The next Knight Frank agent to do a multimillion-pound town house deal might not be too surprised to be thanked with a gigantic bearhug and the cracking open of a bottle of vodka. Because the agency stole a march on competitors last October by acquiring a Moscow counterpart to woo the wealthy Russians who are forming the latest wave of big-time investors in London.
Knight Frank’s stake in PMC, a company set up in 1996, gives it access to nine offices across Russia, including the firm’s Moscow head office, which now trades under the Knight Frank brand. It offers an initial point of contact for wealthy Muscovites who want to buy residential or commercial property in the UK and Knight Frank is banking on the new venture to gain an early foothold in a fast-growing market.
In the past few months, Russian investors have made steadily more frequent appearances at the bidding table. While the favoured class appears to be residential, agents are expecting increasing interest in commercial property this year.
For many top UK agents, all roads lead to Roman Abramovich, the billionaire oil and aluminium tycoon, who snapped up Chelsea football club last year for a cool £150m and is now looking to buy a £25m-plus house nearby with the change. He joins a small elite of super-rich Russians who do their London property shopping almost exclusively in Kensington, Belgravia and, of course, Chelsea and whose notables include Boris Berezovsky, Abramovich’s former mentor (see box).
But less high-profile investors have swarmed west recently. Some, like Abramovich, are buying for their own occupation; others are buying groups of flats as credible alternatives to leaving their money in banks especially Russian banks, which have suffered a crisis of confidence because of heavy losses on the back of sliding share prices.
This, combined with a fear that the arrest of oil tycoon Mikhail Khodorkovsky may be the first step by president Vladimir Putin to-wards a clampdown on the power of wealthy businessmen in the country, has led many rich Russians to take their cash abroad. Official Kremlin sources estimate Russian capital flight at around £7bn for 2003. Unofficial sources argue that there is around £30bn of cash in Russia, of which a substantial part is expected to be placed in investments overseas.
Chris Bell, managing director of Knight Frank in Europe, believes that as much as 25-30% of money flowing out of Russia and earmarked for property investment could be destined for the UK. Investment agents Kerr Gilchrist and Stephen Clifton will be donning fur hats for a visit in the next two months. “Everyone is hoping that the Russians are the new Irish,” says Bell. “It’s hard to say at this stage, but there’s a pot of money to be tapped if you can provide the right services and the right product.”
The “right services” include the personal relationships on which business deals depend in Russia. Chelsea football club has become a regular haunt for Knight Frank agents, who are encouraged to take Russian clients to see Abramovich’s team play at home.
“Russian investors are used to seeing returns of 17-20% at home, but they are happy to receive half that in the UK, because the market is perceived as low-risk. It is also attractive because debt is cheaper, and easier to obtain. In Russia, it is normal to put up 60% equity into a deal.
“We would expect Russian investors to start taking more of an interest in UK commercial property as they feel more comfort-able with the dynamics of our lending market and the structure of our leases.”
Developers Galliard Homes and City & Docklands have capitalised on demand for residential property by including Moscow in their marketing tours for investment sales. The pair made their first trip towards the end of last year, selling around 15 of the 100 units available at New Palace Place in Westminster and Tea Trade Wharf in Shad Thames.
City & Docklands managing director Gary Sacks says: “We offered Russian investors a complete package, including mortgages and rental guarantees, which provide a 6% return for two years, and were very pleased with the response. As a result, we are setting up a website in Russian for marketing developments.”
The buyers of these apartments are not oligarchs but ordinary Muscovites looking for a secure income stream. Martin Armitstead, director of hotels at Colliers RH, explains: “Eight years ago, we received an approach from a Russian wanting to buy a group of apartments in the south of Spain. When we asked him for proof of financing he opened his suitcase and showed us wedges of $100 bills. Now you’re more likely to be handed a mortgage agreement with a UK bank.”
Russian buyers are, however, suspicious of UK red tape. “Due to a peculiarity of Russian law, most buyers want to buy through a holding company,” says Natasha Reteyum, Knight Frank’s development director in Moscow.
“Our Russian clients prefer not to disclose the kind of information that is required by UK money-laundering regulations but they realise that if they want to invest here, they don’t have a choice,” confirms Bell.
But the apartment investment market is still at a fledgling stage. The agents that have benefited most from Russian interest are those that deal at the very top end of the market, where interest started earlier and has increased more gradually.
Gary Hersham, managing director of Beauchamp Estates, says: “We sold our first property to a Russian buyer 13 years ago for around £5m. Now, there are tens of requirements, and many are in the £10m-£25m range. It hasn’t stopped since June last year.”
Buyers in this sector are, however, notoriously hard to please. Although it was a Russian that finally bought Hugh House, the £28m property on Eaton Square, SW1, formerly owned by socialite widow Lily Safra, Abramovich himself walked away from a deal on the house at the eleventh hour on the grounds that it had inadequate parking.
Security is also often cited as an issue, with many wanting underground parking, as is layout, with many buyers looking for large living and entertaining spaces spread over few floors not the typical layout of a London period house.
A recent residential sale to a Russian was Stanley House, a £10m property in Chelsea with a copy of the Elgin Marbles on a frieze running along a huge reception room. “We don’t like high, narrow buildings,” exiled media oligarch Boris Berezovsky complained in a recent interview.
Abramovich’s requirement remains unsatisfied although in November he was linked with a bid for Formula One boss Bernie Ecclestone’s £80m property at 18-19 Kensington Palace Gardens, W8. The house is in the style of an oriental palace, complete with Islamic mosaic walls and a swimming pool decorated with Persian rug designs. Just the thing for the footballers’ wives, you’d have thought.
Focus: Residential, p59
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Knight Frank beat rival DTZ to buy a 10% stake in 40-strong PMC, a Moscow property consultancy set up eight years ago. The firm’s Moscow office now operates under the Knight Frank brand. It is majority owned by its three founding partners: Stas Tikhonov; Kyrill Starodubtsev; and Natasha Reteyum. KF aims to increase the group’s turnover from £2m in the year to December 2003 to £3.5m this year. It will use KF’s reputation to attract overseas investors to Moscow, and PMC’s reputation to market London property to Russian investors. It has also recruited Victoria Lvova from DTZ to expand its valuation work. Jones Lang LaSalle and DTZ have operated offices in Moscow for several years, and focus on providing investment and development services to overseas clients in Russia. After losing out in the battle for PMC, DTZ has said it is no longer interested in taking over a Russian firm. Meanwhile, JLL is looking to recruit a Russian agent in its London office, but has not, as yet, made an appointment. |
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In August 1991, when communism collapsed, there were no Russian billionaires. Now there are 17. The most influential of these are the oligarchs who made their fortunes in the early 1990s through Boris Yeltsin’s rapid privatisation of Russia’s industries a dozen men who, by 1998, controlled over half Russia’s assets. Half are under 40 years old. But the oligarchs are becoming nervous. The richest member of the coterie, Mikhail Khodorkovsky chairman of oil giant Yukos was arrested at gunpoint in Siberia in October and is in jail awaiting trial for tax evasion. The tacit agreement between Russia’s government and the oligarchs, whereby each side ignored the other’s activities, has broken down and many wealthy Russians are looking to take some of their cash overseas. |
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Roman Abramovich With a fortune of £3.8bn, Roman Abramovich, 36, is said to be the 49th richest person in the world. He bought Chelsea football club for £150m last summer, and spent £300m on players. He also headsoil company Sibneft, and owns a quarter of Russia’s largest aluminium company, Russian Aluminium. Abramovich is the governor of the remote Russian province of Chukotka, but is not expected to stand for office again. He is now based in London, where he wants to trade up from his £5m flat in Lowndes Square in Knightsbridge, and is seeking something with a price-tag in the region of £25m. He also owns a 450-acre estate at Fyning Hill in Sussex. |
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Boris Berezovsky Once Abramovich’s mentor, Boris Berezovsky, 57, is no longer on speaking terms with the younger oligarch. He was granted political exile in London last September, after falling out with the Kremlin, and now splits his time between a £10m house in Chelsea, a home on the Wentworth Estate in Surrey and a flat in Belgravia. He also owns two homes in the South of France. Berezovsky made his fortune estimated at £2bn through ownership of the national television company ORT, a handful of newspapers and most of Aeroflot. He is now putting his cash behind the search for an opposition candidate to run against Putin in March’s Russian presidential elections. |
