Thursday, 30 August 2012

Baltic real estate: bounce or bubble?

By Mike Collier of bne

Of all the real estate bubbles to go pop in recent years, none did so more spectacularly than the one in the Baltic states during the 2008 financial crisis. Property prices halved in many cases, and some bruised investors swore never to touch Baltic real estate again. But never is a long time when there is money to be made.

The announcement on August 27 that the biggest IPO on the Baltic bourses in five years will come from a real estate company looks set to test whether investors are ready to believe Baltic realty can be anything other than boom-and-bust.

The offering from Estonian firm Pro Kapital Grupp looks credible. Until September 7 the company is pushing a public offering of its shares – the first such action on Baltic stock exchanges since 2010, and if fully subscribed, one that is set to be the largest since 2007. It would make PKG the second-largest listing on the Baltic bourses after ferry-to-hotels company Tallink.

PKG is hoping 37m shares worth around €1.90-2.05 each – accounting for 41 per cent of the total share capital – will rake in up to €75m, with trading likely to begin on the Tallinn Stock Exchange on September 14.

That may not seem like a huge amount, but in context it is significant. According to Colliers International, total real estate investment volume in 2011 in the Baltics was around €600m: Tallinn leading with investment volume of €250m, followed by Riga on €212m and Vilnius with €140m.

The free float cash will be used to finance a trio of new developments: Peterburi road Shopping Centre (€89m) and Tondi residential quarter (€11m) in Tallinn and, confusingly, the Tallinn street residential project (€29m) in Riga. So does the next Baltic binge start here?

“We do believe in the future of Baltic real estate market, however do not foresee a new boom. We believe in more gradual development of real estate prices,” PKG chief executive Paolo Michelozzi says. “We are looking to attract various investors – both the ones that already have an exposure to Baltic companies as well as the ones that are currently considering their first new investments into the region.”

Importantly, PKG does have a track record of delivering its developments and was smart enough not to get sucked into the tail end of the boom too deeply. Its shopping centres Domina in Riga and Kristiine in Tallinn were landmark developments when they opened and still compare well with newer arrivals, and the company retains a portfolio of 11 properties worth around €150m, having taken 20 projects to completion since it was founded in 1994.

That’s not to say PKG has been without its problems. This is not the first time the company has been listed: it was listed in Tallinn between 1998 and 2001 before being delisted after it emerged the company had only partially followed disclosure requirements; but chief operating officer Allan Remmelkoor insists lessons have been learned.

“We are planning to be as open as possible after becoming listed on the stock exchange,” Remmelkoor says. “We believe that all the right policies and internal procedures are in place for high quality information disclosure.”

Investors still nervous will take heart from the presence of some cool heads. The bookrunner is the vastly experienced Ivars Bergmanis of LHV Bank while advisor is Mikus Janvars, one of the smartest young players on the Baltic financial scene with Porta Finance.

“This stock does have a pretty unique profile in terms of providing wide exposure to the Baltic macroeconomic rebound and the timing is also special as there aren’t many opportunities out here,” says Janvars.

“But based on post-correction price levels, real-estate in the Baltics should not be any more risky than anywhere else in the world, perhaps even less so, as the starting price level is low and the region is bound to be on a steady convergence track with the Nordics in terms of prices and standards,” Janvars concludes.


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