The residential development boom in Moscow strikes all recent visitors, but few of them know about the even bigger boom outside the city. Whole new neighbourhoods are springing up in dozens of towns surrounding the Russian capital. Annual volumes of new construction in this region, equal to Switzerland in size and population, are overtaking those in Moscow city. Prices are moving up more quickly, real annual returns on investment are close to 40%,and demand is only increasing.
One of the fastest growing and most ambitious company's is Stroymetresurs on the breathtaking market offered by the Moscow commuter belt. Stroymetresurs plans to establish strong debt and equity links with foreign investors, who can help to take best advantage of this unique opportunity.
Shifting from building materials to the development segment in the last couple of years in order to seize the perceived opportunity, the company now has nearly a million square meters under construction, of which nearly half will have been sold by the end of the year. Current 25% market share is likely to go higher as Stroymetresurs challenges the established order of one-town-one-developer by offering attractive packages to municipal authorities all over the region. Growth of company revenues to $200 million by 2005 is a highly conservative estimate, based on a price standstill, which no one is predicting.
Biggest projects to date are in Sherbinka, a town just outside Moscow's southern city limits, where Stroymetresurs is building two micro regions with around 100,000 square meters of real estate apiece. Each comprises a dozen medium-rise apartment blocks plus shops, school and other social facilities. Projects are at the negotiation or implementation stage in nearly 20 other towns near Moscow, and the company is already moving to transform itself into a national player with projects east of Moscow in the ancient Russian city of Vladimir and the Republic of Mari El on the Volga River.
When a big new market beckons, rapid reaction is the key to success, and Stroymetresurs is using every possible means to raise cash for investment. Surging demand makes it possible to sell all flats at the development stage, and bank financing is increasingly available as credit institutions recognize high capacity and low risk of the company's business. Stroymetresurs is also developing its own extensive financial program to ensure maximum funding at minimum cost: the company will place a second issue of bonds on domestic capital markets this year, and also offers promissory notes and investment contracts.
The company's most promising financing project to date is organization of an on-shore closed mutual fund for investment in its real estate projects. The fund will start placement of shares in October 2003 to domestic and foreign institutional investors with a minimum entry ticket of $1 million and a target size of $33 million. Management will be entrusted to one of the longest-established operators on the Russian mutual fund markets, which has been working smoothly for the last seven years under tight regulatory supervision.
Stroymetresurs is building a credit history to match its achievements in brick and mortar, and, like many other Russian companies, it is targeting an IPO on western markets in the medium term. But, unlike most Russian companies, Stroymetresurs is taking real steps to satisfy stringent transparency and financial requirements that are the conditions for IPO success. A second Russian bond issue by the company this autumn will be accompanied by a credit rating from top international rating agency, Moody's. Stroymetresurs will transform itself from private to public status (from "closed" to "open" in Russian terminology) by the end of 2003, and shows no qualms about revealing its real shareholders. The goal is to carry out an IPO in 2005.
Judging by current promise, international investors will know a lot more about the Russian real estate market by 2005. But the market in Moscow region has special features that make it worth immediate attention . This is not a "new rich" market of penthouse developments with glass lifts and Jacuzzis. It is the core market for the emerging Russian middle class, who want to live in modest but attractive and well-built apartment blocks in a pleasant and pollution-free environment.
Stroymetresurs can meet that demand at the right price in Moscow region thanks to free availability of land, willingness of local authorities to take a smaller share of the pie (compared with Moscow city), and detailed, accurate analysis of the type of building, which is required. Rapid price increases have taken average price per square meter at Stroymetresurs developments to $560 this autumn, but that is still under half of the average price per square meter in Moscow city. Demand is coming from Moscow families, who see the sense of living in pleasanter and cheaper surroundings, while commuting to the city to benefit from higher salary levels. Local residents and newcomers from other Russian regions account for the other half of the company's customers.
This is a market suited to long money, combining low risk with high returns. It is the market, which many Russia investors have been looking for, and Stroymetresurs is the company to lead them onto it.