The Smart Money in Russia

Had you predicted a mere five years ago that property prices in Moscow would soar to one of the highest levels on earth, you'd be justified in feeling a trifle smug today.

What's astonishing is that just a few years back Moscow was considered a place where you'd be lucky if it was only your money that you lost. After Russia's debt default, the Russian capital had become known for being a place of Mafia shoot-outs and rampant crime. Enter at your own risk!

For certain, this wasn't the kind of area that average investors would have even glanced at.

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Fast forward from 2000 to 2005, and property investments in Moscow have multiplied in value. Real estate here is now among the world's most expensive, with downtown Moscow experiencing a shortage of office and retail space, and a severe lack of hotel rooms. Moscow now has the world's highest occupancy rates for luxury hotels, despite having some of the highest room rates.

Those who got in early, made an absolute killing.

For adventurous investors, there's now an opportunity to look even further a field to cash in on Russia's developing boom.

Besides Moscow and St. Petersburg, Russia has 12 additional cities with more than 1m inhabitants. And then there's the plethora of cities with 200,000 to 999,999 people. None of them is as affluent as the two commercial hubs of the country, but there is, nonetheless, a rapidly growing middle class with disposable income. Just think of Siberian towns that are near oil fields!

Retailers head for the heartland', is the headline of an article in the current edition of Business Week. The mainstream magazine reports how companies are rushing out to tap the wallets of those Russians that don't happen to live in Moscow or St. Petersburg. Even in Volgograd, one of the country's poorer cities, the middle class is now estimated to represent around 20% to 30% of the population.That's a lot of purchasing power.

Property investors have just now started to take notice, too. In major Western European cities, commercial real estate values are estimated to rise 5% to 7% per year. For regional Russian cities, an estimate by Knight Frank in Moscow runs at 20% to 25% per year. Using borrowed money to leverage, this is the kind of environment where smart investors can multiply their money.

These regional cities are at a stage of development that Moscow and St. Petersburg were at five years ago. Foreign investors are far and few, and conditions for developing real estate are not always easy given the level of corruption in Russia. There are additional risks that need to be considered, such as a lack of liquidity. But it's for those very reasons, that property can still be had for a much lower price. Once conditions have improved, prices will have already risen.

Buying commercial property directly in regional Russian cities is not what a small-time saver can pull off himself. Instead investors should take a look at suitable listed companies that look set to profit from the trend. Like London-listed PGI Group, headed by a Harvard-educated American with 14 years of experience in Russian property.

PGI will place investment funds that invest in Russian property, and the regional cities are well on the CEO's radar screen, simply because they offer the potential for higher returns. The firm will not itself invest in these funds, but instead manage them in exchange for management and performance fees. If the investments in regional Russian cities do well, PGI will get a share of these profits.

Noticeably, one of Russia's leading investment bankers has just been voted onto the board of PGI. Charles Ryan was the man who negotiated the $6.35bn tie-up between British Petroleum and the Russian oil and gas firm, TNK. His firm, United Financial Group, is one of the premier players in Russian mergers & acquisitions, and it's 40% backed by Deutsche Bank.

These are players who know what they are doing, which gives the dodgy-sounding topic of regional Russian property an entirely new angle. Remember, we are not recommending the stock - but this merely illustrates the point that whenever there is an interesting new trend emerging, somewhere in the world a listed share will let you hang on to it.

By Sven LorenFor The Profit Hunter Files