti-government demonstration since the fall of the Soviet Union, Morgan Stanley Real Estate Investing (MSREI) was busy putting the finishing touches on a $1.1 billion deal to buy the Galeria shopping mall in St Petersburg.
At press time, MSREI still had not fully completed a deal with the seller, Meridian Capital, a Moscow and St Petersburg investment boutique founded by Russian and Western businessmen in 1997. However, all the signs pointed to the transaction nearing completion. If completed, the deal would dwarf the largest reported commercial real estate deal recorded in Russia, which was the $600 million acquisition of the Ritz-Carlton Hotel in Moscow by Verny Capital last year.
Positioned in the centre of St Petersburg, the Galeria is a new 200,000-square-metre shopping centre that enjoyed its official opening on 25 November 2010. Rather than cut a deal with the owners immediately upon the opening of the centre, MSREI preferred to wait and see how it traded before agreeing to terms. In order to secure its position, the firm entered into exclusive talks around seven months ago, although it had been tracking progress of the asset for a lot longer.
Real estate sources knowledgeable about MSREI’s activities in Russia have said privately that its objective has been to buy the best retail or office asset in the country. It is said to have bid on an office in Moscow in recent times, but a rival buyer offered more. On the Galeria deal, it had “gone in at a very high yield for what is definitely a prime Class A asset,” said one person familiar with the situation.
The Galeria investment is being made on behalf of Morgan Stanley Real Estate Fund VII Global, which had roughly $2.7 billion of its original $4.7 billion in equity left to invest as of the end of last year. Media reports suggested that, if completed, the transaction would represent an investment of $400 million – around 8 percent of a vehicle that has had its investment period extended following a vote by investors in December.
MSREI recently has made a number of investments around the world on behalf of the fund. In the run up to the end of 2011, about $320 million was invested in two deals in Australia, and the firm is thought to be putting a further $200 million to work in China, $50 million in Japan and $90 million in India.
News of the Galeria deal started to leak out towards the end of last year, just as real estate brokers put together data on deal volumes in Central and Eastern Europe (CEE) showing opportunistic money was arriving in the region after a lull. CBRE, for example, said the CEE region had managed to attract a significant amount of capital that was partly explained by value-added and opportunistic money flowing to Russia.