Sistema close to backing out of property development

Sistema is set to sell its remaining 27.6% stake in property developing subsidiary Sistema-Hals to VTB according to a Kommersant report.

VTB acquired a 51.2% stake in December 2009 after agreeing to restructure Sistema-Hals debts. Its press office confirmed the bank was in talks about the acquisition which is estimated to be worth about $59 million.

Under the control of VTB, Sistema-Hals would join other real estate assets including a controlling share In Donstroy Invest, which have come under control of Russia’s second largest bank as part of property development sector restructuring during the global financial crisis.

Maxim Karbasnikoff, European director, Head of the Retail department at Jones Lang LaSalle Russia says the property development sector has been looking for traction after the financial crisis inspired free fall in investment and activity ended in late summer 2009.

He notes Russian investment activity continued to pick up, with 1Q 2010 deal volume up 69% year on year to $813 million, with a further recovery to bring total annual volume to $4 billion, and says the move by VTB may indicate it believes it is in a position to capitalize on a weakened sector.

“Russian banks acquired many real estate assets during the economic downturn. Financial leasing can become an efficient way to sell these properties and to help banks ease the burden of non-performing loans. Well, it might be a progressive strategy of VTB to launch another giant investment and development company-to keep a track on projects and choose the most profitable one. This deal may show a positive attitude of VTB group to real estate market growth.”

Karbasnikoff added that banks are currently cautious about providing real estate financing, preferring projects that are at an advanced stage or to refinance existing schemes. But he added that Sistema Hals obtained $80 million from VTB to complete its projects in 1Q 2010.

Banking analyst at Troika Dialog, Olga Veselova, says a possible reason for the interest of VTB in buying out a further stake in Sistema Hals, is the possibility of being in control of the best projects and financing, but that it may also have a different game plan.

“Well, on the other side it also brings forward the idea of establishing a new unit in the real estate development sector comprising assets of the leading investment & construction companies such as Sistema Hals and DonStroy. VTB is also possibly chasing the chance to cover the loans of Sistema Hals and Don Story by gaining profit from projects which are almost finished, which would enable VTB to control investments and lessen bad debts.”

Troika Dialog real estate analyst, Igor Vasiliev, believes that VTB is unlikely to sell the stakes in Sistema-Hals or DonStroy in the near future due to market conditions.

“It is unlikely in the current market situation with frozen unfinished projects on the books of both companies. It needs to get back investments pooled into the projects construction and development companies, and bring their assets to an attractive position to have the possibility of selling them at a higher price than they were purchased.”

Purchase of the Sistema’s 27.6% stake in Sistema-Hals would bring VTB’s stake to 78.8%, providing it scope to delist the company