Real Estate Investment Compartment shall consist of different classes of Participating Shares which could be created or liquidated by the decision of CIO approved by the Board of Directors. For the time being there shall be four Classes of Participating Shares as follows:
Class “RE1” Participating Shares
Residential development projects
Investment product for investors with long-term investment profile. The Company looks for suitably located plots of land to acquire freehold/leasehold rights to build residential buildings/complexes or to acquire existing undervalued properties for further development and/or to sell/rent out.
Class “RE2” Participating Shares
Investment product for investors with medium-term investment horizon and with preference to steady revenue stream over asset appreciation. The Company targets middle-class-oriented segment of the market and subsequently hotels and tourist apartments ranked between 2 and 4 stars, preferably with long-term management contract with established hotel operator. This kind of real estate investment presents opportunity to receive decent ROI for a number of years with significant potential upside in the price of the acquired real estate itself. At the same time assets within this Class of Participating Shares can include vehicles, boats and planes to be leased out and/or used to service hotel-type properties in possession.
Class “RE3” Participating Shares
High-street & prime location retail properties
Investment product for investors with low risk tolerance and long investment horizon. This is going to be case-by-case investment as on this market demand is high and supply is low.
Class “RE4” Participating Shares
Investment product for rent-seeking type of investors. Investments into office premises having long-term lease agreements with first-class tenants and/or currently underpriced with significant upward potential pricewise. Another option is to buy such premises on the stage of construction or redevelopment to benefit from price surge when the construction is finished and offices are set up to be up and running.
The investment strategy used for this compartment is a combination of “bottom-up” approach with dividend investing. We strongly believe that potential targets should be cherry-picked within the generally well-performing asset type. At the same time our goal is to identify an asset which will be delivering good ROI while in the portfolio through lease payments by tenants.
When evaluating potential target for acquisition or asset in portfolio for disposal, Chief Investment Officer uses two approaches combined:
Maintenance strategy: CBM (Condition Based Maintenance) – Continuous or occasional monitoring, maintenance when required,
Asset simulation: an approach to predict the long term monetary consequences of maintenance and renewal strategies for real estate,
Diversification: geographical and through acquisition of different types of real estate assets
Benchmarking: validation of quality of assets in the portfolio through comparison with available sector data
The nature of Investment in Real Estate and other kind of Property as described above is such that the Company may not be a suitable investment for investors other than those who are knowledgeable in investment matters, are able to bear the economic risks of the investment, understand the risks involved, believe that the investment is suitable for their particular investment objective and financial needs and have no need for liquidity of investment. Should any non professional investor invest in the Fund, it is advisable that only a part of the sums that an investor intends for long—term investment should be so invested. It is also advisable that they should seek advice from a professional investment advisor before making the investment.
The Company’s investments in real estate will be subject to various risks including risks typical to real estate investments. In case that the Company’s investments do not generate sufficient income to cover its expenses, including the servicing of possible loans, the Company will have to increase its debts. This fact would have a serious negative impact upon the extent of the Company’s profit and therefore upon the extent of the profit attributable to Shareholders.
The income, the profit and the value of the real estate and other properties owned by the Company might be unfavourably affected by various factors: the market situation; the ability of the Company to provide effective management, maintenance and insurance; the business climate in the country, etc.
Unfavourable changes in market prices. The large part of the assets of the Company will be invested in real estate. Because of this, the dynamics of the real estate market prices including the rental and construction prices and other related services (insurance, maintenance, etc.) to certain extent will have a decisive impact on the Company’s profits and the Company’s capital value.
Reduction in the real estate market prices and prices of other properties. The Company is expected to realise a substantial part of its profits by subsequent sale of the properties acquired by it. Therefore, the market prices of real estate and other properties could have a considerable impact on the profitability of the Company. It is possible that a reduction in assets’ prices would reduce the profit of the Company and negatively affect the cash payout paid out to the Shareholders.
Reduction in Rental Rates. The profits of the Company from rental of real estate depend on the rental rates in the respective real estate market sub-sectors. Therefore, a reduction in rental rates would negatively impact the profits of the Company. The trends in rental rates are expected to be of significant importance to the profits of the Company because a large part of them should be realised through rental of real estate. The Company will aim at reducing the risk of potential rental rates reduction by entering into long-term lease agreements.
Increase in insurance premiums. The Company will insure all properties owned by it. A significant increase in real estate insurance premiums would negatively affect the Company’s financial results. Because of the relatively small extent of these expenses, the insurance premium extent will minimally affect the Company’s general profitability. To reduce the insurance premium the Company will seek optimal offers regarding insurance coverage and insurance premiums, including holding procurement tenders among the insurance companies and using the assistance of insurance brokers and agents.
Delay in Real Estate acquisition. The Company will invest the capital raised (and subsequently the funds gained by the sale of the possessed property) in real estate. It is possible to have a considerable time lag between obtaining the funds and their investment in real estate property because of lack of supply of attractive real estate or properties satisfying the Company’s requirements, and due to legal and factual complications related to property transfer. During such periods the available funds will be invested in bank deposits and highly rated short term government bonds. Most probably the income from these investments will be lower compared with investments in real estate, which will reduce the total return on investments. In order to control this risk the Company will plan its cash flows looking for flexibility in its financial leverage, in order to avoid keeping larger than required monetary positions for long periods of time.
Illiquid investments. Real estate and other property investments are characterised by a greater difficulty and sometimes even impossibility to sell quickly and with minimum transaction costs at the current market price. Because of this, the ability of the Company to undertake rapid changes in its real estate and other property portfolio in response to changes in economic and other conditions will be limited. There is no guarantee that the Company will succeed in selling assets in due time or that its sales price will exceed its acquisition price. Considering the liquidity risk, the investment strategy of the Company foresees real estate purchase / construction with attractive location, which should guarantee its eventual sale within comparatively short period of time as well as acquisition of shares, stocks and convertible debt instruments issued by small and medium-sized enterprises with high growth potential which also should provide for reasonably quick disposal of those if the need arises. In order to meet short-term cash requirements, part of the Company assets will be invested in liquid instruments (cash, current bank accounts, bank deposits with term of up to three months term and securities with term to maturity of up to 90 days). The Company will manage its liquidity by means of continuous monitoring and forecasting the cash flows.
Company’s dependence on tenants. The Company will be dependent on the tenants of its properties for a significant part of its income. Hence, the Company will be dependent on the financial stability of its tenants. In case the tenants have difficulties in paying their rent, this will reduce the Company’s cash flows. If this persists for a considerable period of time, it is possible that the Company might not be able to cover the payments on bank loans. In such a case the Company would be forced to sell real estate most likely at a discount to its market price, which could negatively reflect on its profitability. However the Company will target well established companies with sound financial standing so as to limit any risk related to tenants’ default.
Vacant real estate and need for reconstruction. Periods of time might exist when there will be no tenants for part or all of the real estate purchased by the Company. Thus the Company would not obtain any income for the period when the real estate is vacant. Part of the property may be reorganized in a way to meet the requirements of specific tenants, which could subsequently impede its letting to new tenants and/or may require additional reconstruction. To overcome these risks before realization of any investment by the Company, the particular real estate will be subject to a thorough analysis and the expected cash flow from it will be estimated. Priority for the Company will be to invest in real estate, which letting or sale would not require significant reconstruction, as well as in real estate with expected high occupancy rate.
Competition for limited investment projects. With the development of the real estate market globally, the competition among the potential buyers of real estate may possibly increase. This would lead to a temporary imbalance between supply and demand and to a rise in property prices. The imbalance will be temporary because in a market economy in the short run supply will increase (under the specific restrictions of the real estate market) in order to meet the higher demand. The effect for the Company will be in two directions – on the one hand, the expected profit from newly purchased properties will fall, while on the other – the price of the real estate possessed by the Company will rise and this will lead to higher value of its investment portfolio and its profit.
Losses not covered by insurance. In compliance with the requirements of the law, the Company will insure all its real estates against fire and natural disasters according to the usual reasonable practice in the country. However, there are risks for which no insurance coverage is offered, or at least not at reasonable financial terms (e.g. insurance against terrorist acts). If there are any damages from an insurance event beyond the insurance amount, the Company would suffer a loss up to the extent of the capital invested in the respective property and the Company would continue to have an obligation to service any loans, obtained for the acquisition and operation of the property.
Concentration of Investments. The Company may at certain times hold relatively few investments. The Company could be subject to significant losses if it holds a large position in a particular investment that declines in value or is otherwise adversely affected.
Up to 80%