An analysis of foreign investments in Russia’s construction industry in 2015

An analysis of foreign investments in Russia’s construction industry in 2015
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In 2015 the new partnership agreements with foreign investors in the Russian construction sector made headlines time and again. And this is no wonder, since construction in Russia is on the rise and the authorities, as well as investment platforms, are making significant efforts to create a favourable business environment, despite certain tensions existing on the international stage.

Numerous cases of successful deals that have been reached in the course of year 2015 confirm this assertion. Just as an example, one could mention Poland’s Rovese company which made an agreement with the administration of the “Titanium Valley” Special Economic Zone in the Sverdlovsk Region to invest more than 4 bln rubles in the construction of a ceramic tile and sanitary wares plant. American Mars Inc. is building its fifth factory for the production of wet cat food in the Rostov Region; the deal was signed in June by governor Vasily Golubev and Mars CEO Valery Shchapov. The Beijing China Sport Construction Co. is considering investing in building accommodation for the guests of the FIFA World Cup 2018 in Nizhny Novgorod. The opportunities are great and there is a variety of ways for foreign partners to benefit efficiently from their financial activities. 

The Russian Direct Investment Fund offers reliable long-term investment partnerships

In the course of recent years, a number of Gulf states and European and Asian partners have found their way to the Russian market through cooperation with the Russian Direct Investment Fund (RDIF), which was created in 2011 under the leadership of the country’s President and Prime Minister, and which at present is acting as a catalyst for direct investment in Russia. The Fund has already attracted over $25 billion of foreign capital into the Russian economy by entering into long-term investment partnerships.

Thus, RDIF reached a deal with the State Bank of India to jointly invest in the infrastructure sector. Under the agreement with RDIF the United Arab Emirates’ Mubadala Fund is to invest up to $5 billion in infrastructure - the largest investment in this sector. At present, Mubadala is considering a construction project of the Moscow-St. Petersburg M-11 highway, the Moscow-Minsk M1 federal highway and one of the most ambitious projects in the country’s road building industry in recent years - The Central Ring Road around Moscow.

However, the most noted established partnership turned out to be an agreement between RDIF and the Saudi Public Investment Fund (PIF) to invest $10 billion in Russian projects, including infrastructure, construction of manufacturing facilities and real estate. This deal has become the largest foreign direct investment in the country in the last four years. Companies from Qatar, Kuwait, Bahrain, France, South Korea and China have entered into investment partnerships with RDIF as well.

An analysis of foreign investments in Russia’s construction industry in 2015

Platforms for dialogue that provide new opportunities

In September 2015 the first Russian Eastern Economic Forum took place in Vladivostok, destined to become a platform for dialogue between international investors and the Russian and Asian countries’ governments. It’s worth noting that over 20 countries and 800 foreign companies participated in the Forum. Speaking at the event, Russian President Vladimir Putin confirmed plans to extend Vladivostok’ s free port status to other cities in the region and to spend about 500 billion rubles on the modernisation and expansion of the Trans-Siberian and Baikal-Amur Mainline.

The Forum has turned out to be another confirmation of the Russian government’s firm commitment to make the Far East, the region that covers almost 40 percent of the country, increasingly attractive to foreign investors. It’s noteworthy that at the Eastern Economic Forum a series of deals were reached. China's Huaqing Housing Holding signed an agreement for the creation of an IT park with a co-working center, a fitness center and a children’s center for computer programming in the largest Siberian region - Yakutia. The project is to be fully financed by Huaqing Housing Holding, whereupon Yakutia will buy out the facility over the course of seven years. The company is enthusiastic about expanding its involvement in the region’s projects: negotiations on other construction projects, including the building of the Aldansky oil refinery worth $2 bln, are underway.

The Japan Bank for International Cooperation announced at the Forum that it had made a deal to invest around $100 mln in the infrastructure for the Vostochny Cosmodrome in the Amur region. A total of 80 agreements amounting to 1.3 trln rubles were reported by the end of the event. This success shows the effectiveness and utility of such a discussion format as well as the Russian government’s commitment to creating an environment for attracting investment.

An analysis of foreign investments in Russia’s construction industry in 2015

Investments into Russia’s commercial real estate market

Despite a certain decline in business activity, there is increasing interest from foreign investors in real estate in Russia. One of the reasons is the devaluation of the ruble and the reduction of asset prices. Thus in 2015 the share of foreign investments in this sector was still high - 42%. The most activity came from European investors, having spent $644 mln. From among the American companies The Hines Fund can be singled out, which in partnership with PPF Real Estate Holding B.V. acquired in July the Metropolis Office Buildings I and III located in Moscow. 

In the first half of 2015 the total area of new trade centers built throughout Europe amounted to 1.36 mln square meters, half of which were in the Russian market, with 12 mln square meters more under construction. This figure is due to a significant number of cities in Russia with a large share of the middle-class population.

Foreign investors selecting land plots for construction that would optimally meet their demands have the option of participating in land auctions, conducted by the Russian Housing Development Foundation (RHDF). Since the Fund began its activity, over 14 land auctions have been held, with the participation of foreign companies, as well as companies planning to attract investments from outside the country. Investors from the USA, Canada, France and Finland have been acting as funding sources.

Although the main objective of the Fund is housing construction, it’s also involved in the commercial real estate market. In March 2015 the Russian Housing Development Foundation and IKEA signed, at the MIPIM real estate international exhibition in Cannes, a cooperation agreement, in the framework of which the Fund would help the Swedish company select better plots for stores. At present IKEA, owning 14 hypermarket on the territory of Russia, invests not only in the renovation and expansion of the existing ones, but in construction of new stores as well.

An analysis of foreign investments in Russia’s construction industry in 2015

Russian companies winning international contests

Nowadays Russian companies strive to keep up with the times. This includes an environmental approach to construction projects' development. One illustrative examples is the Ecodolie Group of Companies, based in Moscow, which has won numerous prestigious awards. Nevertheless it was the victory in the Ecology category of the FIABCI Prix d’Excellence that brought it international recognition and new prospects for foreign investments.

Having presented in the contest a residential complex in Orenburg, Ecodolie attracted significant foreign investments to its low-rise construction projects in Russia - at present its partners are the largest in Eastern Europe, the direct investment fund Baring Vostok Private Equity Fund IV and the European Bank of Reconstruction and Development. The efficiency of these investments is being proven in such projects as low-rise housing in Samara, Ekaterinburg and the Kaluga region. Today its Sholokhovo residential complex project in the Moscow region is underway and will cover a total area of 170,000 square meters. 

Crimea is a region of great expectations

Now that Crimea is in the Russian Federation, the forthcoming privatization of state property and its favourable geographical location provide a full range of investment opportunities in the region. Actually, the Crimean economy is a good prospect for foreign investors, with hotel and tourist center construction considered as priority areas. Asian, Israeli and Swiss potential partners have already shown their interest in the region.

In December 2015, the Minister of Economic Development of Crimea, Valentin Demidov, held a meeting with a delegation of businessmen from Germany who were considering investing in the reconstruction of the Yalta seaport, and financing the construction of a multi-functional sports and health center with a hotel complex. Mr. Demidov in his turn provided an overview of the favourable conditions for foreign investors’ activities and instruments for their support, including those in the framework of the Crimean free economic zone.


Tatyana Kanunnikova