In 1991, the Houston-based real estate executive Jeff Hines started investing in Russia with his namesake real estate firm, Hines.
It was shortly after the collapse of the Soviet Union, and Hines and his team saw an opportunity. They quickly became among the first American firms to invest, own and manage commercial real estate in Russia with an apartment and office tower they created called Park Place Moscow, which opened in the early 1990s.
Many CRE firms from the West followed in Hines’ footsteps to help build the Moscow skyline for what it is now: an international, eclectic collection of buildings funded by developers from across the globe, from Asia to Europe. It was a time when the West hoped that the Cold War was over, and Russia would become a strong economic hub.
It was a sort of commercial real estate renaissance known as “Russia Reborn,” an era where the market saw a bounce back as it meshed with the western European economy. Over the following 20 years, Hines bought and — even now — currently owns over 150 properties across Europe, including buildings in Greece, Denmark, France and Russia, where the firm owns and operates Russian shopping malls, office buildings and multifamily rental properties, all valued at over $2.9 billion, before the war in Ukraine (currently, Hines has properties in 27 countries globally).
However, since the invasion of Ukraine, the situation has changed. Their Russian properties are facing a loss of value, especially since several commercial foreign companies are pulling out of the country — be it McDonalds, Coca-Cola or even Starbucks.
While Hines’ portfolio in Russia is only 1.8% of their $160 billion portfolio, it is still tricky. The company recently released a statement condemning Russia’s invasion of Ukraine.
“We unequivocally condemn this unjust, unprovoked act of war. This is a humanitarian tragedy, and our deepest sympathies go out to the Ukrainian people whom we stand with in solidarity,” it read.
“We are not going to make new investments in Russia. We do, however, have commitments made to our investors, partners, tenants and lenders and we are in discussions with them to determine the best path forward. Our employees in the region are safe, our assets are operational, and we are continuing to monitor the situation as it progresses.”
Undoubtedly, it is putting a dent in their portfolio, and they’re not alone. A fund managed by Morgan Stanley Real Estate Investing owns a 50% stake in the Metropolis Mall in Moscow, which is valued at $1.1 billion. They also bought the Galeria Mall in St. Petersburg for $1.1. billion in 2012, and still own a 39% stake in the building, according to the Wall Street Journal.
Meanwhile, the Goldman Sachs bought a St. Petersburg shopping mall with the help of a Russian partner, and are apparently “winding down” their business in Russia, The New York Times reported.
Raven Property Group owns warehouses and industrial real estate in Russia. Their shares, listed in London, have lost almost half their value since the war in Ukraine started on February 26, so they suspended trading their shares and have delisted as part of a wider plan to distance themselves from Russian business.
The company released a statement last month: “In a short time frame of just two weeks, the impact of the actions of Russia on Ukraine has completely compromised the company’s business model and its ability to assess its current financial position and ability to inform the market accordingly.”
As for Hines, the element of unpredictability plays a role in his job. “We’ve always known that geopolitical shifts could present challenges and have navigated those successfully,” Jeff Hines told The Wall Street Journal, as he runs the company with his daughter Laura Hines-Pierce.
As for Morgan Stanley Real Estate Investing, the financial fallout is minimal, and as experts claim, they remain somewhat unscathed. However, according to PERE, they will likely hand over the keys to the Russian lenders of the mall eventually.
In fact, the New York luxury real estate market is seeing its Russian property owners selling their properties in Manhattan, worth $5 million and up. On Billionaire’s Row on 57th Street, CNBC reported that oligarch Roman Abramovich’s $50 million Colorado mansion could become a sanctions target. This pattern is being called “unloading their trophy homes.”
It isn’t just residential, though. New York is losing its commercial tenants, too, over the Russian sanctions. Russian-funded grocery app Buyk was planning on moving into a Manhattan space, according to the New York Post, where they had already hired an architect for a renovation. But the firm furloughed 650 staff members in the U.S., and filed for bankruptcy shortly afterward, as their funding sources were cut off.
It isn’t just Americans who have bet on Russia’s property, but Israeli real estate owners have bet on Ukraine’s market, too. As one anonymous expert in the field recently told Haaretz, he purchased two properties in Kyiv a few years ago after a recommendation from a colleague.
“To tell the truth, at first I was deterred by the idea,” he explained. “Not because I was worried about the stability of the regime in Ukraine, but because it’s a country with a different mentality and with a less secure banking system than that of other Western countries. In spite of that, I made my calculations and decided to go for it.”
While the property was profitable for a few years, all opportunities have been destroyed since the start of the war. As he explained, in Ukraine, banks don’t accompany real estate projects, and there isn’t a sales law or other kinds of laws protecting property buyers with security for their money invested, in the event that a developer goes bankrupt.
“In most cases,” he said, “developers bring the money themselves or from the buyers, and that involves risk. In such a situation, if the developer declares bankruptcy, the buyers are likely to find themselves with nothing.”
Which investors will be fine, and which will find themselves with nothing? As the Ukraine crisis continues to unfold, we will see.