Russian real estate group O1 Properties is flourishing, despite pulling a London flotation last year. Emily Wright meets chairman Dmitry Mints in Moscow to hear why a listing here is still his goal
Dmitry Mints is a man of two halves. As the chairman of O1 Properties, one of the biggest real estate companies in Russia, overseeing $3bn (£1.9bn) worth of assets, he is every inch the hard-nosed Muscovite property mogul. As a man about town with plenty to say on the subject of vodka, he is every inch the 31-year-old.
That’s not to say the two are mutually exclusive, of course. But in Mints’ case the division is particularly pronounced – right down to his sartorial choices. Sitting behind the vast boardroom table in a navy blue suit jacket, pink shirt and Rolex Daytona, he is the picture of corporate style. That is, until he stands, revealing the baggy jeans that make up an otherwise immaculate ensemble.
In a city as brusque as Moscow, where locals can take a while to warm to strangers, the jeans are pleasantly disarming. But when it comes to business, Mints’ outfit is where his youthful edge ends. He talks about his group’s ambitious plans to grow and the future of investment in the Russian property market with the authority and confidence of someone twice his age.
Just over two years after it was set up by Mints, the $260m-turnover O1 Properties has 400,000m² (4.4m sq ft) of rentable office space in Moscow, making it one of the largest office landlords in the city. The firm hit UK headlines last May after seeking $425m (£270m) from an attempted float on the London Stock Exchange. The timing wasn’t right and the deal fell through, but Mints was not deterred and reveals plans to try to float again in spring 2014.
On a bitterly cold December day at O1 Properties’ Moscow headquarters, the man behind the brand sweeping the Russian capital, and slowly gaining notoriety in London, gives his first-ever UK interview. He talks about everything from development to expansion and legalities to corruption, insisting that Russia is an increasingly attractive option for western investors.
Doubts and risks
Mints’ decision to set up a property business in 2010 amid global economic turmoil could have backfired – especially as the failure rate of Russian property firms over the tough economic period has been high. Out of the six main listed property firms in the country, half have collapsed since 2008.
Mints admits it was a nerve-wracking process: “You are always supposed to have doubts, right? If you don’t have doubts then you probably haven’t properly thought over every risk.” But he was convinced that, with the right research, he could buck the trend – especially as the Russian economy has remained comparably strong in Europe. It grew by 3.5% in 2012 and the country’s public debt is no more than 10% of GDP.
“The decision to start up when we did was based on the fact that real estate generates income and the only thing missing from the market at that point was liquidity,” explains Mints. “This meant that certain things were mispriced and we bought commercial real estate assets in 2009. We hoped that when liquidity returned, the assets would return to their original values. We were right.”
He also used the high failure rate of Russian property companies to his advantage, analysing everything his competitors were doing wrong to ensure O1 did the opposite. The result, he says, was developing a business model rare in Russia but that for many western European firms would be a no-brainer.
“The majority of Russian real estate firms that have run into trouble had or have a lot of developments and no income stream to support them. Many Russian developers have a mix of 90% development to 10% standing assets. It is a model that worked OK in a growing market but that can be, and was in many cases, destroyed by a couple of years of absence of demand and growth. We decided O1 should never have more than 20% development in the portfolio, balanced out against 80% of standing assets. This means if we have any problems with 20% of our assets, we can cover the risk with income from properties we are leasing.
“We have also balanced leverage, so we are not too dependent on the market. We can lose almost half of our income and still pay the interest and service the debt. It scares me that this model has been implemented all around the globe but pretty much no one apart from us is doing it in Russia.” It may scare him, but this is arguably what has given O1 the edge in the Moscow market. And it is an edge Mints is hell bent on maintaining.
Making it in Moscow
Moscow is Russia’s political, financial and development hub. Around 15m Russians are thought to live in the capital city, which accounts for almost 20% of GDP. In short, this is the place to be to make money or – in Mints’ case – rent office space.
Since 2010 and the $333m (£212m) acquisition of class-A multi-purpose business centre Silver City in the heart of Moscow, 01 properties has acquired Moscow’s Olympia Park and the 49,520m² (533,000 sq ft) Lesnaya Plaza business centre. Other key properties include the 34,285m² (369,000 sq ft) Stanislavsky Factory and the 32,000m² (344,445 sq ft) Sheremetievskya office complex.
All of O1’s properties are in Moscow and Mints says that while the group has a growth strategy in place, it is a modest one: “We have been an active buyer over the last couple of years. We have been approached by everyone in Moscow by now. Excessively. We don’t necessarily want to see everything we are shown but it does mean we have great market information and intelligence. We are seeing literally everything in the offices market. I would say that, at the moment, we are analysing about 60 projects a year and we may do two or three deals.”
With 400,000m² of rentable office space in O1’s portfolio as part of the group’s overall $3bn assets and 12.5m m² (134,548,880 sq ft) of office space in total in Moscow, Mints says the firm could easily double in size over the next two years and not overheat.
“Offices in Moscow are not being built on the scale they should be,” he says. “The economic crisis stopped a lot of development but as the economy grows, demand is rising. Vacancies are diminishing fast but soon rent will be pushed up and new developments will flow again.”
Safe haven?
Mints insists that the current market conditions make Moscow an excellent investment option despite corruption fears. “What we have right now is a liquidity trap,” he says. “We have high-quality real estate at low prices compared with the rest of Europe and the price does not reflect the value as there are limited buyers because of a lack of local players. I know that institutional companies in the west have their own issues at the moment but once that settles down, we will see their interest in Moscow spiking.
“To highlight the sort of difference in value I am talking about, I will use one of our buildings here in Moscow. It is a top-quality grade-A office space with tenants including Clifford Chance, Citibank and Goldman Sachs. Here, you would probably buy it for 8.5% of running yield. In London you would pay double. The difference is just the country location.”
But there remains a massive hurdle – one that is likely to be the first thought than runs through every potential western firm’s mind before doing business in Russia: corruption.
It is a problem, admits Mints: “Russia is suffering from a situation here that is half true and half a foreign PR issue,” he says. “The Russian government has not done enough to improve international PR, which now affects the whole country. In terms of our specific business – and there are others – we think the legal protections are strong and each and every building we purchase is done in English law.
“We don’t have a political element as part of what we do at all. We have a lot of international tenants, including big western firms, and none of them has ever had any issues. You just have to do your research and understand the system and the processes. In England, you have contracts on documents of 200-300 pages. In Russia, sometimes deals are done on the basis of a handshake and a one-page memo that says ‘We sell, you buy, the price is the following’. This is something a lot of people from the West don’t really understand. But it’s not always bad. It helps to do big transactions quickly.”
This “reassurance” might well raise more questions than it answers. Mints concedes that the issues are hard to explain, a problem he came up against when he tried to float O1 Properties on the London Stock Exchange last year. “Half the questions I was asked during the IPO process were devoted to the business model itself and half were about corruption.”
Whether the fears over corruption had anything to do with the eventual failure to float, it is impossible to know. “Adverse market conditions” was O1’s official line. Either way, it wasn’t enough to put off Mints. He has plans to attempt to float again in spring 2014, subject to market conditions.
London calling?
“We have put the IPO aside for now,” says Mints. “But we will try again once all the assets we have assembled over the past two years show up on the report. We haven’t owned some of them for long enough. So 2014 will be the right year.”
In terms of any further interest in the London market, Mints wouldn’t rule it out. “It is one of the most stable places in the world,” he says. He loves the UK architects and particularly likes the notion that if you are in Chelsea “you can be in a country house in the middle of one of the biggest cities in the world”. In Moscow residential is “much less comfortable”.
For now, there are opportunities aplenty for O1 Properties in Moscow and Mints has his sights set on expanding his business on home turf.
Down in one
Mints might not be eyeing the London market just yet, but he is keen to work with as many UK firms as possible in Moscow, from architects to agents, engineers to surveyors. His advice for any westerners doing business in Russia? Learn how to take your vodka.
“It is a shot. Always. From start to finish. You must drink it in one go. It is better to eat a little in between shots I suppose, but no drinking in between. Not even water. If you must, then just a little. If you drink a lot you will get more drunk as the alcohol is diluted and absorbs more into your bloodstream. I know. Trust me.”
He speaks on the subject with the authority of a businessman, the very recent recollection of a 31-year-old and the knowledge of a Russian. On second thoughts, perhaps a man of three-thirds.
