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SOFAZ to start investing in real estate recently - INTERVIEW

SOFAZ to start investing in real estate recently - <font color=red>INTERVIEW</font>

12 March 2012 15:17 (UTC +04:00)

SOFAZ chief Investment officer Israfil Mammadovâ€™s interview to APA-Economics.

- According to SOFAZ investment policy, near 15% of SOFAZ investment portfolio can be invested in gold, shares and real estate in 2012. What does this index mean in value?

- As itâ€™s known, according to SOFAZ Investment Policy for 2012, Fundâ€™s investment portfolio is planed to include new instruments, as well shares, gold and real estate. So near 5% of investment portfolio can be invested in shares, near 5% - in gold, as well near 5% - in real estate. But, as it is noted, 5%-limit for each financial instrument is a maximum limit for such investments. Taking the specification of abovementioned financial instruments into consideration, they will be included in Fundâ€™s investment portfolio, partly. In other word, these financial instruments can make 15% of Fundâ€™s investment portfolio. But, as itâ€™s planned to include those instruments in portfolio partly, share of these instruments is expected to be lower than allowable maximum level.

- According to SOFAZ official information, the investing in shares is planned to conduct via foreign managers, initially. Thatâ€™s, wonâ€™t SOFAZ put forward any factors on the shares? Or, will it be processed within the Fundâ€™s requirements on shares?

- SOFAZ plans to invest in shares via foreign managers. Generally, itâ€™s the international practice to use foreign managersâ€™ services in management of funds. But, this does not mean that, the decisions on those investments will be passed by foreign managers. This case is available for SOFAZ share investments, that is, during selection of foreign managers for these investments, Fund will determine their powers, requirements on investments and other provisions and all of these will be reflected in the contract. Generally, selection of foreign managers will be held via Service Proposals Survey and the announcement on this was posted on Fundâ€™s internet page. At the same time, there are benchmarks and requirements on foreign managers were posted on the page. The managers will be well-known financial organizations with the sufficient experience, high-level personnel and etc.

- What factors will be taken into consideration during selection of shares? Are there priorities on countries that issued shares or spheres of economy?

- In an international practice, management of share investment is conducted via several directions, including via selection of any share market index as target and its replication (on the basis of passive management - APA). Such a management is conducted by the method of inclusion of shares of large companies in portfolio with a special share and is considered as conservative management method. SOFAZ share investments will be conducted by foreign managers via this method. Main target for these investments, SOFAZ has selected MSCI World index.

- When does SOFAZ intend to realize the investing in shares itself?

- Fundâ€™s share portfolio will be initially managed by foreign managers. For the purpose of internally management of SOFAZâ€™s share portfolio, the works on studying of international practice, collection of current knowledge and experience and preparation of personnel will be accelerated after granting mandates to foreign managers. Consequently, a large part of these investments will be managed internally.

- What is the supposed level of annual income from investing in gold and share?

- Main income of SOFAZ was stable-income securities. Although these financial instruments, especially short-term stable-income securities are specified with the risk of less price change, they reflect less profitability during long-term period. Inclusion of new financial instruments, as well real estate, gold in Fundâ€™s investment portfolio is to minimize the influence of a financial instrument on portfolio in short-term period and increase the total profitability of the funds during long-term period. As itâ€™s known, the shares are financial instruments affirming the ownership right of any share in the company. Price of share mainly moves in accordance with economic cycle, business sector that its company places in, as well companyâ€™s development trend. At the same time, the share does not have any returning period and does not promise stable profitability after buying. This instrument is characterized with high price change during short time, that it can not indicate positive profitability. But, note that, according to statistics, the shares indicate higher profitability than securities.

About investing in gold, to note that, investors have difference of opinion on investing in gold and they attend these investments in different forms. A lot of investors interest in investing in gold against the factors as inflation, exchange rate risks, and economic decay, that this makes it more attractive in diversification of portfolio. Along with these, gold is specified high price change and SOCAR intends to include these investments partly. SOFAZ investing in gold is conducted via owning of gold ingots. According to Fundâ€™s internal instruction, these ingots must be in accordance with London Bullion Market Associationâ€™s standards and be purchased from member banks of that organization.

- When does SOFAZ plan to invest in real estate?

- SOFAR has begun serious work to develop an investment strategy for a diversified real estate for a long time. Appropriate researches are conducted in direction of studying the real estate market, opinions of authoritative market participants are being estimated. The Fund is considered to realize the first investments in real estate in the coming months.

- Will these investments be invested directly by SOFAZ or through the foreign managers?

- By their specificity, real estate investments are significantly different from investing in traditional financial instruments such as stocks and securities. In general, real estate investments are made directly by brokers and investment managers, as well as indirectly - through the acquisition of shares of investment trusts, real estate and participate in joint investment funds. Currently SOFAZ is preparing relevant for the development of a geographically diversified investment strategy that reflects a number of investment areas of real estate. At the initial stage of investment in real estate, SOFAZ is planned to realize it conservatively â€“ by the acquisition of commercial real estate with a relatively low fixed-income and low-price fluctuations. To this end, real estate markets of a number of cities having transparent market environment, and high liquidity have been analyzed point by point. In general, the investment by direct purchase of real estate is a phased process, characterized by their complexity. During this process the main participants of real estate must first be correctly identified, their views and recommendations should be taken into account. In this regard, SOFAZ held meetings with relevant authoritative brokers, investment managers, large owners of real estate and other companies operating in the real estate market, to be invested. Equally important is the organization of a rational structure, providing a high degree of commercial interests of the Fund to carry out transparent sales process that creates the conditions to minimize taxes on income to be derived from real property, on the necessary level. At the present time, serious works are underway in this area jointly with foreign companies. Along with the above mentioned, assessment of real property, checking for high tech equipment and legal issues, which also seriously studied assume great importance. During the acquisition of real property, SOFAZ uses the services of reputable brokers who have sufficient experience in this area, during the choice of which will be put forward high requirements too. Given all we can say that, the first investment in real estate by SOFAZ will be implemented over the next 3-4 months. Due to the fact that commercial real estate for the first investment will have a large enough area of financial and technically equipped, even after the sale management will be entrusted to specialized authority in the field to companies under the control of the Fund.

- What are the priorities and criteria will be used during investments in real estate?

- At the initial stage, SOFAZ plans to implement these investments in commercial real estate markets in major cities of some countries with a transparent market environment, and high liquidity. The main priorities include the presence of SOFAZ long-term lease, location in the central business areas, excellent for use with modern technical equipment, transparent assessment of the Fund’s assets, ensuring an efficient tax structure, financial stability of tenants. In addition, factors such as the inviolability of property, the transparency of the legal system, the level of the real estate market in these countries are seriously studied.