Eyal Fishman: «Luck cannot be entered to Excel»
Chairman of the Board of Directors at the investment-industrial holding Fishman Group, Israeli tycoon Eyal Fishman, explained how investors choose properties for their financial investments, compared European and Russian markets and elucidated the role of luck in development business.
Commercial Real Estate #2 (223)
– Two years ago, you had stated that you were going to «move abroad” and to sell your real estate in Israel. Have your plans been realized?
– I was not talking about any intentions to stop our business in Israel; I was saying
that in my country we were reducing a volume of business. Of course, we are not
– In which countries, except Russia, does «Fishman
Group» operate? in which new markets do you invest?
– Since the beginning of crisis in 2008, we do not enter new markets. The exception is the U. S., where immediately after the crisis there were good investment opportunities; and in order to take advantage of them, in 2010, we had completed several transactions there. In general, over the years we’ve been working in 14 countries. Today, the greatest share of Fishman Group’s investment is in France, Germany, Canada and Israel. However, it is quite possible that in the near future our investment portfolio in Russia will swell, as our business in your country is growing faster. Two years ago, our share in Russia was only 10%, and today Mirland Development Corporation, which was created for the implementation of investment projects in the Russian real estate market accounts for 17% of our investment portfolio. We hope that very soon the share of Mirland Development in our investment structure will be over 20%.
– Soon – when?
– As soon as we acquire new land plots.
– And do you have such intention?
– Of course.
– In one of your interviews you said that investment climate in Moscow is not favorable any more for entrepreneurs from Israel, but outside Moscow – there are more opportunities… Does this mean that now Fishman Group is interested in more distant from the center of Russia regional markets?
– I think I was not correctly translated. And I meant that Moscow as a city – it is just the other rules, more complex ones. Although, of course, compared to what it was before the crisis, the yield of completed projects – for example, in commercial real estate – has become much lower. In addition, competition has intensified. So based on this the average deal price in Moscow is too high for Israeli investors.
However, at the same time, I am pretty much sure, that if an investor has enough money and is not time-pressured, then development in Moscow is still profitable. And so for us Part of Our strategy is to diversify geographically – Moscow, St. Petersburg and Russian regions. But, like any other company, Mirland Development is limited in its capabilities – particularly in human resources, and cannot simultaneously develop 100 projects at once – we first need to finish what we started. In 2006–2007 years, we have made several land plots acquisitions which found to be rather profitable, and we succeeded to develop there our real estate projects. For example, Mirland has successfully completed «Triumph Mall» shopping center in Saratov and «Vernissage» mall in Yaroslavl, as well as «MirLand business center” in Moscow and cottage settlement in the country- side. At the same time, as a development company, we are in a very good position as the balance between our loans and the value of our investment portfolio is just perfect. Now we are ready to invest into new projects, and now we are looking for suitable land plots.
– What is the minimum investment return rate for you, below which you’ll never go in any country of the world?
– If it is a commercial real estate, we are looking for rates around 13–13.5%, it means a payback period of 7–8 years.
– You are talking about the Russian market now. In Europe the yields are lower and payback periods are longer…
– Of course. However there is no such a significant difference as it used to be before the crisis. In the suburbs of Paris or London, you can find a very good project with a yield of 9%. There is a different situation in the central part of those cities. For example, properties in Oxford Street in London show 5% yield. And more or less the same situation is in Moscow downtown where the yield of commercial projects is around 7.5%. You can buy a completed yielding building, but no one will start construction at such investment returns rates, because it’s not possible to get a bank loan for less than 7% per annum. Therefore, for developers there is no sense to buy such projects – those projects may be interesting for investment funds, or for high net worth Russians who consider such investments as conservative ones. Situation outside Moscow is different.
So every time you compare, you should compare locations rather than countries. You cannot say about country’s specific market.
– What is your recommendation for investors in Russia?
– The most important thing is to build in the right place for a reasonable price and to maintain a balance between loans and the size of the investment portfolio. In Russia, it is very important – not to take loans that exceed 50% of the value of your portfolio – even if you have to say “no” to some project. Otherwise, there will be problems.
– What is the criteria in Russian market that investors define as the most attractive and stable?
– I think that Russia has a great potential for shopping malls in the regions and business centers in Moscow and St Petersburg. Although all varies from project to project and effected by the duration of development. When we entered the Ukranian market for example, Fishman Group had one mixed-use project in Kiev – a shopping mall and a business center. The shop- ping mall looked more attractive from the return on investment perspectives, than offices. Once the construction of the shopping mall was completed, tenants terminated their preliminary lease agreements. On the opposite, offices have started to show a huge demand exceeding our expectation by 25%, and covered our decline in the income of the shopping mall.
– If the market changes so fast, it means that it is impossible to calculate the prospects of the project.
– Most probably, yes. However, business risks are part of the game. The development process is very long in any country. In addition, during the project delivery anything may happen. You can buy a land when the market is in recession, and by the end of construction the sales prices will go up, and the project will be much more profitable than initially anticipated. At the same time, you can start construction in the time of market recovery, then prices will fall down, and you lose. You know, at the time Napoleon said: I do not need the most genius generals, I need only lucky ones. Therefore, it is here. Yes, of great importance is professional director, competent management, experienced team. But if there is no luck, I believe that nothing else really matters. Real estate developers need luck as well as Napoleon on the battlefield.
– And where can we get luck? Perhaps there is a success formula, a certain sequence of actions, which any successful businessman adheres to?
– I think that luck cannot be entered to Excel. Today, it smiles at you, and tomorrow it turns away from you… There is no universal formula. It is impossible to calculate everything, to consider all force majeure and to make the project “shine” under any circumstances. Remember the crisis in Russia in 2008–2009. Because there was no prerequisites, and the economy was in good condition, all developed steadily upward. However, suddenly there was a crisis in the U.S., which had then come to Europe, and Western investors were forced to withdraw their investments from the Russian economy. As a result, many prosperous development companies in Russia went bust.
– Should we expect foreign investment in the Russian real estate market – and in St. Petersburg, in particular – to increase in the near future?
– I did not analyze the situation in details, but I think that now the market in your country is quite stable. Although again it is necessary to understand how the foreign investor evaluates opportunities. Of course, first, he looks if the country is stable or not. Then comparison of opportunities starts. And if one country is good, but the other one at any point or aspect, even the most insignificant one, is a little better, the investor will invest exactly where pros outweigh cons. It does not matter if it is Russia, Israel, France or any other country. Those rules apply for any country.
– During one of your speeches you accepted the fact that from the point of view of business «there is no country better than russia. it has no restrictions.” Did you really mean russia has no restrictions?
– In fact, I was referring to Israeli investors who have invested a lot in Eastern Europe without getting any traction in the end, about the enormous scale of Russia – and the territories, and finance, and development potential. I meant that Russia has no limits. The fact is that most Israelis do not understand that Russia and Eastern Europe – is not the same thing. I explained that Russia is a separate country and cannot be compared to a small Eastern Europe. The same applies to Russian and Eastern European markets. As for the legal restrictions, I do not think that in Russia they are higher than those in Israel or elsewhere. Moreover, the lack of regulation in business can cause irreparable damage to the economy. Undisputed rules are always good, they protect us. For example, in shopping cen- ters, after a series of fires, there are new fire safety regulations. And if we do not want people to be burned, we have to follow them.
– How old is the concern «Fishman Group» present in Russia?
– We’ve created Mirland Development Corporation in 2004 and for the 10 years in your country everything has changed incredibly. Everything changes very fast. Starting from Lada that virtually disappeared from the streets, and followed by people’s men- tality, their way of living, level of education, etc. I can tell this as the one having experi- ence dealing with our partners and employees. The level of specialists has risen.
– what event in the global real estate market do you think is most striking in 2013?
– Nothing extraordinary. It was the most stable and maybe even the most boring year in the history of real estate. No crises, no ups or downs. I think that’s fine/perfect.