June 25, 2008 / 2:47 PM / 11 years ago

Russia's AFI on prowl for credit crisis victims

MOSCOW (Reuters) - The head of one of Russia’s richest real estate empires, AFI Development (AFIDLq.L), can’t wait for the autumn: Then, he says, the global credit crisis will fell his competitors and he will snap them up.

Chief Executive Alexander Khaldei said a number of Russian development companies have just a few more months before they find themselves completely unable to refinance or pay off debt.

Khaldei’s company, on the other hand, has relatively little debt, is wielding a $1 billion war chest left over from its public offering, and will use it to buy up fallen rivals.

“Companies took on a lot of debt, thinking it would be infinite. And now they have to pay it off. Banks have raised rates or have called in loans. Some big companies are having problems,” Khaldei said.

Khaldei is not the only cash-rich domestic investor circling over a weakened industry. Metals tycoon Mikhail Prokhorov, flush with the proceeds from selling his stake in Norilsk Nickel (GMKN.MM) said last week he saw takeover opportunities in the crisis.

A flood of revenue from oil and raw materials exports and a relatively underdeveloped commercial lending industry have helped insulate Russia from the global credit crisis. Construction and development are among the few exposed sectors.

“I think it will be possible to make these purchases from autumn onward,” Khaldei said. “We are in talks with these companies. It won’t matter whether they have hit bottom or not.”

In addition to its only liability, a $280 million credit line from Sberbank (SBER.MM), AFI is obtaining a loan to build in Moscow City, a vertiginous array of steel and dazzling blue glass rising from a former industrial site between the Moscow river and a railway line.

The development is seen as a bulwark for the Kremlin’s plan to turn Moscow into a major European financial centre. AFI expects the project to return $150-$180 million per year.

Moscow has become the world’s second most expensive city after London based on the price of a square meter, and many analysts say the rise could continue, since turnover depends little on mortgages, the Achilles heel of the world market.

Unlike Prokhorov, who said he was eyeing an Asian resort, Khaldei said AFI would stick to Moscow and concentrate on high-end commercial property, betting prices would continue to rise on a persistent deficit despite booming construction.

“The development business is high-return, and everyone is going into it now, including hairdressers and photographers,” he said. “Now we are going to see natural selection. The little ones will go off somewhere and die.”

“You can’t say there is no crisis. But the crisis is global, not in Russia. Here it is based on rising rates and a certain decline in sales of sites which have been built less professionally.”

Demand for high-quality office space is so high, he said, his own company is renting an office in the centre of Moscow because it sells its sites as fast as it can build them.

“We’re like the barefoot cobbler. We build buildings thinking we’ll occupy them ourselves, but then we get offers and we sell them at a high price before we can even complete them.”

Khaldei said the Moscow market would cool a bit, but remain highly profitable.

“Until now we’ve had superprofits, not just profits — 100 percent, 200 percent, 300 percent,” said Khaldei, who sold a Moscow office complex in May at six times cost. “Everything will stabilize. We’ll just have good profits”.

“Prices will still rise,” he added. “We haven’t caught up with London, or with New York, or with Tokyo. We have all that ahead.”

Reporting by Anton Doroshev; writing by Melissa Akin; Editing by Jason Neely

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