The FINANCIAL — “We want to bring a new lifestyle experience to Tbilisi,” says Henry J. Bennett, one of the key investors of the GRATO project by Benett & Benett Capital worth USD 55 million. “This project will be a magnet for greater investment inflow in the country, and will also generate employment opportunities for Georgians,” says Mr. Bennett, who decided to build one of the luxury projects in memory of his late grandmother Anastasia Tsereteli. He told the FINANCIAL about the beautiful story behind GRATO and about its new life in Georgia.
Q. Mr. Bennett, tell us more about the meeting you have arranged for Benett & Benett Capital in London. Who are they? What are the main arguments proving the profitability of the GRATO expansion project?
A. Our two-year partnership with Benett & Benett Capital was so successful we decided to expand our business in Georgia and start working on further projects together. This matter proves that investors have confidence in the Georgian economy and real estate sector. The GRATO expansion project sets a five-stage completion plan to be executed over four years. Two premium class shopping malls and an office building will be built within the expansion plan. Also, a luxury residential development GRATO Grand Residence will be launched in the heart of Tbilisi. The whole project that we will take on the road show is worth USD 55 million.
As for the meeting held in London on January 9-13, 2009, the intention was to present the above-mentioned plan to a group of investors who have expertise in raising funds and have investments in real estate projects all over the world. We also invited experts to analyze the project financially. It was agreed to set up a road show in London, Paris, Copenhagen and Geneva as well as in other cities, present the project to international investors and raise USD 55 million for it. Since our pilot project (GRATO Passage) in Georgia was successful, investors will have more trust and confidence in joining forces to become Benett & Benett Capital’s long-term partners.
Q. What was the reason you decided to invest in Georgia and build the GRATO Passage?
A. Investment in Georgia is a combination of history and a very good investment climate. I heard about Benett & Benett Capital and its project in 2007, on one of the road shows my father and I attended in France. Because of my father’s connections with Georgia, the project immediately sparked his interest. We started looking at the project, and the Georgian economy, in more depth. We started to see it as a very good basis for business and that any investment we would make would bring us good return in the medium-long term.
The escalation in retail and commercial development in the country has been enormous, much bigger than we had in London over the same period of time. Much as my father had connections with Georgia and loved Georgia, today it is about making a serious financial decision. To some extent the business we are in crosses boundaries and from my perspective, it is not constrained to a particular geographic area. It is really where the best opportunities come along from a financial perspective.
Q. Could you please tell us more about your Georgian roots?
A. My grandfather Henry Bennett served in the British expeditionary forces. During his service in Batumi in the early 20th century, Henry met my future grandmother Anastasia Tsereteli with whom he fell in love. Henry and Anastasia’s love for each other was so strong they decided to elope first to Turkey and then to France. My grandparents lived happily until my grandmother Anastasia passed away.
GRATO Passage will be built in memory of my late grandmother Anastasia Tsereteli. We chose the name GRATO as there is a beautiful story behind it: When my grandparents were on their honeymoon in India, Henry bought Anastasia a beautiful pink sapphire as a wedding present. After returning to Nice, Anastasia had a ring made with the stone, which she wore till her death. The sapphire was so big and grand, that Anastasia’s friends called it GRATO, (Latin meaning: big). The GRATO ring is our family’s heirloom and will be passed from generation to generation.
Q. What is the amount that was raised during the meeting with the investors?
A. We will invest money to finance the project’s preparation, feasibility studies and road show arrangements. As for the USD 55 million we will raise it at the road shows.
Q. What is the mechanism of financing? Will you get USD 55 million fully in advance?
A. Financing will be obtained in the form of quasi-equity financing to the particular entities designated for each investment project. Interest rate will be lower than those offered in Eastern Europe and will be linked to the LIBOR rate with predefined premium. Funds will be allocated according to the 4-year – 5-stage preliminary development plan. We estimate that funds will be distributed in accordance to a 1-3 / 4-2 ratio spread over the 4-year period. Interest rates will be hedged with the combination of financial derivatives in particular straddles.
Q. As it was reported, you are planning to launch a luxury residential building called the GRATO Grand Residence in Tbilisi, but construction experts here believe there is no niche for luxury projects, especially during the crisis. What’s more the Central Bank has lowered its 2009 economic growth forecast. Please explain your expectations.
A. High quality projects are the sort of projects we get involved with. There is always a niche for luxury projects and luxury products, I would not argue if we were talking about the high volume segment, but indeed there is always a demand for luxury products and services in modern culture oriented countries. This demand rises as society develops. The whole project will be finished in 2012. By then interest for luxury projects will be very high.
Q. Give us more details about these two premium class shopping malls and the office building planned. Who will work on the design, construction etc.?
A. We want to bring a new lifestyle experience to Tbilisi with this project. The GRATO expansion project will blend luxury, comfort, services and leisure options. We will create top shopping, office and residential destinations in Tbilisi. Leading architects, designers and operators will offer our customers the best. One can only imagine making all this reality. This project will be a magnet for greater investment inflow in the country, and will also generate employment opportunities for Georgians.
Q. Quoting Mr. Vako Togonidze, CEO of Benett & Benett Capital “International investors have confidence in the Georgian economy and RE sector in particular”. What about political instability or the recent war with Russia? Do you consider it a main risk for your projects?
A. Briefly to overview, my investment portfolio is comprised of a well differentiated structure of higher risk and return SBUs along with comparatively mature and stabilized lower income investment securities, allowing me to gain at substantially higher returns than the market offers, as ones say in my FD – “my portfolio lies at the utmost levels of its efficient frontier”. The nature of these high risk/return growth projects is well represented in the GRATO projects.
Without a doubt political risks affect the results of investment projects. But again I refer to one general rule in finance and investor relations – higher risks reward higher returns, in addition to this, the motivation which lies behind the development of GRATO investment projects, which is not solely profit oriented, as general audience and interested parties probably know there are incentives related to the long standing interest of our foreign partners in Georgian culture, society and history.
We’re committed to the idea that what has been started is to be continued, despite additional costs on behalf of the developer in order to secure the successful launch of promised projects.
Q. Many of the local construction companies in Georgia were forced to freeze their projects. Commercial banks have suspended financing claiming the crisis in the financial sector. Give us your view about how the Georgian RE sector can regain its position.
A. First you need to restore confidence and liquidity. It’s going to take a little bit of time for positive things to start flowing again. Research shows that there is still demand on emerging markets, people are still buying, there are foreigners coming into the marketplace, I think activity will pick up over the next several months.
Hopefully, there will be an orderly process where people look at their assumptions and analysis. They have to go back to the fundamentals of how we look at our businesses. When businesses moved away from the fundamentals and started thinking everything was going to go up forever, that’s when the troubles began.
There are always motives behind the development of real estate. There are some that qualify not only profit oriented projects but also the motivation to create something of remembrance, yielding in architectural achievements and offerings which serve to the overall welfare of the society and market. Real estate is an industry which is driven mostly by attitudes and expectations. Expectations on real estate paybacks may differ. What was happening over the past 4-5 years in Georgia could be characterized as simple carnal interest in rapid financial success, which solely relies on the attitudes which are carried by market participants, therefore it could be explained why some of the projects, lacking every feature of acceptable development, prospered like mushrooms in the Georgian real estate industry.
I think the flaw of the Georgian construction code and related legislature allowed many Pharisee entrepreneurs to benefit with perception about the real estate market, with so called pre-sale project financing. Today we see the aftermath of this strategy, that the majority of real estate projects are estimated to be at default levels, with ambiguity in project exits.
Our approach relies on significant financial and entrepreneurial involvement in the project before the responsibilities and titles are transferred to the consumers. Financially the structure of total capitalization rests on the principle of equity. Basically it means that estimates of the completion of the project are determined at the initial stages, leaving the project independent from economic turbulence and unfavourable changes in market attitudes.