EXCLUSIVE: Hines Considers Exiting Russia As Big Investors Weigh Ukraine Invasion Fallout
By: Mike Phillips
Global real estate investment giant Hines is considering exiting its Russian real estate assets and weighing the future of its presence in the country following Russia’s invasion of Ukraine, Bisnow has learned.
“We are concerned for the safety and well-being of people impacted by the Russia-Ukraine conflict. We have limited exposure to Russia and no presence in Ukraine,” a spokesperson for Hines said in an emailed statement. “Our employees in Russia are safe and our assets are operational.
“We are in discussions with our partners to reevaluate a large percentage of our assets in Russia and our presence in the country. We will continue to actively monitor the situation.”
Like Hines, some of the biggest names in global real estate and finance made significant bets on Russian property in the past 15 years. As sanctions in the wake of Russia’s invasion of Ukraine cut the country off from the global economy, those investors are left with portfolios facing an uncertain future.
Morgan Stanley, Hines and retailer Ikea are among the biggest U.S. and European investors in Russian real estate in the decade and a half following the financial crisis, while UK-listed Raven Property Group built up a large portfolio of Russian logistics. Raven’s biggest backer is £25B fund manager Quilter.
Just shy of 2% of Hines’ $84B in assets under management are in Russia, equating to about $1.5B. Hines owns stakes in assets in Russia, sometimes alongside international investors, but mainly in partnership with domestic Russian investors, acting as an asset or investment manager on buildings on behalf of these investors.
Both the U.S. and UK have imposed sanctions against large Russian financial institutions, and the European Union was on Tuesday implementing proposals banning seven Russian banks from accessing the SWIFT system that processes international banking transactions. The combined moves essentially shut Russian banks — including Sberbank and VTB, the country's two largest lenders — out of the international financial system, making it extremely difficult for them to make or receive payments.
The value of companies listed on global markets with exposure to Russia has plummeted in recent days. Raven’s share price, for instance, has fallen 47% to 13 pence in the last five days. As recently as last November, it was worth three times as much.
Companies in other sectors have said they will divest assets and businesses in the country, including Shell, BP and Norway’s sovereign wealth fund. For global real estate owners, it is currently unclear whether they could find a buyer for assets they own in Russia or whether sanction rules would allow them to sell.
Hines began investing in Russia around 30 years ago. Its biggest single investment was the purchase of a 50% stake in the 2.2M SF Metropolis shopping centre in Moscow from Morgan Stanley in 2013, a deal that valued the centre at about $1.2B. It bought its 50% share alongside U.S. pension fund CalPERS.
Houston-based Hines continued investing in the country as recently as 2018 when it bought a 361K SF office tower adjacent to the Metropolis shopping centre alongside investor PPF for $117M.
In addition to the 50% stake in the Moscow mall bought alongside Calpers, Hines has a portfolio of 11 assets in Russia, according to the company website. These include outlet malls in St Petersburg and Moscow, offices and logistics assets in and around Moscow, and a residential development in Moscow.
Two of its outlet malls, at Belaya Dacha and Arkhangelskoye near Moscow, have loans secured against them totalling $261M from lender VTB, which is on the U.S. and UK sanctions list. Hines declined to comment specifically on how the sanctions will affect the loans to VTB or the operation of these assets.
Hines' country page for Russia today displayed a 404 error message.
One asset formerly majority-owned by Hines gives insight into how, in contrast with most markets, Russian real estate values have suffered over the past decade — in no small part due to the withdrawal of much foreign capital in the wake of sanctions imposed in 2014 following the annexation of Crimea.
In 2011, with values still low after the financial crisis, a global REIT managed by Hines bought the 95K SF Gogolevsky 11 office building in Moscow for $96M. That REIT is liquidating its assets, and despite the building being 99% leased to a roster of international tenants and the big rise in global prices since 2011, it sold in September last year for just $45M, according to local press reports.
Morgan Stanley made two big investments in Russia in the aftermath of the financial crisis. In 2012, it paid $1.1B (£821M) for the 1.1M SF Galeria shopping centre in St Petersburg; and in 2013 it paid $1.2B for the Metropolis centre in Moscow.
CalPERS did not address any of the specific questions put to the fund by Bisnow, but its CEO, Megan White, said in an emailed statement: “CalPERS supports the people of Ukraine who are suffering due to what is an unjustified and unprovoked attack. Ukraine is an independent democracy, and its people are standing up for freedom with honor and heroism. CalPERS investments in Russia total less than one percent of our total portfolio. We are monitoring current events and will take action as appropriate to protect the interests of our members.”
Both centres were bought for Morgan Stanley Real Estate Investing’s $4B G7 global opportunity fund, which was raised in 2010. The strategy in buying the assets was to capitalise on the lack of glitzy western shopping centres in Russia. Both centres were bought at yields of about 9%.
As well as the 50% stake sale to Hines and CalPERS in Moscow in 2013, Morgan Stanley sold a 49% stake in the St Petersburg asset in 2019 to Mubadala Investment, the investment fund from the United Arab Emirates.
The G7 fund is in wind-down mode and has been selling assets and returning cash to investors, with only a few assets left to sell, including the two Russian shopping centres. The fund has returned $5.6B of equity to investors, a 16% return, fund information shows. Rent checks and the sale of half shares mean that the fund has already made back its investment in the two Russian centres.
Because the fund was coming to the end of its life, Morgan Stanley’s business plan was to sell its stake in the two assets over the next 12 to 18 months. At the end of last year, press reports in Russia indicated that a formal sales process for the stake in the St Petersburg Galeria was about to begin.
But that plan, conceived before the invasion of Ukraine, has now been put on ice, leaving the future ownership of the malls in limbo. Russian real estate is likely to be highly illiquid, and even if Morgan Stanley did find a buyer, sanctions mean it might not be able to receive any money paid for its stake.
The Galeria mall has a $773M loan secured against it provided by Sberbank, records show. Sanctions against the bank mean Morgan Stanley is now unlikely to make good on interest payments for the loan. That means Sberbank could enforce the loan and repossess Morgan Stanley’s share of the mall.
The global firm with the largest real estate presence in Russia is Ikea, through its Ingka shopping centre development division. According to Ingka’s website, it owns 14 centres across Russia, each anchored by an Ikea, comprising 2,516 stores and 19.3M SF.
“The war in Ukraine is a human tragedy and our deepest empathy and concerns are with the people directly and indirectly affected,” an Ingka spokesperson said in an emailed statement. “Our immediate actions are focused on the personal safety of our colleagues and their families as well as securing employment and income stability. Our highest priority will remain with people.
“Together with IKEA Foundation and many more organisations — we are working around the clock with experts to assess the immediate relief needed in the region and how we can best support displaced people in the coming days, weeks and over time.”