Top trends of 2007: development is the new real estate

PERE looks back at the year just passed for the trends that mattered most. Today we look at trend number eight - private equity firms forayed into emerging markets via joint ventures or by taking equity stakes in development companies.

Be it Russia, Brazil, China, India, Poland or Turkey, fund managers were making moves into emerging markets in 2007 by investing in companies with construction and development
track records.

There is little mystery why. Not only ca potentially vulnerable managers avoid pitfalls of an unknown market by teaming up with an expert player, but they can also potentially gain exposure to a pipeline of projects rather than having to compete for highly valued completed single assets.

Construction is hot

Morgan Stanley, which is a strong proponent of buying stakes in companies oftentimes on behalf of its special situations fund, made its first move into Poland by acquiring a 25 percent stake in WAN SA, a Warsaw-based developer of residential, office and logistic properties. It didn’t stop there. It also took a 14.3 percent stake in Sao Paulo-based real estate broker and developer Abyara Planejamento Imobiliário, and a 25 percent stake in St. Petersburg – based real estate developer RBI Holdings as the investment bank continues to build its presence in the Russian market.

Also in Russia, JER Partners and its Moscow-based private equity partner Alfa Capital Partners formed a joint venture with local developer Storm Properties for a one-million-square-foot office complex on the outskirts of capital through their comanaged Marbleton Property Fund.

The strategy even spilled over into mainstream private equity. Global buyout firm Permira acquired a 20 percent stake in gaming company Galaxy for HK$6.5 billion ($840 million) to capitalise on the Chinese company’s plan to develop the world’s second largest casino at Macau. Also in China, Standard Chartered bank was reported to have invested $35 million in Beijing –based Sino Ocean Real Estate Development.

Another rapidly emerging destination, Turkey, saw a variation of the theme. US hedge fund Och-Ziff established a development company with Turkey’s Tekfen Real Estate Development to undertake projects in the country’s largest cities.

In each case, the investee companies could point to a track record of completed schemes and a pipeline of future developments in varying stages of readiness. They also gave funds access to secondary and tertiary cities in order to escape some of the over-crowded primary cities.

At the PERE Forum, held in New York in November, Gary Garrabrant, co-founder of Chicago based Equity International, declared that his firm was uninterested in property – instead it was snapping up property developers around the world