Ben Aris in Moscow -

Russia's real estate sector boomed and then went bust in spectacular fashion during the 2008 crisis. But as it starts to come out the other side, investors in the sector have dropped down a gear. "Real estate investment now is more like a fixed income asset that pays a high yield in a low interest rate world, rather than a speculative bet on rising property valuations that it was before," says Dmitri Mints, chairman of the board of O1 Properties, which bought up stalled projects in 2009 and is now the leading real estate company in Moscow's lucrative premier office segment. 

The Russian-language Forbes magazine recently ranked O1 Properties as one of the six largest commercial real estate companies in Russia. It was troubled office development deals that shunted the company to the top of the pile: O1's first-quarter profit grew three and half times on year even though the Russian economy is barely growing at all. Russia may be shrouded by a pall of pessimism due to political and economic problems, but O1's prospects are good enough to have persuaded Goldman Sachs to take a 6% stake in the company in May. 

Banking on real estate

Mints is part of the post-Soviet generation that is building the new Russia. Born in 1981 in the town of Ivanovo – a textile hub near Moscow that used to largely employ women and was known in Soviet times as the "city of brides" as it lost so many of its menfolk in World War 2 – his entry into the commercial world was made easier as Mints' father, Boris, worked in the Yeltsin administration in the 1990s, first as a property manager for the state property fund, and later running the presidential administration's relationships with smaller cities. 

The family moved to Moscow when Mints was 13 years old, and he finished his studies at the prestigious Moscow State Institute of International Relations (MGIMO), where he studied marketing and foreign trade.

While still a student, Mints cut his teeth working for TransMashHolding, one of Russia's leading producers of railroad equipment and rolling stock. But after graduating he went to work as an analyst at SDM Bank, a leading mid-tier bank that specialises in catering to the needs of Moscow's medium-sized enterprises and factories. Still only in his twenties, Mints was tasked with leading a fund that specialised in investing Russian money into foreign real estate. "There was a huge real estate boom in the Baltics and a very profitable story in Latvia and Estonia. We got in early and got out at the right time," he says.

After three years Mints left SDM to join Otkritie Bank, an up-and-coming investment bank where his father was a co-founder and 50% shareholder. Otkritie was also interested in real estate and launched a fund to finance the construction of a huge office complex behind the Paveletskaya train station in southern Moscow. "In March 2008 we pre-sold the offices to the German real estate investment fund KanAm for $1bn. At the time it was the biggest forward sale of real estate on the market, but the problem was the deal wasn't completed before the current crisis struck that autumn," says Mints. 

The project had been financed with loans from Deutsche Bank and Bank of Austria. In the mess that followed the collapse of Lehman Brothers, Mints says they bought the Deutsche Bank loan out, although Bank of Austria stayed in as a creditor, taking three buildings as collateral. As part of the resolution, O1 Properties was created and took over the remaining assets to finish one office and the hotel, which was financed separately and sold. The spring of 2009 was not a happy time for Russia. The equity market was in free-fall and the economy had more-or-less collapsed, shrinking by 7% in that year alone. The real estate bubble popped and a lot of people found themselves and their projects in trouble. "At the beginning of 2009 we looked more closely at the markets. We bought buildings that were half-finished. Otkritie put up some money to finance these projects and we raised more," says Mints. 

Mints Snr's partner at Otkritie, Vadim Belyaev, was not interested in getting into the real estate business, so Mints sold some of his shares to raise cash and O1 Propertiesbecame a separate company. With money in the bank, the company went shopping for troubled projects, quickly completing them and leasing them out to tenants.

More like fixed income

The nature of investing in real estate has changed since the crisis. Previously investors were looking at the rapid appreciation in the valuation of buildings for their returns. Development was done on debt and real estate companies listed on the exchanges to raise cash and tap the bullish outlook for investments. These shares soared, making everybody a lot of money, but since the crisis stock prices have collapsed and the volume of development projects shrank dramatically. 

Mints says that investing into real estate these days is more like investing into fixed income. "Our model is different. If Russia doesn't collapse and the economy continues to grow by about 1%, then investing into real estate is a good idea. It pays a high yield of about 12% and is a high-quality credit. You can't find that kind of return anywhere else in the world at the moment," says Mints.

Interestingly, many Russians agree with him. One of the side effects of the West's threat to impose sanctions on Russian businessmen over the Ukrainian crisis has been that a lot of Russian money has left global tax havens and returned home in just the last few months. "These guys are looking around for something to do with their cash and many of them have put it into retail estate," says Mints. 

However, the outlook for the real estate sector in Russia is mixed. Pre-crisis, the economy was growing by 5-6% and many tenants had plans to expand rapidly, as their business plans predicted strong growth. Not now. Mints says office demand has fallen away as most tenants are not investing in their businesses and instead are concentrating on improving efficiency rather than scaling up. 

Foreign exchange dynamics have also had a large effect on the real estate sector. Nearly all of Moscow's big real estate deals are priced and paid for in dollars. That includes the rent. Pre-crisis the ruble was appreciating strongly, which meant rents were becoming cheaper and cheaper as most companies working in Russia make their money in rubles. That had the effect of driving up real estate valuations. 

Post-crisis, the ruble has been depreciating; the value of the ruble against the dollar has fallen by about 15% this year, although it has recently stabilised. That makes the dollar-denominated real estate projects and rents more expensive. 

Demand has also been dampened by the exit of many foreign investors; pre-crisis, most of the money for developments came from outfits like German pension funds or UK hedge funds. "Now those guys have all disappeared," says Mints.

The upshot is real estate development has become a more exclusively Russian business backed by Russian money. O1 Properties is a family trust, of which about 68% is owned by the Mints family and 1% by management. In April the Russian industrial group ICT, owned by tycoon Alexander Nesis, bought 26% of the company (he is also getting into banking and bought a stake in Otkritie). The money he spent on O1 Properties has gone into setting up a pension company. "The sale to ICT was more like an exit. We took the cash out and have used it to invest into a non-state pension fund business that is now part of the O1 Group," says Mints. 

A month later O1 Properties sold another 6% to Goldman Sachs. The US investment bank has good form in Russia, as it was an early minority investor into leading online bank Tinkoff Credit Systems (TCS), which floated in London in October last year with a $1bn valuation. Clearly Goldman would like to see another IPO and Mints says it is definitely on the table, but only when market conditions improve. "Goldman Sachs has invested into the company as a financial investor and their money – about $100m – has stayed in the company. It is being used to extend the business," says Mints. 

Taking the biscuit

Real estate tends to lag behind the rest of the economy: when times get tough it is the first sector to go into crisis, and when times improve it is the last to recover. "The Russian office markets has always been, is, and will continue to be a tough market," says Mints. "Not many deals are being struck at the moment, but lots of people are starting to look at the sector again. And banks are still financing projects so we're not sitting on our hands."

Currently O1 Properties' biggest project is the renovation of the Bolshevik Biscuit factory on Leningradsky Shosse, just north of Belaruskaya station in Moscow's heart and one of the choicest locations in the capital. 

Bolshevik Biscuit is an iconic location. The factory was the first in the Soviet Union to use electric light bulbs when the world was electrified a century ago. It was also one of the very first Soviet enterprises to be put into the voucher privatisation in the very early 1990s. The 6-hectare site was bought by Kraft Foods in 2O12 and used as a production centre, but more recently the company relocated its production to the more cost-effective Golden Ring city of Yaroslav and sold the site to O1 Properties. 

The company has been renovating the 16 impressive Tsarist-era buildings and intends to lease them out to top-end clients. French media firm Publicis has already taken leases on three of the buildings and is in the middle of fitting them out. "Publicis was the first pre-lease deal since the crisis," says Mints. "For most of the last five years nobody was leasing a building until they had seen the finished product."