The Real Deal New York

Moscow finds ‘new oil’ in real estate

About one quarter of Russia's 87 billionaires gets wealth from real estate construction

March 31, 2008
By John Wendle

The homepage of Mirax Group Corp., a Moscow-based real estate development company, features five young men standing in a heroic pose on the edge of a building. The Moscow River curves behind them, and so does the Moscow City project, a vast $12 billion mixed-use venture that is rising on the edge of the city’s downtown. The five men — some wearing designer suits, others formal blazers — might as well be wearing superhero capes, given the vaunted status of real estate developers in Russia these days.

Since the country’s financial crisis in 1998, recovery has been remarkable. Annual growth has averaged above 7 percent. While oil and other natural resources, which are trading at near-record highs, account for a majority of the economy’s shine, analysts said that since 2003, other sectors, particularly real estate and construction, have also been booming. Real estate has become so profitable that it is commonly referred to as “the new oil.”

Indeed, real estate and construction account for the wealth of about a quarter of Russia’s 87 billionaires, according to a survey by Forbes Magazine.

“[Right now] construction and real estate are the engines of growth,” said Sergei Riabokobylko, the Russia director of Cushman & Wakefield Stiles & Riabokobylko, the Russian part of the global brokerage.

Many of these new real estate tycoons are quite young. For instance, Sergei Polonsky, the ninth-youngest billionaire on the Forbes list with a net worth of about $1.2 billion (which earns him the rank of 962 among the world’s 1,125 billionaires), is just 35. In building Moscow City, his
firm, Mirax, will erect the 1,660-foot Federation Tower, which will be the tallest building in Europe.

The development will add 1.5 million square meters of office space to the market by the end of 2011.

Other young real estate and construction tycoons include 35-year-old Dmitry Zelenov, ranked 843 with an estimated net worth of about $1.4 billion. Zelenov’s fortune was made through his development company, Don-Story, which built the 833-foot-tall Triumph Palace apartment tower in Moscow.

Two other Russian real estate biggies, Kirill Pisarev and Yuri Zhukov, each 38 years old and each with an estimated net worth of $6.1 billion, tied for the 160th spot on the Forbes list. Together they founded First Mortgage Company; in what at the time was Europe’s largest real estate share issue, the firm sold 15 percent of its equity for $2 billion last June.

“These guys were the people who were pushing the envelope in the late ’90s and early 2000s when everyone else was
saying, ‘What are you doing?’” said Riabokobylko. “They are the ones who have created some of the most visible projects, and now they are looking west, south and causing the paper value of properties in cities to skyrocket. A survey done in March by PricewaterhouseCoopers and the Urban Land Institute indicated that Moscow’s property market is the world’s hottest.

Last year, the same survey ranked Moscow 18th in the world.

According to international property analyst Knight Frank, the cost of homes less than five years old in Moscow was up 92 percent in 2007. Yekaterina Thain, a director at Knight Frank real estate, expects prices to grow by 18 to 25 percent this year.

Despite the addition of nearly 8 million square feet of new space in the last four years, the value of commercial space is also going through the roof. In Moscow, the vacancy rate for office space remained at just 2.4 percent in 2007, and asking prices have gone up 45 percent in just one year, to $1,909 a square meter (about $180 per square foot), according to Knight Frank.

Many Russian real estate moguls have their hands in multiple real estate-related enterprises, including road and airport construction.

Riabokobylko explained, “Clearly, the amount earmarked by the government for infrastructure is tremendous. The government has realized that infrastructure investment brings a multiplier effect.”

However, even despite the present boom mentality,
analysts said Russia’s latest batch of billionaires isn’t invincible.

“I wouldn’t say they are masters of the universe. They haven’t gone through a full real estate cycle.

“We’re still waiting to see how long the boom cycle will last. It is inevitable that we will enter an oversupply phase,” said Riabokobylko. “However, the structural
deficiencies are so serious that it could take five to 10
years to reach a stage where we may experience a supply-driven crisis.”

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