Real Estate Investment Due Diligence

Navigator Consulting was commissioned by an international construction firm to assess the commercial due diligence of a major commercial property development investment in the centre of Minsk, Belarus.

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The building was designed with 19 stories above-ground and three below-ground, and combined office and retail space.

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Minsk is currently under-served by high quality office space. There is only one building classified as a western-standard Category A building; seven buildings provide 53,137 m2 NLA of modern Category A and B office space, which is low compared to other European capitals. The stock of modern retail space is approximately 62,000 m2, which also trails other capitals in the region.

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Navigator Consulting provided the following analytical outputs:

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• A detailed inventory of A, B and C commercial property in Minsk, including (a) current space available, (b) space under construction, and (c) planned projects. This was compiled in an interactive MS Excel model that permitted future changes.

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• A supply-demand model. The supply model was based on the real estate inventory; the demand model was based on two statistical models: a historical demand model; and a labour force model. Comparative benchmarking (space/capita, cost/m2) with Warsaw, Moscow and Kiev added further insight into the model.

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• A detailed profit/loss model of the investment based on three exit strategies: (a) early sale; (b) medium sale, and (c) long-term rental and management. This model took into account real estate taxation, sales and rental income, construction and operating costs for the building.

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• A Scenario Plan for economic development in Belarus to 2013. This was linked to four different cases for real estate supply and demand, and linked to the Excel model.

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• A detailed assessment of taxes and incentives as applied to the investment model. This involved the development of an interactive tax model that was included in the Excel PL forecast.

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• A detailed review of the planning building, its utility, facilities and pricing.

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Interviews were held with a  range of financial and property development institutions, including:

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• Belagroprombank

• BelCTN Developer

• Colliers International

• European Bank for Reconstruction and Development (EBRD)

• Fransa Bank Belarus

• Golden Taller Bank

• Hypercom Development

• International Finance Corporation (IFC)

• Mikhail Kostyukov

• Masterskaya Construction Magazine

• Priorbank

• Star PM Developer

• Tvoya Stolitsa Realtors

• US Embassy

• Victoria Plaza Development

• Viva Invest Developer

 

The due diligence project was successfully completed in August 2008. The report content included the following elements:

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Executive Summary

 

Scope of Work

• Description of Project Objectives

• Work Programme and Research Activities

 

Macroeconomic Development of Belarus

• Political System and Stability

• Historic GDP growth and forecasts

• Inflation, PPI, CPI

• Currency Exchange Movements

• Structure of GDP: Agriculture, Industry, Services

• Interest Rates

• Unemployment

• Industrial Production

• Foreign Direct Investment

• Government Debt

• 5-Year Economic Forecasts

 

The Market for Commercial Real Estate in Minsk

• Supply of Commercial Real Estate

• Demand for Commercial Real Estate

• Standards for Real Estate (A-B-C)

• Private Sector Projects Announced or Under Construction

• Government Projects Announced: Airport development, Hi-tech sector, etc.

• Average Prices per Square Meter: Construction Costs

• 5-year Model for Commercial Real Estate Supply and Demand

• Role of Foreign Investors

 

Commercial Real Estate Operations

• Activities of Realtors: Staffing, Commissions, Sales

• Purchasing Off-Plan

• Purchase Contracts and Agreements

• Rental Contracts and Agreements

• Hedging against Currency Risks

• Eviction Processes for Non-Paying Tenants

 

Construction Operations

• Activities of Major Contractors

• Availability of Key Equipment

• Imports and Availability of Materials & Finishings

• Imports and Availability of Labour

 

Banking and Financial Operations

• Activities of Commercial and Investment Banks

• Activities of International Financial Institutions (IFIs): EBRD, IFC, MIGA

• Availability of Mortgage and Lease Finance and Interest Rates

 

Tax & Financial Strategy

• Recapitulation of Main Taxes

• Tax model as applied to Project

• Taxes and the PL Model

 

Investment Process

• Corporate Legal Forms

• Investing from an “Offshore” Base

• Laws and Attitudes towards Foreign Investors, including expected changes

• Licensing Process

 

Risk Analysis

• Risks from Governmental Actors

• Risks from the Municipality

• Risks from Technical and Construction Operations

• Risks from Commercial Operations

• Risks from Currency Operations: Convertability, Repatriation, etc.

• Risks from Non-transparent Sources

• Risks from Acts of War, Natural Disasters, etc.

• Project Risks (delay in destroying and moving existing building, imports, etc.)

 

Three Investment Scenarios

• Best Case

• Base Case

• Worse Case

 

Project Investment Strategy

• Offshore Base

• Local Partners

• Contracting Process

• Sales Process

• Quality Standards

• Government Relations

 

Annex I: Profiles of Major Projects

Annex II: Service Provider Assessment

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