Taurida Darkness


Commercial Real Estate, # 9 (230), May 2014

A month after Crimea joined Russia some real estate market participants act as if "there were no real estate in the region", while others "in accordance with the state vector were willing to invest even the next day". The most daring will be winners: there might not remain places on the peninsula for those who have decided to "wait and see".

While many Ukrainian companies are rapidly scaling back business in Crimea, according to the estimates of Rustam Aliev, partner at Goltsblat BLP LLP, the Russian investors are not showing much interest in investing in the region. However, taking into consideration the fact that Vladimir Putin announced an accelerated development program for the territory and its integration into the Russian economy, as one of Russia's priorities (as part of the federal government, the Ministry of Crimea was created and a plenipotentiary of the president was appointed), the big players may significantly accelerate their investments into the region. "The Russian government has already announced tax benefits for investors, who will implement projects in Crimea," as Roman Tkachenko, head of RD Group in Russia, pointed out. "The interest of the state in the development of the peninsula and the establishment of special economic zones increase the investment attractiveness of the region - for Russian as well as foreign investors."

Crimeans themselves believe that this Ukrainian businessmen's "holy place" will not be empty for a very long time. "We are not monitoring the situation in real time, but I believe that the Ukrainian retailers will leave the market," reflects Elena Nikitenko, director of economic development department at Yalta City Council. "However, we get several calls a day from Russian business representatives who are willing to come to Yalta. We are very flexible and ready to work with investors in real time, even in this difficult transition period. From 1991 to January 1, 2014, Crimea attracted foreign direct investments of $1,608,912,000 and about 50% of these were from Russia. Thus, the investment picture has not changed a lot for us: we are waiting for Russian investors, just like during the previous 20 years, and the government will only further intensify its work on special programs."

According to Alexander Tyulenev, partner at the Renaissance Real Estate Agency (Crimea), it is already possible to speak about the positive prospects for the real estate market on the peninsula, especially in medium and long-term projects. "This is primarily due to modernization of the infrastructure of the peninsula, which has not undergone major changes over the past years as a part of Ukraine," continues Mr. Tyulenev. "However, even with the rapid modernization projects in the field of transport, energy and other sectors, some tangible results will appear only in two or three years. At the same time, these circumstances will allow investors to enter the market of the peninsula with minimal start-up costs during the acquisition of sites, facilities and companies. Especially taken into consideration should be the limited or no high-quality supply in some segments."


However, Russian experts have assumed an "active waiting position", when speaking about the "positive perspectives". According to Irina Onikienko, partner at Capital Legal Services, it is obvious that this region will develop due to transfers from the federal budget and attraction of financing from companies with state participation, and only in last instance - by means of Russian private development projects. "It is possible that there will be interaction between the state and business in the form of public-private partnerships," said Irina Onikienko. "The current political situation, including international legal sanctions against Russia, virtually eliminates a number of potential investors among foreign companies."

In Capital Legal Services, they believe that the greatest difficulties for investors will be associated with the transition. "We need to prepare and reform all legal and public institutions and authorities," the expert continues. "The creation of a single legal space of Russia and Crimea is declared de jure, but de facto it does not exist yet." The lawyers refuse to speak about the specific dates of a "full legal unity", and this is explained by the fact that many things will depend on the work of Moscow representatives of the federal government and the funds, allocated by Moscow to reform state and legal institutions. A five-year period is the most realistic. Meanwhile, real estate market participants may face difficulties in matters of inventorization and real estate property registration, property identification, legalization of unauthorized buildings, and fixing of borders and land titles. In connection with the latter, the experts do not exclude many lawsuits. "These are important questions," agrees Mikhail Tarasov, managing director of UFG Real Estate. "And now it is very difficult to convince investors that they will have full legal purity while investing. It will take time to normalize the situation, to complete the legal documents correctly, to form cadasters, registers and a database without technical errors. We are very happy to talk about the Crimean direction to our investors, considering it a promising one, even though the economy in this region is now in second place, and politics - in first place. Investors, who want to invest for a long period of time, are interested in the stability of the region, as this is the most important factor. It is necessary to wait until the situation calms down in Ukraine, the International Monetary Fund allocates funds, Ukraine finally forms an opinion on Crimea, and Europe starts to change its opinions and attitudes."

The region with an unclear legal regime always represents a risk to any institutional investor, says Rustam Aliyev. However, if a favorable economic environment is created and political risks are eliminated, it is not a problem to create the legal environment. "In addition, we must understand that in the mergers and acquisitions market, not only local laws are applicable, but also various international instruments that have long been established and will not require a significant correction (for example, English legislation)," the expert recalls. "This applies both to the real estate market and other areas of mergers and acquisitions." At the same time, according to Sergey Yelin, managing partner of Audit and Law, an audit and consulting group of companies, Crimea auditors, lawyers, and appraisers will need considerable time to adapt to the new realities. "Even in the most intense training mode, it will take at least one year," the expert believes. "There are a lot of specific nuances in public procurement as well."

Meanwhile, the Ministry of Economy of the Russian Federation has prepared amendments to the legislation, according to which the re-registration of real estate in Crimea and its inclusion in the cadaster should be completed by 2017. It is assumed that Crimea and Sevastopol real estate, ownership of which was executed after January 1, 2013 (when in Ukraine a unified system of registration was launched) will be automatically included in the Unified State Register of Rights (USRR). As for the other objects, rights are also recognized and will be processed under the simplified scheme. "Obviously, it will be necessary to re-create the system of cadastral registration of real estate, which can take a year or two," shares Nikolay Vecher, FRICS, vice president and partner at GVA Sawyer. "Another problem would be the rise of construction costs due to increase in transportation costs: the maritime means of transportation is the main method of shipping construction materials. Here it is worth mentioning the overall increase in real estate prices: incomes of Crimean residents growing to the Russian level will inevitably bring an increase in prices."

As a result, Crimea in the next six months will remain terra incognita for the great majority of players. However, according to Mikhail Tarasov, the Crimean market right now, despite the moratorium on real estate transactions, is experiencing rising prices - by 30-40%, in comparison to 2013. "However, due to the geographical isolation of the peninsula, in the implementation of new projects, there may appear problems with logistics, so most investors have taken a wait-and-see stance," reflects Alexey Gulevsky, head of consulting at Astera, an allied member of BNP Paribas Real Estate network. "It will be possible to speak on the prospects in a year's time. Until there are bridges built across the Kerch Strait, it will be difficult to achieve sustainable economic development of the region. Implementation of infrastructure projects, by contrast, will give a powerful impetus to the development of Crimea." Denis Kolokolnikov, chairman of the board at the RRG Group of Companies, recalls the Sochi experience. "We have seen how the organization of a global event is fully capable of motivating the creation of good infrastructure, including modernization of the airport and the railway network," continues Mr. Kolokolnikov. "Crimea needs no less work, and of course, this can be done only by means of a serious involvement on the part of the state."


According to the preliminary analysis of the largest agglomerations of the Peninsula, conducted by Torgovy Kvartal Development, despite the presence of a significant amount of Ukrainian and international retail operators, the retail real estate market in the Crimea is underdeveloped. "We have identified several cities that may be of most interest to federal and international developers of retail real estate: Sevastopol, Kerch, Evpatoria, Feodosia and Yalta," lists Andrey Chmutov, general director of Torgovy Kvartal

Development. "Speaking about Simferopol, according to our estimates, the potential new input of quality retail real estate in this city is close to zero: there are several high-quality shopping centers, the total amount of which exceeds 170,000 sq m."

Torgovy Kvartal Development notes that the retail real estate market of the peninsula is promising, in terms of low levels of competition. However, companies see some risks due to weak socioeconomic indicators in the region. "The average wage at the beginning of this year is about 10,000 rubles, which is more than two times lower than the national average," continues Andrey Chmutov. "This may cause low purchasing power and, as a consequence, low turnover and weak revenues for retail complexes. On the other hand, the seasonal factor is of great importance, as in the summer time, the Peninsula is visited by several million tourists. The degree of influence of these factors on the market, as well as the peculiarities of local consumer demand, requires a detailed study, the results of which will predict the levels of rental rates, attendance, conversion and other performance indicators of the shopping centers."

Rents in the professional shopping malls in Crimea today constitute from $600 to $2000 per year. "There are very few professional operators in Crimea," says Alexey Gulevsky. "It is necessary to list among the major retail chains such players as METRO Cash & Carry, Auchan and the Ukrainian networks (ATB, Silpo, etc.)." It is not surprising that the experts see high prospects for grocery hypermarket networks on the peninsula. However, these are not hurrying to open their shopping centers in Crimea. "Representatives of Lenta Company attended the meeting with the government of Moscow Oblast on the issue of cooperation with the manufacturers of goods from Crimea," says Yana Mogileva, public relations specialist at the Lenta Company. "We listened to the government's proposals to support Crimean winemakers. The question of extending the range of Crimean wines and cooperation with manufacturers will be analyzed in due course, and we are ready to hold talks with the manufacturers. It should be noted that the Lenta Company has been successfully cooperating with Crimean manufacturers for a long time already: there are 20 varieties of Crimean wines in this hypermarket's chain stores."

Moscow jewelry retailers have clearer plans. "We consider Crimea a region of promising development," says Maxim Weinberg, executive director of the Adamas Company. "In terms of the presence of federal networks, the Crimean market is far from saturation, which gives us reason to anticipate high demand for the entire range of Adamas' products: both classical gold lines and youth brands, such as APM, Monaco and Agatha, oriented to fashion- consumption." The company notes the advantages for jewelers in the region: huge tourist flows and the traditional "southern" attitude toward jewelry. At the same time, the other major jewelry company, Valtera, compares the peninsula with a lottery ticket. "One can win, but it is more likely one will lose and remain without means," says Alexander Seregin, director of marketing at Valtera. "And I would wait for good commercial prospects at least until the situation in Ukraine stabilizes."

In any case, Crimea was undervalued in terms of demand and investment in the last 20 years, Daria Yadernaya, managing director of the Esper Group is sure. "There is a battle in the field for a lot of new brands, shops, and as a result - for retail sites, not only in clothing, but also in other areas," says Daria Yadernaya. "However, the limited paying capacity, rising costs and prices cannot be redeemed by Russian investments: it will take time to rebuild retail business models in this area. Much will also depend on the possibility to determine the influx of foreign demand in the area, in the form of tourism, to develop the investment zones, to expand employment on the peninsula. Crimea has an enormous potential, but the restructuring phase will be long and quite painful. At the same time, it is impossible to postpone entry onto this market: a holy place is never empty, and after a year or two, the market can be divided in such a way that it would be difficult, time consuming and expensive for new players to develop in it."

The peculiarity of international brands in Crimea was entrance only through franchisees (master franchisees, coordinated at the Moscow-Kiev level). The mass-market franchisee brands are represented largely by themselves, and it is unclear who should take responsibility for them, say the representatives of the Esper Group. Franchisees often used other warehouse programs and overall software. They created their own product strategy, the logic of which might have been unknown to the head office. In addition, when the supply of goods was made from the Russian territory to Ukraine, it passed from Kharkov to Crimea, which was the Ukrainian territory. Now due to Ukraine's non-recognition of Crimea's borders and belonging to the Russian Federation, any goods coming into this territory may be considered contraband. This significantly complicates the work of logistics.

Controversial issues arise when dealing with supplies from China. "If the goods are supplied by air, then shipment directly from Russia is much more expensive, and at the same time, the processing of air cargo in Crimea, of course, is not greatly developed," says Daria Yadernaya. "As the Ukrainian hryvnia currency was weaker, compared with the ruble, the transport costs and customs duties were lower for goods coming from the EU and China, the cost of goods was lower. At the moment, the prices have increased by 10%, and they can grow another 10% by the end of summer, and this is not the limit. Moreover, this increase of prices is observed in the background of limited demand, which is not ready to expand, even if they move to Russian wage levels."

Since most of the lease payments are denominated in dollars, there will not be a significant growth in leasing of shopping centers and street retail in Crimea. Esper Group representatives believe that opening of the market for Russian developers would mean expanding the pull of more competitive, in terms of quality, commercial real estate premises and additional services. This would mean "differentiate or die" for the existing shopping centers. This fact will require additional investments for modernization, which has to be finished before the competition comes into full force. "This will require funds and they will be taken from the tenants," believes Daria Yadernaya. "Another aspect is the entrance of a larger number of Russian retailers into the Crimean market. Many of them have had no prior experience with Ukraine or were forced to leave because of bureaucratic problems (Finn Flare), now they can come to Crimea."

This region is quite controversial in terms of development of the professional retail real estate and retail, agrees Martin Lundvall, general director of Retail Profile Russia. "This is connected not only with political risks, but with the ambiguous macroeconomic situation as well. For example, the weakly developed industrial production meant the region was more subsidized (the situation was the same when it was a part of Ukraine)," says Martin Lundvall. "If we talk about the coming of the big players, such as Retail Profile Russia, to Crimea, we, being a company working in the field of commercialization of shopping centers, always follow the developers and commercialize something. Thus, something must be built first. We could be interested in Crimea as a new platform for development, but first the professional federal and international developers and investors must come." For the same reason, Russian restaurant investors are in no hurry to invest anything in Crimea. "Krasnodar Krai is the only interesting resort destination," says Alexey Gisak, founder of the Vokker Company. "As for Crimea, we are not interested in going there ourselves, but we are ready to sell franchises."

In this regard, although restrained, the retail players might be interested in the warehousing segment. According to the Renaissance Real Estate Agency, now Crimea has a number of professional warehouses and storage premises, including specialized ones, but soon the demand in this segment may exceed the supply. According to Evelyna Ishmetova, development and consulting director at the Land Service, the creation of quality warehouses, in relation to the entry of retail real estate in the region, will lag about three years. "At the moment, our company is working on requests for the selection of land in Crimea through our local partners," says Ms. Ishmetova.

Investors will be less interested in business centers in the next five years. "There are very few of them in Crimea, and they do not seem to be professional ones. 'Class A' business centers are absent in Simferopol and Sevastopol," says Alexander Tyulenev. For this same reason, there are no professional management companies, and many owners, carrying out projects in the field of commercial real estate, often employ managers without any experience. According to Andrey Sinyavin, director of consulting at Sawatzky Property Management, after having completed the integration of Crimea into the Russian Federation and the settlement of all legal issues related to the status of the republic and the issues of doing business on its territory, management companies operating in Russia, will seriously consider the opportunity to work with objects in Crimea as well. "At the same time, in the next few years in Crimea, there will be a great demand for qualified personnel for the professional management companies," continues Mr. Sinyavin. "Therefore, companies will have to pay more attention to providing support, for facilities on the peninsula, from their headquarters and the necessary standards for the training of local staff."

In parallel, the largest Russian services providers may appear on the market: to start renting out space, for example, in the new business centers. "There are no serious offers in the services rendering sphere in Crimea, the market is not developed, and it is little studied and understood by the average Russian businessman," says Dmitry Nesvetov, director of the Diana Group of Companies. However, the one who first dares to enter this market, from our segment, is more likely to win than lose."


The main destination for investment, according to all surveyed players, will be, of course, tourism. And although some representatives of international hotel brands privately said that "Crimea does not exist for us", while others complained about the "savagery" and the "habit of cheapness" of the local tourists, almost all hotel brands are likely to open hotels here in the next five years. "No one has forgotten that at one time, Crimea was the first and the best resort of the USSR," says Mikhail Tarasov. "And this will become a great direction for investors in this sector." However, the "active Russian presence" in this segment was always observed. "The owners of hotels in Crimea are Sberbank, Gazprom, Lukoil, Alexander Lebedev's National Reserve Corporation, and many others," lists Alexander Tyulenev. VTB and Konstantin Grigorishin's Energy Standard possess sites for the construction of shopping and recreational facilities. Ukraine did not invest into Crimea because of weak capital concentration, leading to low level of awareness of Crimea on the international resort market, says Nikolay Vecher. "As a consequence, in Crimea only six hotels are managed by international operators, although, there are 225 hotels and 650 guesthouses," the expert continues. "The mini-hotel market (10-15 rooms) is more developed in Crimea. There are about 3,000 such objects. Nevertheless, the demand for hotel services on the market for everything that is called hospitality (hospitality as a business) is very high. "

Difficulties in entering the Crimea hotel segment, according to Marina Smirnova, partner and head of hospitality real estate at Cushman & Wakefield, are traditionally associated with seasonality, poor infrastructure (transport, roads, sufficient water quality, electricity, etc.), limited by the geography of demand and low purchasing power on the domestic market (holiday home projects). "At the same time, Crimea has huge hotel and therapeutic potential," continues Ms. Smirnova. "In addition, the high risks are promising high incomes - at the moment the situation reminds of Montenegro in late 1990s, and there is a unique opportunity for "inexpensive" entry onto a promising market." Several projects in Crimea are now being considered by the RD Group. "We cannot disclose the details, but these will most likely be multifunctional complexes, including the construction of hotels and related entertainment infrastructure," says Roman Tkachenko.

Thus, now the Crimean authorities face the task of returning all-seasons tourism to the region, as well as the active development of spa destinations. "Yalta was once a leader in investment attractiveness," says Elena Nikitenko. "We have everything to develop not only traditional, but also pilgrimage, 'green' and other types of tourism. It is necessary, according to the leading players in the hospitality industry, not to repeat the mistakes of Sochi, with its chaotic building of private boarding houses "in a new-southern style". The most attractive places, in general, should not be made available for mass construction, they consider at Cushman & Wakefield.

It is significant that Crimea's annexation has already created difficulties for the development and adaptation of Sochi in the post-Olympic period. "Now Crimea will compete with Sochi and other Russian resorts," reflects Alexis Delaroff, general director of Accor Hotel Services in Russia, Georgia and the CIS. "In the near future, the peninsula will remain a resort for Russians and Ukrainians, and in order to attract tourists from abroad, it is important to make significant investments into the tourism infrastructure. With regard to international tour operators, they largely depend on whether local investors are willing to invest into the region." According to Alexis Delaroff, Accor has no specific plans for Crimea, but they are ready to consider the possibility of entering the peninsula. "Some incentives are needed for business to enter here," said Yuri Savelyev, member of the presidium of the All-Russia Association of Small and Medium Enterprises OPORA. "For example, it is necessary to exempt these companies for five years from federal taxes and insurance premiums, leaving only the direct expenses - staff salaries and electricity costs. During these years, entrepreneurs themselves will develop the infrastructure: will build the necessary facilities, improve airports, equip ferries, develop the retail network, hotels, and agriculture. All these things will ultimately make Crimea a self-sustaining territory, which will not depend on the state and, on the contrary, after five years, the region will enrich the state budget with additional resources in the form of tax deductions. We now have only 8-10 non-invested regions, the rest are helped by the state in one form or another, so it is important not to miss this opportune moment." Meanwhile, according to Mr. Savelov, due to lack of competition and high-quality supply, the prices are very high in the hotel and services sectors.

Now representatives of Russian businesses are greatly helping Crimea. "My recent trip to the Alushta Aromatic Sovkhoz-Factory was voluntary," says Galina Annie, founder of the Moscow perfume club and creative laboratory of vintage fashion - the Sweet Sixties. "This year, the economy will face a shortage of workers in the harvest period for roses (first half of June) and lavender (July). Previously, this factory signed contracts with Ukrainian universities, and students came there, but now, for obvious reasons, universities are unlikely to send students to help this factory." Crimean authorities have called such steps by Russian businesses "very noble", saying that they are waiting not only for investments, but also for "any kind of help" from the Russians.

Contact details


If you would like to receive our legal alerts and updates highlighting current legal issues relevant to your areas of interest and providing expert commentary by our lawyers, please click on "Sign Up" and fill out the form.