The FINANCIAL — Levan Lomtadze, reporter of The FINANCIAL, had an exclusive interview with Mr. Kenneth Angel, Senior Investment Officer of OPIC and Mrs. Ekaterina Kamushadze, Vice-Chairman of the Supervisory Board of Iberia Real Estate.
Iberia Real Estate (Iberia), one of the leading real estate development companies in Georgia, managed to obtain a commitment letter for USD 10,000,000 credit line from Overseas Private Investment Corporation (OPIC). The loan which has 4 year term will be used for completing Iberia’s 4 current projectse.
Iberia was lucky enough to get the credit line as the real estate market in Georgia is lacking financing. Problems started following the war when liquidity on the Georgian market dropped dramatically. Many of the projects had to be temporarily stopped.
Back in October 2008, Iberia successfully negotiated a funding package in the amount of USD 6,300,000 from OPIC for its subsidiary SB Iberia, thus becoming the first Georgian real estate development company to receive commitment for foreign funding in the aftermath of the conflict in August.
Levan Lomtadze, reporter of The FINANCIAL, had an exclusive interview with Mr. Kenneth Angel, Senior Investment Officer of OPIC and Mrs. Ekaterina Kamushadze, Vice-Chairman of the Supervisory Board of Iberia Real Estate.
OPIC’s political risk insurance and financing help US businesses of all sizes invest in more than 150 emerging markets and developing nations worldwide. Over the agency’s 38-year history, OPIC has supported USD 188 billion worth of investments that have helped developing countries to generate over 830,000 host-country jobs. OPIC projects have also generated USD 72 billion in US exports and supported more than 273,000 American jobs.
Since September 2008 OPIC has approved six projects in Georgia. Mr. Kenneth Angel believes that this number is more than the number of projects approved by OPIC in any other country. He thinks that it shows the magnitude of OPIC’s involvement and willingness to be assisting projects in Georgia.
Interview with Mr. Kenneth Angel
Q. Why is OPIC supporting the Georgian RE market?
A. It goes back to the conflict in August. At the end of August representatives from the US Government including the Department of Commerce came to Georgia, and OPIC came too to see the type of assistance that Georgia needed. Later in September they made the announcement that the US Government would support Georgia with USD 1 billion. As part of this package it was decided that OPIC would make USD 150,000,000 available for Georgia. In October the President of OPIC came to Tbilisi and signed a memorandum of understanding for 7 projects to the total of USD 176,000,000. Some of those projects have been approved and have come to provision and some have already been disbursed. Iberia Real Estate’s project is in addition to the USD 176,000,000.
The reason why Georgia was chosen is that the US Government is supporting this country, this is where we are putting our resources. Afghanistan, Pakistan and other countries are also in the list that OPIC is supporting.
Q. The former Minister of Economic Development has stated in one of his previous interviews that investment flows have decreased worldwide, but there is still enough investment capital for such a small country as Georgia.
What should Georgian real estate developers do to attract more investments during a global economic crisis?
A. Investors are interested in economic and political stability of the country. In addition they are interested in the companies with good quality products and with professional western educated, transparent management team
Right now we are in a global financial crisis that somehow will end and then businesses will pick up. The second aspect which has to do with political risks and with the demonstrations in Tbilisi’s streets is harming potential investors who want to come to Georgia. Be it in the real estate or other sectors there probably are foreign investors who are sitting on the sidelines waiting to see how things develop both in political and economic areas.
Q. How many new vacancies can Iberia Real Estate generate with the USD 10,000,000 credit line that it got from OPIC?
A. I believe it’s roughly 400 jobs that will be maintained because of this credit line. These people were under threat of becoming unemployed, but now with this loan Iberia has recreated these jobs.
Q. What other industries other than real estate and the banking sector seem promising in the eyes of OPIC in Georgia?
A. Areas that OPIC would like to be able to support are export oriented, agriculture and something that would be outside of Tbilisi. We have one cold storage project in Poti and we are looking forward to its development.
Q. What are your plans of investing in Georgia in the future, are there any specific projects?
A. There are four projects that are in the pipelines, two in the tourism sector, one in mining and one in the financial services sector. Those projects are still in the process of development.
Since September 2008 OPIC has approved six projects in Georgia. I believe that this number is more than we have approved in any other country. It shows the magnitude of OPIC’s involvement and willingness to be assisting projects in Georgia.
Q. Why did you choose Iberia Real Estate to invest in?
A. This is the second project with Iberia Real Estate. The first project we were involved in was with SB Iberia which is a joint venture between Iberia Real Estate and Bank of Georgia. Through that we gained understanding of the management of the company and the ways in which they do projects.
There were other construction companies that spoke to OPIC, but they lacked the crucial criteria, which is having US investors. So this was the company that met the criteria of offering a commercially viable project, plus having US ownership. To summarise, first reason is the experience that OPIC had with Iberia, second is that US investor Firebird was involved in the project, third is that RE sector was among two focus sectors along with Financial Services. In financial services it is particularly in the area of mortgages, so that the bank can be provided with resources to continue lending.
Today I see a lot of construction cranes in Tbilisi, but they are all quiet and nothing is going on at the moment. One of the things that financed real estate in Georgia is presales of residential apartments. I think that is going through a transformation stage now. Customers are waiting for their houses to be finished and they don’t want to take presales risk. It is a challenge for real estate companies to attract more financing till the point that they start sales again. Many construction companies have been left without lines of credit. In other countries where you’ve got more established companies, meaning that they have been in existence for a longer period of time, have developed broader sources financing and they can now plan their presales.
Interview with Ms. Ekaterina Kamushadze
In October 2008, Iberia successfully negotiated a wholesale funding package in the amount of USD 6.3 million from OPIC for its subsidiary SB Iberia, thus becoming the first Georgian real estate development company to receive commitment for foreign funding in the aftermath of the conflict in August.
Iberia has received a commitment letter for 10 million USD credit line.
Q. The financial resource that you got is a notable achievement considering the current economic crisis. What can this success be attributed to?
A. To achieve success you need professionalism and luck. So we had both, we put together good strategy and we certainly were lucky to be able to execute that strategy. This has led Iberia to the opportunity of getting a loan from OPIC. That underlines our willingness to transform the management of the company into a more western style one to attract foreign investors.
It’s been our company’s strategy to move its management style and business operation to a more global level. We can’t continue financing our business like we used to. I don’t mean to say it was wrong. At that time that kind of financing was available and it worked. Now things are changing and we need to adopt new strategies.
Q. What was the sales tendency after August’s events?
A. After such a shock the tendency wasn’t promising and it was downward oriented. Although we still had sales it was not enough for financing. We had fluctuations and it became an unreliable source of financing. Not to make any false remarks, I can say that we have suffered a lot. The sales were down by 70% after the war.
Q. How can real estate companies foster trust among investors and customers in such deplorable occurrences?
A. It’s difficult to come up with a recipe for success, but certainly in a critical moment every company needs management that can put together, communicate and execute new strategies. I think in 2007 we’ve successfully established our long term plan, moved to execution and were adjusting it with the ongoing difficulties without loosing overall direction.
Q. Is real estate becoming an unprofitable business in Georgia?
A. I don’t think it’s becoming unprofitable. Unprofitable businesses can’t exist, they just die. If you manage your business in a right way you can gain profits even during a crisis. Real estate was the first sector that started booming in Georgia during the first economic growth cycle. There’s a reason behind this, which is a huge unsatisfied need for real estate in Tbilisi. As soon as people have more money in their pockets, the first thing they will buy is real estate. So I look at this as a temporary slow down which will disappear if and when economy recovers.
Q. How would you characterize real estate businesses Georgia?
A. Real estate businesses in Georgia are facing great challenges. However I want to make sure that the entire society understands the importance of this sector. We shouldn’t forget that construction business pulled out USA from great depression in the 30s. I think it is very important to solve current problems in this sector. I do believe that the real estate market in Georgia will overcome current difficulties, because without stimulating construction business it will be difficult for Georgia to overcome the economic crisis.
Q. Developers are blaming the banks for having stopped financing their projects. What can you advise them on the subject?
A. It is not beneficial for the business community to start blaming each other. This is not going to be constructive, as everybody is in difficulty, we all need to take responsibility towards our shareholders and our customers. Each bank has their own decision making process. If banks have stopped lending this is because they have their risk criteria and responsibilities toward their shareholders and depositors. I wish that the hard times that we have today will soon go away and banks can start lending again.
Q. Prices on real estate were rising since 2003, while the buying power of the citizens wasn’t. What reasons were behind such a fast pace price increase?
A. I already mentioned the reasons behind the quick rise on house prices in Tbilisi. There was a huge unsatisfied need among customers. In our case prices went up because there were more than enough people who were ready to buy. Buying power is not necessarily connected with the money people have at home or in their bank accounts. Banks were willing to give mortgages and our customers were able to service these mortgages. also In addition, don’t forget that most of the population in Georgia inherited real estate from the Soviet Union, which they can trade in. So as a whole I can say that market conditions at that time supported quick growth in house prices.
Q. The list of your future projects is headed by the Business Centre on Melikishvili Avenue. The territory where the construction of Iberia Business Centre is planned is located in the historical Vere district of Tbilisi, at the crossroad of Melikishvili st. and Varaziskhevi. The architectural monuments such as the building of #1 wine factory and the 1st block of Ivane Javakhishvili State Tbilisi State University are located in the nearest neighbourhood of the project.
Please tell us about the importance and details of this project.
A. The cost for the Business Centre on Melikishvili Avenue is approximately USD 15,000,000. This project is very important for our company in its essence because of its location. It’s one of the best locations for a business centre in Tbilisi, as it is on the intersection of two main roads. I can forecast great success for this Business Centre. At the moment we are negotiating with a foreign investor who got interested in this Business Centre. The architectural planning is still moving ahead and we are not wasting any time now. So we can start construction immediately as soon as we finish the negotiations.
The economic crisis is the reason why house prices started falling 8 months ago. Since then some developer companies started thinking about offering different discounts. House prices have been decreasing by 10-15% from September to December on average.
Q. What are the current dynamics on house prices in Tbilisi, should we be expecting further decreases?
A. There are no tendencies today because for framing a tendency you need enough transactions and statistical sample. We can’t make proper assessments today as the transactions are not enough. Therefore I don’t have any idea about current trends, but I don’t have an expectation for a positive trend for sure. Nevertheless keep in mind that demand is drying up, but supply is going in the same direction. So it’s too vague too make any conclusions at the moment.
The price elasticity of demand is very rigid. The demand doesn’t follow price reduction. Small decrease of price does not stimulate demand. If there is expectation that prices can go down by 80% and then customers can move in, I can surely say that it’s not going to happen. Simply because whoever does that will automatically go out of business. I don’t think that reduction of prices by construction companies has shown us any impact because of price elasticity. This crisis is not driven by prices it is driven by lack of liquidity therefore price drop will not solve the issue.
As for offering discounts it will only be in the form of promotions. We usually have Christmas and summer promotions. But I want to say that we are not going to have permanent price cut at the moment.
Q. How successful has 2008 been for Iberia, did you see a profit or losses?
A. Despite the war and financial crisis, the previous year was still profitable for us. From 2003 to 2007 we had a growth rate of roughly 50%. It levelled off and went down to a 15-20% growth rate. It’s obviously not surprising as we put some projects on hold.
Q. How big are the liabilities of Iberia to its creditors?
A. Any business is connected with risks. We do believe that our company is liquid and net asset positive.
Written By Levan Lomtadze
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