Katen Bakhytbek. Development: Strategies to escape from the crisis.//21.04.2008

http://www.kursiv.kz/1195200926-development-strategii-vykhoda-iz-krizisa.html?menu_view_select=/arhiv/kak-potratit-arhiv/

Bakhytbek Katen, director of NAI Kazakhstan Aristan – Kazakh branch of NAI Global.

It is said enough about world liquidity crisis. One can search internet to find different approaches to find the origins. We invited Bakhytbek Katen, the Director of NAI Kazakhstan Aristan – Kazakh branch of NAI Global to comment some of them, combined with local specifics, gave the result, which we see now and tell us his point of view on mistakes done by players of “developer cluster” and discuss the conclusions made to get out of emerging situation.

“Subprime” factor, USA

First of all, the “subprime credits” crisis happened  due to risky situation in investments into securities derivatives of mortgage debts of second-tier banks in USA. Here, it is necessary to pay attention on two important points. The economic model of USA allowed increasing derivatives, but “complexity” of investment relations reached the stage, when it was impossible to find the origin of a debt  and then to monitor the associated risks.

Actually, risks associated with each debt have been monitored but market structure was sort of “adjusted” to large financial bodies , who successfully, without in-depth analysis could mix “first class”debt instruments with subprime segments and, consequently, sell the “mixture” labeled “medium risky”. Moreover, the investment euphoria during last 5 years overflowed everyone. So, no one paid attention on “risk” word. There was no time to analyze the default risk as well. After the crisis, several US large investment funds and banks temporary froze all activities to analyze the global situation and make prognosis on future possible scenarios. But to track the origin of the debt, the creditworthiness of the majority debtors has become impossible. Of course, investors were frightened to invest in anything at all, because could not estimate the influence of subprime debt on all market and on a particular player. They lost confidence in investment offers, especially from developing countries. So, our banks failed in debt refinancing. Developers were next who failed in that situation because they have been financed basically by bank credits. Though,  all reasons of crisis are clear, I would like to pay attention on problems deeper than “subprime”. They are our own mistakes.

No diversified financial recourses.

Despite the fact that this is not something new, I would like to point that developers could not imagine that something like that could happen to Kazakhstan banks. They didn’t even look for alternative way for direct financing besides crediting. Moreover, our banks lowered the requirements of the majority of investment institutions for crediting of development projects and no one did always stick to parity of their own assets. It led to situation, when many developers did not have their own capital, besides land holding, which have been bought against a pledge and their   value did not have the necessary 20-25% of the project value. Meanwhile, there are many objects, which are pawned real estate. The debt to bank for disbursement is 75% of the total value and the construction has not been started yet.
It is clear that such “developing” project will be difficult to sell, because the owner of the project in this case is a bank. I think that this kind of projects will be sold to their mortgagees as a pool. Transforming this pool into large “developer” company banks will obtain funds (by selling the share and foreign investments). We have several examples like Kazkommerts bank and BTA. The destiny of the largest projects is decided direct participation of these banks. Banks should participate in all processes and go further if they want to get, at least, laid down capital.

Diversification is also refinancing of the projects in foreign banks. It requires more efforts than selling the share of the project. Dealing with any creditor implies to lower their risks and it is not easy for any developer.  However, the bright example of successful credit obtaining by one of the Kazakhstan company just bank credit shows that even in current situation foreign banks are interested in Kazakhstan. In liquidity crisis conditions in RK this fact means that international “Rifefaizen” and HSBC consider these risks as insignificant.
Finally, last years we here a lot about such recourse of financing as Islamic instruments. But due to limited possibilities of investment these source of financing in “khalal - projects”, location and preferences given to Kazakhstan, owners of Islamic instruments  think about the expansion of their presence in Kazakhstan. Dealing with these large financial institutions as Islamic banks, it is interesting to develop not only investments into “development” but also the Islamic mortgage, which allowed simplifying the situation in this segment.  

Now we initiate the development of program of participation of Kazakhstani pension funds in as investors in real estate market. Here we want to diversify the investment portfolio of pension funds and improvement the quality of analysis of investment risks in real estate projects. Because, decsreasing the risks in real estate we would get the significant investment capital with expecting stable deferred income. It would allow solving the problem in real estate segment and giving the possibility to participate on the market of commercial real estate, to hold the part of assets in Kazakhstan.

I believe that pension fund should make research of the possibilities of internal investments including the real estate sector. It is a logical conclusion as crisis consequence. Diversifying the investment portfolio only with foreign securities we increase the dependence on world system crises. In this aspect real estate is considered as solid assets with profit   coming from rent, where risk can be diminished by professional work at each stage: leasing, managing an object and its insurance.

It is necessary to point that real estate assets in case of cyclic crises do not lose their values. Temporary reduction in profits can happen, but after each jump, market is stabilized and begins to grow and the cost of real estate starts to restore. So the term “sit out in real estate until the crisis is over” came from there. It is not widely used in Kazakhstan, but has prospective to get implanted as a good way to minimize loss.

Mistakes of state governing

Mistakes in planning of state program for cities’ reconstruction caused the changes in prices on land objects within cities. If take into account the failure of city’s technical services to provide the necessary technical conditions, it is obvious that Kazakhstan cities are not ready for reconstructions. The lack of transparency of  projects agreement and permits obtaining for construction processes as well as technical conditions, it is clear that the project prices are growing due to these unexpected expenditures. It has an effect on deadlines of the projects. If we still want to obtain foreign investments, the state should provide the transparency of expenditures, provision of technical infrastructure or allow to develop these infrastructural projects.

Mistakes of banks and developers

Unfortunately, our banks unintentionally made 80% of Kazakhstan “development” dependent on external investments, so they played the negative role of formation of “developing” experience qualitative growth of projects. Spoiled by easy debt capital, Kazakhstan developers did not go to the level of rising cost of project, saving on everything, which elevates the market value: project management, obtaining successful construction companies, planning and realization of marketing strategy. Many projects lack the qualitative planning, market analysis and strong conceptions. It seems that objects are constructed not for buyers but because of liquidity of constructed objects.  Absence of understanding of necessity of project management led developers to over expenditures of assets, delaying of deadlines and mediocre quality of constructions.

Additionally, due to rejection of foreign institutional partners, our companies lost the possibility to use experience of foreign partners and international marketing possibilities. Another serious mistake producing the inflation is non adequate approach to estimation of assets and projects. It is always necessary to proceed from the level of attraction and capitalization estimation. But often developers want to get the unreasonable price, which was introduced in the market as an average. Let’s see, selling office building class B even in business centre in Almaty, developer cannot set the price of 5000$ only because he wants it or there is no space for construction in Amaty. It is necessary to understand that rental rates limited by 60$ (is psychological and economical limit) do not allow going to higher rate of capitalization. And there is no investor in the market, who seeks the projects with profit lower than 13-15%.

Weak corporate governing.

Among the mistakes or, to be more precise, reasons of weak corporate governing of “developer” companies the following can be noted: weak management (lack of experience of the team, absence of knowledge of project management technologies and development, incompetence in investment relations), absence of strategic planning (risk management, diversification of financial recourses, monitoring of macroeconomic), absence of transparency of managing accounting, absence of expenditure optimization.

There are many technological mistakes, which many developers made before crisis and continue to repeat now. For example, to plan a mall development it is necessary to do the actual model of the mall functioning and its covering the expenses, besides the architectural conception. It requires the serious marketing analysis and creation strong actual conception of successful functioning of the object of trading: development of the right format, area, distribution of potential renters and so on.

The reason of such omissions is weak theoretical preparation of developers and absence of experience in project managing. In this case developers should draw into the project consultants and improve the team by adopting the experience and practical training (conferences, exhibitions).

Solution

Among ways out of liquidity crisis we can, first of all, recommend to pay attention on direct project financing. Second of all, investors attraction There are many potential investors: investment funds, banks, international banks credits. They are ready, but developers should understand the expectations and build the work structure according to them. Among their requirements are highlighted the following: qualitative approach to managing of developing project, transparency of all project transactions, reasonable approach to price formation (selling the share), and permits for construction processes. Fulfilling these requirements do not infringe upon the developers rights because they reasonably acceptable. So, just control over the situation and seeking for consensus are necessary. We believe in resolving of existing situation in near future. But time, which it takes, depends on developers.

Future forecast.

1.    Development will change the face. Kazakhstan developers will merge with large transregional investment and developer groups. Generally, investors and developers will get the commercial real estate projects. This process will take half a year till the announcement of first big deals. Foreign managing company, investment and trust funds will buy the already existing objects in market. One might expect the formation of several funds with participation of foreign investors and Kazakhstan managing companies, who have been studying study the possibility of REIT creation (Real Estate Investment Trust). It is difficult for investors enter real estate market without local support but in two years it will change. More foreign players will enter the real estate market. So, it will look like Russian market in terms of investment and management of development projects. But for players from Middle East and Persian Bay Kazakhstan market is more attractive than Russian because of more developed regulations (possibility of land  possession) and local open mentality or eastern versatility (if you wish). That’s why Kazakhstan in contrast to Russia can expect more Asian and Arabic investors and developers who will work as well as western.

2.    Kazakstan  banks will become real “developers”.  Because of high share in crediting of developer projects (around 40% of investment portfolio) of Kazakhstan top 10 banks and because of  the liquidity crisis’s consequences banks will be forced to take the risks of development. Moreover, they understood that all developer’s risks are on them. In case of deadline violations or assets over expenditure , delays in agreement processes or permists obtaining banks are first, who will suffer. Banks will get the outcome – real estate as liquid product or solid mortgage with delay in deadlines. And this causes the delay in refinancing, merging and selling of mortgage derivatives, obligations, and debt return. That’s why, Kazkommerts bank will be followed by other banks, hiring project managers to track purposed funds expenditure, materials procurement, risks prevention and control of fulfillment of the schedule. These are positive tendencies. Unfortunately we should note the absence of professional approach to project management   and absence of engineering departments which could track the process of fulfillment of project work straight on site. It was necessary,  but it was not considered, and now it is time to reform the structure of construction projects crediting, adding the engineering expertise.  For example, Sber bank had a Department to control construction projects, where engineers did not allow the over expenditure of funds and prevented any deadlines violations. Needless to say, that no western bank will work with a developer without project managers participation.

3.    I would like to believe that crisis helps. Now we inclined to believe that despite on expectation of regression, external crisis will help to overcome the liquidity problem in Kazakhstan. The main hypothesis is that world investment sector has preceded in predominated form of aggressive investment funds, which in crisis will seek the “harbor” in developing economics. Globalization gave the opportunities to minimize the cost of studying such countries as Kazakhstan and systematization of investment cycle has never been more real. This means sitting out after last summer is over and more and more investors turn their heads to our region and start studying it. The geography of capital’s origins is very diversified. One can asserts that getting seriously damaged from investment in derivatives once, more players (foreign, pension, insurance and other investment funds) now talk about improvement of investment mechanisms and investments directly in projects.

However, Kazakhstani who expect the market return on the same positions to sell mortgage land or several apartment with great profit should understand that it will never happen. Other type of investments will be used. Projects and real estate will have another values. The cost will be estimated  based on economic efficiency but not the market average  rate. It will improve the quality of market relations, shorten construction period, increase the transparency of transactions.

In this difficult time for our economic I would like to remind that word “risk” (ryzk in turkish) has two meanings: risk and ryzk (provision, profit). So, we should consider all problems and risks as something positive. Concentration on negative takes strength and does not help to find solution. My goal in this article is concentration of participants of developer cluster on actual reasons of crisis and I hope that understanding by developers that everything is up to us will accelerate the process of escaping from crisis.

Katen Bakhytbek. Development: Strategies to escape from the crisis.//21.04.2008

http://www.kursiv.kz/1195200926-development-strategii-vykhoda-iz-krizisa.html?menu_view_select=/arhiv/kak-potratit-arhiv/