Finnish Consortium Eyes Investments in Russian Real Estate

Special to The St. Petersburg Times

Published: May 17, 2005 (Issue # 1070)

A consortium of Finnish companies has unveiled a joint plan to expand investment into the Russian and Baltic real estate markets. SRV Group, a leading Finnish construction company, together with a group of high net-worth shareholders, established Vicus Ltd., a fund that will be based in Finland. A Finnish investment bank, Conventum, will manage the endowment.

Vicus anticipates making diversified long-term investments into real estate in Russia and the Baltic states. During the first three years, Vicus will allocate 100 million euros ($127 million) for purchases and development projects. SRV International Ltd., a subsidiary of SRV Group, will consult on all aspects of the enterprise.

"The sum is going to be divided between many projects in Baltic countries and in Russia," said Veli-Matti Kullas, managing director of SRV Russia. "SRV has good experience in project developments and real estate developments in both Finland and Baltic countries.

"Our target is to utilize our good network among the investment and financing institutions to promote new real estate developments in Russia," he added.

Until recently, the prevailing trend among Finnish firms has been to develop and invest into properties that are directly related to their own business operations in Russia.

"Most investments are involved with companies' own production," said Anne Pajalin, director of the St. Petersburg office of the Finnish-Russian Chamber of Commerce. "Pure real estate investments are rare. In the near future I see companies investing more into Russia because of the more stable economic and political situation."

The formation of Vicus also bolsters the rate of Western institutional investment in Russia. In March, Moscow witnessed the third institutional real estate deal when Britain's Fleming, Family & Partners (FF&P) purchased an office and retail center. In two earlier acquisitions, FF&P Russia Real Estate fund bought a premier business center and Switzerland's Eastern Property Holdings purchased the Berlin House office and retail center.

However, Vicus' release does not detail the background of its shareholders. According to Hanna Kaleva, director of research services at KTI, an independent research group in Finland that specializes in real estate and economics, Finnish institutional investors, such as pension funds, tend to be more open about their participation and the standard practice is to specify their involvement.

Kaleva believes that Vicus represents an arrangement between opportunity funds and developers. She cautions that the Russian market is not yet stable enough to sustain continuing expansion in the sector of institutional investment.

"It might take some time before they'll come to Russia because they seem to apply pretty risk-averse strategies in their internationalization," she said. "But even this interest might arise as the market gets more established."

However, opportunity funds tend to focus on short-term, high returns while Vicus' press-release stated that the company will target long-term investments in retail, logistics warehouse and industrial property.

During a gathering of the Russian-Finnish intergovernmental commission on economic cooperation in Moscow in March, Economic Development and Trade Minister German Gref said Finnish investment in Russia in 2004 surpassed $1 billion, Interfax reported. Bilateral trade grew 36 percent to a record $12 billion. Gref expects Finnish investment could soon exceed 2 billion euros.

St. Petersburg and the northwest region account for the bulk of Finnish investment into Russia. According to the city administration, Finnish investment accounts for 10 percent of foreign capital invested into St. Petersburg.

The local real estate market continues to draw sustained interest because of its high rate of profitability. "Real estate in Russia remains a promising sector in the near future because of growing prices," Pajalin said. "Investors make good profit when prices are going up all the time."

The program announced by Vicus consolidates the position of Finnish companies in the city and also expands their presence across the country. Kullas noted that besides St. Petersburg and Moscow, the company will focus on such regional centers as Yekaterinburg, Nizhny Novgorod, Samara, and Kazan.

SRV is already overseeing several construction projects in the city, such as the Trade and Entertainment Center District 700. But Kullas said they will be separate from announced initiative.

"The investment and financing plan of the Trade and Entertainment Center District 700 does not include the involvement of Vicus. SRV has negotiated with other investors and financiers for this District 700 project and these negotiations have proceeded very well."

The long-established trade and economic ties between Russia and Finland provide an added assurance to present-day relations between the two countries. SRV has similarly taken account of their first-hand knowledge and practical expertise.

"Our long experience in the construction business in Russia is, of course, a very good foundation for the new developments in Russia," Kullas said. "We have many good and long lasting Russian partners and together with them we intend to increase our operations in Russian markets in the coming next years."

As Finnish property companies expand abroad, the proximity of Russia and the Baltics may begin to play a decisive role.

"The Finnish property sector is internationalizing rapidly right now," Kaleva said. "Baltic countries and Russia are natural markets to look at from the Finnish point of view because of both geographical vicinity and long traditions of cooperation in other business areas."

The availability of the Russian export market has already bolstered Finland's economy. KTI Finland lists Russia along with China as the country's two vital trade partners.

Nonetheless, investment still proceeds at a slow pace. Vicus intends to invest around 100 million euros over three years, a figure that may be insufficient to make impact on the market.

"The total sum is obviously rather small, especially considering that it will be diversified into both Baltic and Russian markets," Kaleva said.

"But obviously it's only a start. These types of transactions tend also to increase the interest of other players, so they might have some intermediate effects as well."