The Georgian Reconstruction and Development Company (GRDC) has been a player on the local real estate market since 2003. Its value has increased from $25 million to $70 million. Levan Karalashvili has used “soft power” to run the company. 


GRDC appeared on the market at a time when Georgians decided that the level of corruption in their country had become unbearable. 2003 was a year full of big changes and expectations of new developments. The company was started by a group of friends who shared a common vision and business interests, and their endeavor was successful: the $25 million in seed capital and the group members’ expertise in the field of development has enabled the company to invest $100 million within the exceptionally short period of three years.

The projects created by GRDC are known to most of us. These include the modern shopping mall Tbilisi Central and the first ‘ClassA’ office building in Georgia, dubbed ‘Green Office’. Aside from this novelty, the company is not neglecting traditional developments either. For example, it is currently investing $50 million in the construction of an all-year-round resort in Mitarbi-Bakuriani. Future plans are even more ambitious, but we will return to those later.

First, I would like to introduce the company’s CEO, Levan Karalashvili. Born and raised in Tbilisi, Levan Karalashvili graduated from the Faculty of Economics at the Tbilisi State University, specializing in banking and finance. At various times, he worked on several World Bank and USAID projects, before continuing his studies abroad. He obtained an MBA degree from Stockholm Business School and proceeded to complete specialized programmes at Harvard Business School and the University of Pennsylvania.

Later he returned to Europe, studying at the London School of Economics. “I came back to Georgia with a firm belief that the country needed my experience and knowledge,” states the CEO of GRDC. Levan Karalashvili adapted his management style in Harvard. Soft power in business was a new concept for him at the time but has now become a part of his approach. “You are bringing your team on your wavelength by sharing a common goal, common parameters, and a common vision; jointly planning the ways to achieve the set objectives,” Levan Karalashvili explains, adding that his management style was readily accepted by his team. A team he describes as “one of the most qualified teams in Georgia.”

The shared long-term vision and consistent actions further accelerated the company’s success. “That is how we got to where we are today,” says Mr. Karalashvili. The company’s journey has not been without challenges. Levan Karalashvili remembers the 2008-2009 period as particularly difficult, as Georgia struggled with the effects of the five-day August War against Russia and the global financial crisis. The country’s economy shrank by almost 4% by the end of 2009. Prior to the August War, economic growth had been so stable (around 6% per year on average) that GRDC had initiated a new wave of major investments, implementing the Tbilisi Central project.

The latter is a source of particular pride for Mr. Karalashvili. It is fitting that our interview takes place in an office located in the Tbilisi Central building. The CEO of GRDC tells me that this project cost approximately $30 million to implement in the period 2007-2010. The retail center’s occupancy rate is 100% and it employs more than 1,200 people. “This company has one of the best business parameters,” Mr Karalashvili states without a hint of exaggeration. Tbilisi Central’s consolidated financial statements show that the corporation posted rental revenue of more than 12 million GEL and a net profit of 6 million GEL in 2018. As of 31st December 2018, the company is fully owned by GRDC Holding BV, where 50% of the shares are owned by French, German and Dutch investors (including Bob Meijer), while the remaining 50% is owned by Mamuka Khazaradze, Badri Japaridze, and other Georgian businessmen.

“The challenges were extremely serious,” recalls Levan Karalashvili. Initiated in 2007, the project had to weather the 2008 / 2009 crisis before it died down in 2010. “We had to work under force-majeure circumstances. Around 70% of the contracts with leaseholders had to be canceled. Businesses could no longer expand their operations. There were problems with contractors and financial backers. It took an enormous effort from the whole team, company partners and founders to overcome these difficulties.”

The businesses located in Tbilisi Central have an annual turnover of more than 250 million GEL, which provides a sizeable tax contribution to the state budget. According to the CEO of GRDC, if Georgia can realize its substantial potential with regards to property development, premium-class offices, and retail spaces will be able to contribute even more to the country’s economy. Even a brief look at the latest Cushman and Wakefield Georgia forecast for 2020 is enough to see that Levan Karalashvili’s assessment is correct: the estimated vacancy rate in the Class A office segment is 31%, while retail centers have over 447,000 m2 of vacant rental space in total. As for GRDC itself, based on the company’s current portfolio, it has the potential to develop two million m2 in office, residential, industrial or retail space.

Specific examples show how big a push it would be for the country’s economy even if only this one company could realize just a small part of its own potential. We do not need to look far beyond our borders, as experience from Eastern Europe and the Baltic States shows that each new 100m2 in retail space creates anywhere between 5-8 new jobs. “Georgia must compete with other countries to attract high-quality investors and capital, ensuring that these investors do not go elsewhere and contribute to the success of other countries’ economies. Enhancing our competitiveness is, therefore, vital. It requires a joint effort from the state and the private sector,” Mr. Karalashvili points out.

In 2019, Georgia ranked 74th among 141 countries in the Global Competitiveness Index. A year earlier, it held 66th spot among 140 countries. More significantly, Georgia is not mentioned as having ‘best practices’ (i.e. being an exemplary country) in any component, in contrast with numerous other states, which thereby adds further value to their competitiveness. Levan Karalashvili has a pragmatic, rather than an emotional approach towards international indexes. He recognizes that a good performance in these rankings can act as a calling card for Georgia, attracting an investor’s initial attention.

However, while holding leading positions in elite rankings is unequivocally positive, it does not necessarily translate into a real flow of investors and money. “Let me give you an example: we are very proud of the fact that it only takes 24 hours to register a business, but how long does it take to close one? The answer is – an extremely long time. It is an incredibly frustrating process, especially for foreign investors,” says Mr. Karalashvili. Official statistics show that foreign direct investments were at a five-year low in 2018. As a matter of fact, Georgia is losing out both on jobs and the transfer of knowledge, which is equally important for the country’s competitiveness.

“An unstable environment, politically motivated persecution of specific business groups and similar factors have a negative impact on the country’s image and the readiness of other investors to bring capital into the country,” says the CEO of GRDC. The more interesting side of this analysis concerns the qualification of business groups and the ability of the private sector to speak with foreign investors. Here is what Levan Karalashvili has to say about it: “There are few business groups and businessmen in Georgia who can talk to foreign investors on an equal level and convince them that Georgia is an attractive country to invest in.”

Almost two decades of continuous activity on the market certainly gives Levan Karalashvili a competitive advantage, GRDC demonstrates that despite various difficulties and risks, it can be worthwhile for a company with a good corporate culture and the right expertise to invest in Georgia. When GRDC was starting out in 2003, the development market did not know what it wanted or needed. “We determined our direction and areas of activity ourselves, choosing the development of commercial real estate and modern office space,” recalls our respondent.

Within three years, it became evident that the company had chosen the right direction. It started attracting the attention of big names such as EBRD and Citibank, as well as giant funds such as the Marbleton Property Fund and Altima Asset Management. This was possible because, from the outset, GRDC brought together investors from Georgia, France, Netherlands, and the United Kingdom.

“This mix and European experience helped us immensely,” says Levan Karalashvili. As a result, in the first three years, the company contributed $15 million to the country’s economy through the purchase of assets, and a further $100 million in the form of investment. The company’s European vision and values have also helped it balance risks. As GRDC was making its first steps on the market, Georgia ranked 124th in Transparency International’s Corruption Perception Index. Against this background, running a clean and transparent business was a bold statement. However, according to Levan Karalashvili, this approach allowed GRDC to avoid reputational risks and gain that which is most important – people’s trust.

“To this day, we have been audited by the Big Four accounting firms, such as Ernst & Young and Deloitte. We have always been open and never hidden anything,” states Mr. Karalashvili. During the aforementioned period, Georgia was categorized by the World Bank as a below-average income country. Per capita GDP (the most accurate indicator of the level of poverty in the country) was below $1,000.

In this context, GRDC purposefully chose the B2B direction, which mitigated risks. “Without a middle class, any business will struggle to develop properly,” says our respondent. Almost two decades later, the numbers still point towards great challenges. Statistics obtained from the Revenue Service suggest that a middle class is virtually non-existent in Georgia. Normally, people on average income who do not live in poverty, do not require social support, have a certain amount of savings, and are capable of sustaining expenses should constitute around 40% of the population.

In Georgia, the presence of such a homogeneous group is not at all evident. Instead, many of those who should belong to the middle class have a level of income that is closer to the poorest 20% of society. A distribution of income levels such as this has its effect on the market. Naturally, GRDC has not been immune from these negative effects, as the success of its sub-businesses, such as shopping malls and office spaces, depends on the group that is closest to the middle class. Against the background of currency devaluation and high inflation, this group of people has decreased even further.

“This is the result of bad economic policies,” states Levan Karalashvili. The CEO of GRDCrepeats the words often said by various people on the cover of this magazine: longterm development and significant economic growth is only possible in a predictable environment with a stable national currency and an orderly judicial system.

“The judiciary has become politicised to the extent that nobody can remember economic disputes that have been settled in the courts. The competence of the judges dealing with economic issues ought to be much higher. In this regard, there is a definite lack of expertise today,” says Levan Karalashvili. He adds: “What can you do when a court case lasts 2-3 years? Are you not effectively standing still?” The question is rhetorical. You can see that Levan Karalashvili is a true manager and businessman, as he never stops at just identifying a problem and he offers a solution right away. “Implementing the Stockholm, Genevan or Parisian arbitration system in Georgia would significantly facilitate conflict resolution between businesses. It would also allow companies to easily find a common language and speed up the resolution of disputes,” Mr Karalashvili explains.

For the CEO of GRDC, the solution is simple: the state must implement stable, sensible and outwardlooking policies, while the private sector will take care of the remaining challenges by itself. “Today we need the public and private sectors to work together as a team to enable our country and the economy in general to move forward.” For Levan Karalashvili, working as a team primarily implies active and consistent communication, particularly with regards to regulation. For example, he views the introduction of stricter construction standards with a view to improving general safety as an absolute necessity, but questions whether Georgian companies were ready for this move, as the new regulations make projects and the final product more expensive.

“Regulations should not be imposed on businesses out of the blue. The transition to a new reality ought to be done sensibly and gradually, and businesses must be given a reasonable time to adjust to the new regulations. All of this cannot be done without communication,” Mr Karalashvili explains.

In this context, another example is provided by excessive debts and regulations on responsible lending, with the private sector actively demanding the latter’s relaxation. Levan Karalashvili is certain that appropriate communication would have prevented “everyone being lumped together from the beginning.” According to him, the two largest banks trading on the London Stock Exchange have stricter reporting responsibilities than in Georgia.

As a former banker himself, Mr Karalashvili believes that excess debt is a fabricated, artificial term. “Around 600,000 people had their debts written off. No sooner did that happen, than more than half of them were already thinking about taking out new loans and have probably accumulated new debts by now.” As a result, the CEO of GRDC believes that rather than combatting the results of slower economic and per-capita GDP growth, it is necessary to fight the root causes and find a systemic solution. He sees the lack of access to capital as the main cause. “You cannot start a business with a loan,” insists Levan Karalashvili. He, therefore, firmly believes that the current reality, whereby the private sector is wholly dependent upon the banking resources, must be altered and the country must have alternative tools that will make capital more accessible.

These include primarily the capital market, investment funds, hedge funds and so on. Here too, he sees the need for both the public and private sectors to work together. “Alternative tools are necessary. To this end, the state must create the appropriate legal foundation, while the business sector must attract people with the relevant expertise and experience, which the country is sorely lacking today,” states the CEO of GRDC. This would also help the Lari. The stability of the national currency is directly linked to the country’s competitiveness, and particularly with the predictability of the business environment, which is a key prerequisite for attracting long-term investment to Georgia.

A prominent illustration of the above has been offered by ISET, whose 2019 analysis shows that the mood of the business sector (as well as that of consumers) changes in accordance with the exchange rate of the Lari: a stronger national currency leads to improved business sentiment. Levan Karalashvili refers to 2019 as the belt-tightening year. Even allowing for the fact that development is a cyclical business that is not characterized by constant growth, the CEO of GRDC sees the company and the industry as a whole in the downward phase of the economic cycle. “Additionally, we can expect 2020 to be a politically turbulent year, so we are counting on being able to recover and start growing again from 2021.” It seems that 2020 will be a year spent in preparation for a new leap forward. If everything goes according to the GRDC team’s plans, Georgia may have an IKEA store soon.

The team is currently negotiating with the Swedish giant with regards to transforming the former Children’s Worldbuilding and the surrounding territory into a retail center. “Once again, I must emphasize that such a project requires economic and political stability,” says Levan Karalashvili. Another project that will be initiated in 2020 will see the establishment of logistics and production centers in the vicinity of the Coca-Cola plant, where the Natakhtari industrial park will be built on a 20-hectare territory.

GRDC does not wish to avoid expanding outside its comfort zone and plans to implement a project that does not fall under its normal field of activity, having said this, the aim is to reach a completely new set of standards in the industry. This project to build an American hospital will cost $50 million, of which $40 million has already been sourced.

“The health sector needs a new quality and exemplary organization,” states Levan Karalashvili. This company, which counts around 100 French, Dutch and British investors among its shareholders and has access to huge capital, is one of the few business groups that have the financial and human resources to complete such large projects and introduce world-renowned giant players to the local market. “GRDC has always believed in a bright future for Georgia,” says Levan Karalashvili. We await the company’s next leap forward.

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