SERBIA: DELTA REAL ESTATE'S LOFTY PLANS TEMPERED BY

UNCLAS BELGRADE 001275

SENSITIVE
SIPDIS

USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH

E.O. 12958: N/A
TAGS: ECON EINV ETRD SR ZL
SUBJECT: SERBIA: DELTA REAL ESTATE'S LOFTY PLANS TEMPERED BY
FINANCIAL CRISIS

Reftel: 07 BELGRADE 1396

SUMMARY
--------------


1. (SBU) In October 2008, Delta Holdings, owned by controversial
Serbian billionaire Miroslav Miskovic, opened the region's second
modern shopping mall in Montenegro with high level government
officials and business elite from Serbia and neighboring countries
in attendance. Just a year after the first modern mall opened in
Belgrade, Delta wanted to give attendees a taste of its plans to
expand operations in the region. Recently however, Delta's
expansion plans have been tempered amid the current financial
crisis. Delta's real estate arm has put projects on hold and is
considering selling properties in response to the tightening of
investors' purse strings. End Summary.

Delta's Mega Mall Entry
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2. (U) In October 2008, Delta City Podgorica opened to remarkable
fanfare. In attendance at Montenegro's first modern shopping mall
opening was Montenegrin PM Milo Djukanovic, Serbian PM Mirko
Cvetkovic, Republika Srpska Premier Milorad Dodik, Skopje mayor
Trifun Kostovski, Ljubljana mayor Zoran Jankovic and regional
business elites. Many of these well-to-dos were flown in via
charter flight courtesy of Delta Holdings (Delta) owner Miroslav
Miskovic (reftel). Delta City Podgorica opened almost a year after
Delta City Belgrade, the region's first modern shopping mall
(standing in the middle of Delta City you might never realize you
were not in the Pentagon City mall). The spectacular grand opening
was one of several Delta Real Estate (DRE)-the division that
develops shopping malls, retail parks, and mixed-residential
buildings - is planning in the region and in Serbia. DRE currently
owns land in Serbia, Montenegro, Slovenia, and Bosnia and
Herzegovina and plans to buy property in Albania, Macedonia, and
Croatia.

Regional Expansion and Reception
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3. (SBU) Miskovic openly supports Serbian accession to the EU and
investment opportunities in the region as evidenced by the October
20 meeting in Brussels that Delta co-sponsored. At the meeting of
Serbian businessmen, EU Enlargement Commissioner Olli Rehn, EU
representatives and international banks, Miskovic pointed out trade
and investment impediments he believed were due to "interference of
daily politics." In a meeting with us on November 12, DRE CEO Dejan
Racic said neighboring countries "have reservations about Serbia"
when asked about the reception Delta receives in neighboring
markets. In Montenegro and Republika Srpska (RS) Delta seems to be
well-received. Miskovic opened a Tempo supermarket in Banja Luka in
September 2008 with Premier Dodik in attendance and later announced
Delta's goal to control 40% of the RS retail market. In Sarajevo,
however, Delta's purported partnership with Fahrudin Radoncic, the
owner of the Dnevni Avaz newspaper and many real estate properties
has been more controversial.


4. (SBU) In August 2008, DRE signed an agreement with Slovenian firm
Grep to build a sports park that will house the Delta Planet
shopping center, a stadium, and a sports hall. In October 2008,
Delta announced plans to buy the Slovenian retail chain Mercator.
Soon after, however, the Slovene government said it would take
"unprecedented measures in the sale of Mercator," amid concerns that
foreign ownership would threaten the Slovenian food industry. In
Bulgaria, Delta bought 85 percent of supermarket chain Piccadilly in
October 2007, the first significant Serbian capital investment in an
EU country. Two Piccadilly stores later suffered explosions in
August 2008 which some media speculated were a message to Miskovic.
Racic said that even though Delta planned to expand to Croatia, he
knew that Serbian businesses (and Serbs) were not welcomed in many
Croatian cities; therefore DRE would likely enter the market with a
local partner.

At Home in Serbia
--------------


5. (U) In Serbia, DRE also has sizable development plans. In a
joint venture with Hypo Bank, DRE is building residential and
commercial spaces for the 2009 University Games hosted in Belgrade.
Racic said almost all of the University Games units have been
pre-sold, with 60% of buyers paying with cash. Racic outlined his
plan to build a Crown Plaza Hotel and luxury apartment office spaces
on land DRE acquired in a tender earlier this year. Other plans
include shopping centers in Kragujevac and Novi Sad.

Tempered Expectations Amid Financial Crisis
--------------



6. (SBU) Although DRE has lofty plans, the current financial crisis
has recently tempered its short term expectations. DRE is actively
seeking international project financing and partners, but Racic said
potential investors were not panning out as liquidity and credit
availability had dried up. In response, Racic said DRE would likely
have to sell some of its undeveloped land purchased on credit,
mainly in Serbia, to reduce its debt burden. He insisted that there
was still a "huge potential" for commercial real estate,
particularly in upscale, premium office space, but demand remained
cyclical. Racic added that the housing market was not overblown in
Serbia. In a conversation with us on October 1, Colliers
International Senior Consultant Bosko Tomasevic was optimistic about
Serbia's real estate market saying there was continued demand for
residential property especially in Belgrade where demand outweighed
supply considerably. He added that DRE was "growing fast" and
aggressively recruiting young talent from abroad and from Colliers.



7. (SBU) On December 1, Merrill Lynch's Director of Global Principal
Investments Rob Schweizer told us that he believed land prices would
go down, but that the pent-up demand for affordable residential
property in Serbia would continue for the next 10 to 15 years.
Merrill invested in DRE competitor MPC properties in late 2007. He
added that companies like DRE that built high-end apartments and
depended on large investments from abroad would suffer as euro and
dollar-based investors could not "rationalize investing in Serbia
when they can get the same and more secure return in Western
Europe." Schweizer said DRE made "emotional investments," often
buying land with no money or plans to develop it, which was why DRE
has had to scale back on several plans.


8. (SBU) Vladimir Mrvic, former Chairman of the Board of Hypo Bank
Consultants and current CEO of Capital Consultants, said in a
meeting with us on October 3 that DRE's financing difficulties were
well known and that several of Mrvic's Israeli clients had expressed
interest in Serbian real estate, but were too "scared" to invest at
this time. As a real estate consultant (and also one of those flown
in for the Delta City Podgorica opening),Mrvic followed Delta and
DRE projects closely and commented that among his business circle,
the "corruption feeling" that had long been associated with Miskovic
and Delta had lessened recently as Miskovic seemed to be adamant
about maintaining "clean" and legal accounting.

COMMENT
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9. (SBU) In the current economic environment, even the country's
largest developer has not convinced new real estate investors to
come to Serbia. DRE met with a string of U.S. equity funds over the
past year in search of an equity partner to support DRE's growth and
development plans. To date, DRE has been unsuccessful, despite
high-level discussions with at least three major international
equity firms. The firms that have discussed some of their internal
decision making with the Embassy have told us that DRE was
professionally run, but they remained concerned about the unknown
risks of Miskovic's controversial image. Serbia, and in particular
Belgrade, still suffers from a shortage of residential housing which
keeps its real estate prices on par with those of many Western
European countries, and is a source of constant aggravation to the
middle class. Miskovic remains a controversial figure, who despite
his successful businesses has been unable to change his reputation
and image. If the market had robust growth and bright near-term
prospects DRE might have been successful in finding investment from
sources willing to accept some additional risks. However, in
today's market DRE faces a difficult road in Serbia, and also in
pursuing it. End Comment.

Embassy Belgrade thanks Ljubljana, Podgorica, Sarajevo, Sofia and
Zagreb for their support in preparing this cable.

MUNTER