Land development in Russia – a disappointment

2010 was a year when most investors and investment companies looked ahead. The financial crisis lied behind us and there were a number of investment opportunities with attractive valuations. One investment area that seemed promising at the time was land investment in Russia. The Russian population had very little housing debt, land cost was low, and there was a huge surge in demand for housing.

The company “Jibréus & Ölvestad Alternativa Investeringar” (www.alternativainvesteringar.se) is a Swedish company focusing on marketing and selling alternative investments. In this case Alternativa Investeringar was the investment broker for “Realfond Ryssland”, a newly founded company (fund) with the aim to seize the attractive land investment opportunities in Russia.

 

The business idea was simple: to buy large plot of lands in attractive areas near large Russian cities such as Moscow, divide them into smaller pieces and create roads and electricity to the property borders to prepare them for building houses, and finally sell them off with a high profit. The investment period would be three years and the investment would be a closed fund during the period. One of the company’s current board members (I believe he started as the CEO of the company) had done similar business before in Russia and claimed that 25% yearly returns would be achievable. It sounds good, doesn’t it? I believed him, and so did others. My wife and I invested with this company with high expectations - 25% per year would almost double our money in three years!

So how did it go…?

Well, now a few years down the road we have the results. 25% per year became roughly 1,5% per year… (I bought the fund shares for 115 SEK and now three years later it is worth 120 SEK).

Apparently, the reason why this investment hasn’t developed as planned is that the company is facing a lot of competition which they hadn’t foreseen (the Due Diligence seems to have been missing when they did their analysis… and maybe we should have done one as well J). And this has led to another problem, not only is the return extremely low compared to what was promised (or “predicted” as they say – not promised), now the company has problems liquidating the fund without making a bad deal with the purchased land. So the solution offered to all investors is to convert the shares in the investment fund into a property developing company called Norrpada (www.norrpada.se). Norrpada would bring a value-adding component to the investors and the investment fund by building houses on the invested land. Thereby the land would be easier to sell and it would also increase the returns on the investment. The company Norrpada aims to go public in 2014 which would create a possible exit strategy for the investors in Realfond Ryssland. But suddenly having stocks in a public traded company creates the risk that the share price might drop if the company’s plan doesn’t live up to expectations, and of course we have the psychology factor on the market... However, this seems to be the only viable option for us investors in Realfond Ryssland because it would be extremely difficult to realize our invested money if we stay in the investment fund. So, let’s hope that Norrpada is the path to success this time… I will update you how this adventure goes...