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Morgan Stanley Purchases a Russian Mall

January 17, 2012 | About:
The largest mall in St. Petersburg, Russia, is the newly opened Galeria. The mall opened in November 2010 and houses 290 stores in 1 million square feet. The mall includes a large selection of Western brands including Adidas (ADDYY), Bebe (BEBE), and the Gap (GPS). The five-story mall cost over $380 million to build according to some sources and a reported $500 million by other Russian sources. The Galeria includes a multi-screen movie theater that includes IMAX, a 27-lane bowling alley, and enough parking for 1,200 vehicles. The top floor boasts a massive arcade.

Morgan Stanley (MS) will be closing a deal at the end of this month to purchase this mall according to Simon Packard of Bloomberg. The Galeria is currently owned by the Meridian Capital CIS Fund, which is backed by an unidentified group of Kazakh investors. The Morgan Stanley Real Estate Fund VII will be purchasing the Galeria from Meridian Capital for a reported $1.1 billion. The MSREF VII includes backers such as China Investment Corporation, Canada Pension Plan Investment Board and the Government of Singapore Investment Corporation.

Investors recently approved an extension until 2013 to invest the money the fund has raised. Lower management fees have also been recently negotiated along with a $700 million reduction in commitments to their fund. According to analysts the mall provides a rental income of around $100 million annually. Not accounting for inflation, it will take Morgan Stanley 11 years to recoup their investment.

Last year commercial real estate sales in Russia were down 15% from 2010, totaling $6.3 billion. That number is 48% less from commercial real estate sales in 2008. Russia has currently seen the largest wage increase in three years. This contributed to an 8.6% increase in retail sales. The Russian economy as a whole grew 4.5% in 2010, presumably as a result of wage increases and consumer spending. The increase in spending is bringing international brands into Russia. By the end of 2012, developers will open an estimated 3 million square meters of retail space in Russia.

If Morgan Stanley (MS) is looking to build a residual income base this might be an ideal play for the fund’s long-term interests. Morgan Stanley, similar to other large financial services firms, has lost a lot throughout the recession in the way of share price and reputation. Although Morgan Stanley (MS) does pay quarterly dividends, a yield of 1.2% is not much of an incentive. Their debt to equity is a little off-putting as well. However, moving into Russia’s commercial real estate market does count as a smart play on their end.

About the author:

Mary Posey
I am an avid fan of financials and investing. I regularly contribute to Seeking Alpha as well.

Visit Mary Posey's Website


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