bne IntelliNews – INTERVIEW: Orient group investing into Uzbekistan’s growing population and investment-friendly climate

Uzbekistan’s Orient Group has emerged as one of the largest multi-sector conglomerates in the country, with interests in real estate, banking, retail and agriculture among other things, making it one of the three largest corporations in Uzbekistan. The company was founded in 1998 and is riding the wave of reform as the country opens up and is actively taking advantage of the new pro-business environment as the economy of Central Asia’s most populous country finally takes off.

Today growth is accelerating in a complicated geopolitical environment as the war in Ukraine spills over to affect Uzbekistan. Like many other countries in the Commonwealth of Independent States (CIS), Uzbekistan has taken in hundreds of thousands of refugees fleeing Putin’s war, including at least 20,000 IT professionals that have made their home at the country’s new IT park.

Uzbekistan’s growth had already attracted a lot of Russian capital a year ago, which is still coming, as Tashkent sits on the international sanctions regime fence.

“Russia’s invasion was a window of opportunity,” acting CEO of Orient Group Andrey Maslov told bne IntelliNews in an exclusive interview in Tashkent. “There is capital that is trying to leave Russia and looking for opportunities to diversify. There are not many countries where this capital is welcome.”

Uzbekistan is one of those countries, but it has to be careful not to fall foul of US secondary sanctions. Amongst the most attractive sectors for inbound Russian investors looking for a profitable safe haven to park their money is real estate, which remains underdeveloped and offers strong returns.

“Before 2017 there was almost no modern real estate in Uzbekistan,” says Maslov. “There was a big gap and a significant demand. And real estate is supported by the strong population growth.”

Traditionally in a family with four sons, the three older brothers are expected to buy their own homes, but the youngest inherits the family home, although he is expected to help finance the purchase of the other houses. Migrant workers are also expected to send home the majority of their pay to help the family, unless they are married, all of which adds to the demand for housing.

Some 300,000 refugees have fled from Russia to Uzbekistan and many are buying apartments, giving the market a bump. Maslov says that sales of housing are up by 30-40% in just the last two months, which he suspects is largely due to the new Russian residents.

“I’m not sure, as it is hard to separate out what increase is due to the arriving Russians and what is due the organic growth of the domestic market,” says Maslov. “But the new money is fuelling growth in the sector.”

Tapping in the international capital markets

The Russian capital remains an important source of funding, but companies like the Orient Group are getting ready to tap the international market. The group has no external debt, but in 2021 issued its first corporate bonds worth UZS126bn ($11mn) – the largest issue of corporate bonds ever.

However, next year the group wants to start tapping the international market. Several famous international investment banks already have representative offices in Tashkent, but currently they are focused on selling big international corporate bonds to the country’s blue chips and not debt financing or syndicated loans for the leading corporate players.

In preparation for unlocking access to the international capital markets, in 2021 Orient Group has introduced IFRS accounts for all its holdings, the first results of which will be released in February 2023, and it will probably organise a syndicated loan thereafter.

“Initially the plan was to raise a syndicated loan from Russia’s leading banks but after this spring we abandoned that plan,” says Maslov. “But we are already in talks with the leading global investment banks and plan to do this maybe next year.”

ESG has become a key focus for the government that is building in good ESG practices to all its projects to increase their appeal to international investors.

Orient Groups is intending to be a pioneer in corporate ESG, which is one of the motivations to being first to switch to an IFRS account as part of its drive to improve the G in ESG.

“At Orient Group we have created rules for corporate governance to build on the confidence of our investors. In our joint ventures with the UzOMAN fund [which has bought several of Orient’s shopping malls] all the decisions of the supervisory board have to be unanimous, despite the fact they are a minority investor. We are also looking at hiring some independent directors,” says Maslov, referring to the joint Uzbek-Oman sovereign wealth fund.

As for the social part, the group has focused on improving safety standards and procedures at work. Traditionally when there is an accident the victim is blamed for carelessness, but in the new regime the company regards accidents as the result of failures in the environment; something was wrong with the procedures and checks, which led to an accident.

“We need to create a safety culture and not blame the individual, as the work environment is to blame,” says Maslov. 

Maslov adds that the environmental concerns are the least problematic, as the manufacturing the company has set up in the last five years, especially in its Bakan Tex and FT Textile Group subsidiaries, all use state-of-the-art machinery, which is already extremely environment friendly.

“In textile production our equipment is already energy-efficient, [uses] closed waste cycles and [is] clean. We care about ecology and sustainability,” says Maslov.

In the meantime, Uzbekistan’s financial system is still working with Russia’s and it is one of the places that will transfer money both in and out of Russia but at the same time its bank’s credit cards still work in the West. This banking business has been another source of inbound Russian capital. Nevertheless, Uzbek banks have become increasingly careful and for Russians, getting an Uzbek bank account has recently become more difficult.

“We have strict system of Know Your Customer (KYC) if someone from Russia wants to open an account. You have to provide documentation not only proving this money is yours but also what the origin of the money is – that it was earned legitimately. And if someone is on the US SDN lists they are barred from Uzbekistan and its banking system,” says Maslov.

Subsidised mortgages fuelling growth

Uzbekistan is poor in the natural resources that finance its neighbours, and in particular only has meagre hydrocarbon resources that more or less cover its domestic needs. But what it lacks in oil and gas it made up for with people: Uzbekistan has one of the youngest and fastest growing populations in all of the CIS.

As incomes start to rise, a middle class is emerging and the demand for real estate is insatiable. Orient Group has already built, and sold to UzOMAN, half a dozen shopping malls that play on this theme. In total, the group’s Golden House subsidiary has sold 185,000 square metres of residential housing and 102,000 square metres of commercial space.

As construction is one of the three big economic growth drivers, the government is supporting the building of residential housing to keep pace with the necessity of providing accommodation for a population with an average age of 29.

The government has launched a subsided mortgage scheme that caps mortgages at affordable rates of 17-18% for properties costing up to $35,000 (the typical price of a house), after which buyers have to raise the money from banks or other means.

“The share of mortgage in the country’s GDP in Russia is 4%, in Kazakhstan 3%, in Uzbekistan 0.4%; i.е. we see the potential of market growth by 10 times,” says Maslov.

Another problem Maslov says is that banks won’t offer mortgages until the buyer can take procession of the property rights. However, as many companies fund the construction by pre-selling apartments at deep discounts, would-be buyers cannot borrow to pay for the pre-pay deals.

Orient has a sister bank – not part of the group, but with overlapping shareholders – that is offering 1- to 1.5-year loans to prospective buyers to fund a pre-pay deal.

There is no funding available to the developers either other than pre-selling apartments, so the business is concentrated the hands of a few large firms that have the financial firepower to fund construction projects.

“In a typical $150mn project the developer will have to come up with $15mn-$20mn to cover the initial construction phase, but the rest will be covered by pre-sells,” Maslov explains.

Retail off square two

Another prospective business that plays on the booming population theme is retail. Orient Group has set up the Makro chain of supermarkets, which it often puts in as the anchor tenant in its commercial real estate developments.

The group has built, and sold, around eight large malls and often the anchor tenant is either Orieint’s Makro supermarket or its fashion stores.

But despite the three decades that have passed since the fall of the Soviet Union, Uzbekistan retail sector remains dominated by the open air bazaars; organised retail only accounts for around 5-6% of Uzbekistan retail turnover, compared with 25% in Kazakhstan and over 60% in Russia.

Currently Makro has just under 100 stores, making it the third largest player on the market after Havas and Korzinka respectively.

“The chain has been growing very fast, but now we are turning to improving efficiency and increasing the turnover per square metre,” says Maslov. “We are competing with the bazaars that have no tax costs – no profit tax or VAT – but we need to be able to stay competitive on price. That means either you tolerate losses as you build up the business or you are very efficient.”

Maslov says that consumers are very price sensitive and cultural traditions are deep rooted; Uzbekistan families tend to buy much of their staples in bulk only once a month rather than pop out to the store when they need something.

“We have a lot of habits to break and misconceptions to overcome. For instance, the consumers assume that if products are in a store they are more expensive, whereas with some items we are cheaper than the bazaar,” says Maslov.

Last year the coronavirus-induced food price spikes provided Makro with a golden opportunity to persuade shoppers to enter their doors. Sugar prices became destabilised worldwide, soaring 75% in the markets, leading to hoarding and speculation. Makro kept its prices at the same level as always to make the point it is also a reliable source of staples.

Maslov says that Uzbekistan’s retail sector is 20 years behind that of Kazakhstan’s, which has enjoyed a head-start thanks to its copious oil production, which has lifted per capita incomes ten-fold compared to Uzbekistan’s and are just behind those of Russia.

But the low incomes will also hinder the development, as for the meantime all the main players are concentrating on the capital and largely ignoring the regional cities.

In the first phase of the sector’s development the two market leaders Havas and Korzinka focused on simply taking over the Soviet-era Universal Magazine (Unimags), which were the closest the Soviet system came to department stores. The two leaders have taken over about 90% of the Unimags, which means from here on in new leases need to be signed and space converted or, as Orient group has been doing, new shopping malls must be built.

“It is not that expensive to start a new supermarket. Most of the premises are on long-term leases, which doesn’t cost that much, and the cost of the fit-out is not that high either,” says Maslov. “What does cost is bearing the losses from the store in the first months of operation. We have closed stores down fairly quickly that didn’t work.”

Although Uzbekistan’s organised retail business is still at an early stage of development, the deep-seated cultural mores mean it will probably develop more slowly than those of Eastern Europe. In the 1990s in Russia the game was simply to open stores as fast as possible and it took almost two decades before profitability became an issue. Because of the stiff competition from the bazaars, in Uzbekistan profitability is an issue from the start.

“The main problem was poor price competitiveness, which was not justified by the quality of fruits and vegetables nor quality of departments,” trade publication EastFruit said in a recent report on Makro. “We suppose management’s main focus was on securing the greatest number of stores before it became more expensive to enter the market and competition moved in.”