At the heart of one of the world’s most expensive shopping thoroughfares in the centre of Moscow is a massive reconstruction site around Tverskaya Zastave Square, near the Belorusskiv train station.
The 500,000 m2 renovation project is being constructed by Turkish company Enka Insaat and will incorporate more than 180 shops, offices, homes and a five-star hotel. Much of it is arranged on five underground floors, and the complex is being developed by London stock exchange-listed company AFI Development, one of Russia’s biggest real estate companies.
As well as playing a crucial role in shaping the new Moscow, Turkish joint stock company Enka Insaat is one of the Russian capital’s biggest office landlords, owning 280,000 m2 of an estimated 1.6m m2 of the Russian capital’s class-A stock.
Its assets, such as some in the 60ha Moscow City development, are in prime locations. It also owns 10 shopping malls in the city with a lettable area of almost 230,000 m2, plus one five-star hotel.
The company is feeling the pinch of the global downturn and the Russian recession. Last October, analysts at investment bank Merrill Lynch altered the way it values the company’s real estate business.
Previously, Merrill Lynch based its valuations on an expectation of around 9% property yields over 12 months. But to take into account the property slowdown and future economic uncertainty, the investment bank introduced a 15% cap rate when valuing Enka’s real estate.
This implies that rents in the portfolio will drop by more than 40% in this cycle, falling back to early 2007 levels. Merrill Lynch has therefore come up with a value of $3.3bn (€2.6bn) on Enka’s real estate, excluding its development project Taganskaya, which would add170,000 m2 of mixed-use space to Enka’s portfolio by 2012.
Enka’s story began in 1957 with the partnership between two Turkish businessmen, S¸arik Tara and the late Sadi Gülçelik, when they registered a limited liability company in Istanbul.
The company’s early projects in the Turkish capital of Istanbul and the surrounding area included the construction of industrial plants, docks, marine slipways, shipyards, grain silos, bridges, roads and piers.
In 1967 the partners set up a joint stock company, naming it Enka Insaat, and shaped it into a significant player in the energy field. During the 1980s, it was involved in such major projects as the Iraq-Turkey oil pipeline.
Ali Pamir, managing director of DTZ Pamir & Soyuer in Istanbul, says. “Enka is one of the best-known Turkish companies. But over the past ten years, most of its focus has been on Russia, where it has become very strong and extremely well known. For the past four five years, it has not been involved in Turkey too much apart from a couple of big energy projects.”
Enka undertook its initial construction projects in Russia within the framework of the Turkish-USSR Natural Gas Agreement of 1988.
Its international construction project pipeline is worth more than $7bn. It includes highways in Romania, a new city in Oman, a new terminal at Moscow’s Sheremetyevo Airport, a football stadium in Donetsk, Ukraine, a Toyota car factory in St Petersburg, and oil field infrastructure on Sakhalin Island in Russia.
The company, which has a 12% free float on the Istanbul stock exchange, branched into Russian real estate in the early 1990s by founding two companies, Mosenka and Moskva Krasnye Holmy, to develop and manage office and residential buildings in Moscow.
All Enka projects in Russia are 100% equity financed from the Turkish parent company and this has enabled the company to build speculatively. Enka is an 80% partner in Mosenka, which develops and rents out office space.
To date, Mosenka turned over $23m in 2007, and has renovated six historic buildings, providing 32,000 m2 of offices, where tenants include Dow Chemical, Allianz and Deutsche Bank.
Moskva Krasnye Holmy has an agreement with a number of Russian partners that includes the Municipality of Moscow to develop the Russian Cultural Center in five phases.
Enka controls 52% of this company, which has built around 150,000 m2 of office, hotel and car park buildings since 1995 in a complex known as Riverside Towers. Here, the 52,550 m2 of offices are fully let and in 2005 the Swisshotel group began operating the complex’s five-star hotel.
Turnover for Moskva Krasnye Holmy in 2007 was $79m and Enka company chairman Sinan Tara estimates that it will reach $90m for 2008.
Since 1995, the company Enka Invest has built 12 office buildings totalling 231,000m2, including Paveletskaya A, B and C and buildings 17,19, 21 and 23 Sretenka Street.
One of Enka Invest’s flagship projects is a 150,000 m2 three-building business centre called Naberezhnaya Tower within the 90ha Moscow City development district west of the capital, where there are 2.5m m2 of offices, a hotel, and retail and recreational facilities.
The first phase was completed in 2004 and achieved average rents of $550 per m2 per year rents for the 2005 second phase rose to $650-$700 per m2. And in November 2007 the company released space in a new 50-storey tower at rents of up to $1,000 for the lower half and more than $1,000 for the higher floors.
The scheme’s success reflects Moscow’s booming commercial real estate market during the first half of this decade.
Last year, a third and final building was completed, introducing to the market around 108,000 m2 of rentable office space in a 57-storey skyscraper. According to Vladimir Pinaev, managing director of owner and occupier services at Jones Lang LaSalle, which is a letting agent on this building, there are up to 30,000 m2 still to be let in the last tower.
Pinaev says that Enka is fortunate not to have a development pipeline to build out in this downturn, which puts it a stronger position than many developers active in Moscow. “Over the past five years, Naberezhnaya Towers was the last big project. The company’s present portfolio is made up of existing income-producing properties and its main activities in Moscow now are asset management ones,” he says. “The company has been looking at a 500,000 m2 large-scale development in a joint venture with Mos City Group at the Third Ring Road. This scheme is separate from Moscow City but is at the initial stages and has not yet taken off.”
For the short term, Merrill Lynch has concerns about Enka’s exposure to Russia, in real estate, construction and energy. As a result, the firm’s analysts have assumed no nominal growth in revenues until 2013, and 7% growth thereafter.
To reflect the rising risk premiums attached to the country, Merrill Lynch has also adjusted its 2008 forecast for the real estate divisions downwards by 10%, and, after revisions accounting for falling rents, the forecast for 2009 earnings is down by 19%.
In comparison with other companies in Russia, the company’s share price, at a 12-month average of $6.13, has not fared so badly, outperforming the ISE-100 and the RTS stock exchange over the year to September 2008.
