Real Estate Quarterly

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1 Real Estate Quarterly Q Published since 2004 themoscowtimes.com/realestate Investments Building stadiums for the long term Russia and regions: risk and reward Buying abroad: global capitals vs. resorts

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3 Q CONTENTS FROM THE EDITOR...4 WHAT S UP News and Topical Views...6 NEWSMAKER Foreign Capital Helps Drive Big Transactions To Record Levels...8 Investors are snapping up premium offices, and breaking into regional retail and industrial projects. Stadiums Seek The Holy Grail Of Long Term Use...12 Developers link up with international sports and entertainment groups to revolutionize leisure; World Cup 2018 building program underway. INSIDE VIEW A Challenging Market With Great Potential But Confidence Is Key...16 AECOM s MD for Russia & CIS on a new approach to investment. INNOVATION Flexible Rooms, Sliding Walls and Breakout Zones Are The Must-Have Features Of A Modern Office...21 Fitting out: Corporate trends and Russia s VIP offices, with the MD of Tetris, Russia & CIS. 8 FOREIGN MARKETS Russian Investors Buy Into Premier International Locations But Wait For Resort Markets To Bottom Out...24 Overseas purchases stumble. EMERGING MARKETS Georgian Developers Use Thaw To Draw Russians To Southern Climes Investing by the sea ST PETE SCENE News from the Northern Capital MONEY MATTERS Available Finance and the Chance of a Rate Cut are Positive Signals for the Market Why investors favor property LEGAL NOTE Civil Code Subject to new Regulation Leasehold law reform APPOINTMENTS...33 INDEX themoscowtimes.com/realestate 3

4 FROM THE EDITOR Q A New Approach To Investment Publisher Ekaterina Movsumova Editor Mark Gay m.gay@imedia.ru Art Director Maria Georgiyevskaya Project Manager Marina Khloptseva Cover photo Luzhniki / Vladimir Filonov / MT The Moscow Times Business Review Real Estate Quarterly Q ( 39) Published: September 2013 Information product category 12+ Editorial & Production 3 Polkovaya Ul., Bldg. 1, Moscow, Russia Editorial tel: +7 (495) Editorial fax: +7 (495) Advertising tel: +7 (495) Advertising fax: +7 (495) Printed in Russia at Extra-M PK, Baltiya Highway 23 km, Krasnogorsk region, Moscow region, p/o Krasnogorsk-5 Tel. +7 (495) Fax. +7 (495) / info@em-print.ru Заказ This publication is registered by the Federal Service for Media Law Compliance and Cultural Heritage ПИ No. ФС Copyright 2009 by OOO United Press. All Rights Reserved. ISSN No Тираж Цена свободная. Founder and Publisher: OOO United Press Address: 3 Polkovaya Ul., Bldg. 1, Moscow, Russia Several high quality sports and entertainment complexes are being built in Moscow, with international expertise. Developers plan to shake up the shopping experience, and seize the attention of shoppers who have become inured to omnipresent brands and retail outlets. Moscow s Galactica Park and the VTB Arena in Petrovsky park illustrate the imagination and ambition of investors and developers. Such multi-function developments may help sports venues to increase visitor numbers throughout the year. It s a crucial lesson for the private and statefinanced developers who are building stadiums for Russia s hosting of the FIFA World Cup in Will they achieve a legacy of long term use or will we see white elephants where wooly mammoths once roamed? (Page 12) High building standards, investment-grade office buildings, lower construction margins are all part of a different approach to investment. International finance is available for large transactions, and while it favors projects that are up and running tenanted offices and operational shopping centers domestic and international, Russia-based developers are giving the market some positive, individual characteristics. With the help of Russia s now-dominant domestic banks, they are building retail, offices and industrial projects not just near the twin capitals but across the regions, in places like the Russian republic of Tatarstan. For an inside view on business, regulation and politics from someone who has been on the Russian development scene for two decades, read our interview with David Whitehouse, Managing Director, Russia & CIS, for AECOM. (Page 16) In an uncertain economy sitting on cash offers little comfort. The late-summer attempts by central bankers to wean the markets off infusions of freshly printed money, only caused emerging market currencies to fall. Currency risk seems to have a life of its own. Real estate investment is not immune, but offers the chance of gaining access to pockets of growth: consumer spending, the growing leisure sector, sports and entertainment, demand for premium office space, and manufacturing and warehousing that is harnessing youthful labor forces in emerging markets. (Page 8) 4

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6 WHAT S UP? Q PATERO Development is building a 700-room hotel complex as part of a multifunction cent. Accor has signed a contract to manage ibis, with 190 rooms, Mercure with 153, and Adagio with 94 rooms. The hotel area covers 35,000 square meters, with 142 parking spaces underground. Accor manages 5 hotels n Moscow, and 18 across Russia and the CIS. An aparthotel Adagio will open in Paveletskaya in November, as part of a complex of three hotels, along with ibis and Mercure. THE STRIKING EXTERIOR OF NAKHIMOVSKY BUSINESS CENTER, RENAMED THE ICUBE AS PART OF ITS PURCHASE BY O1 PROPERTIES AND CURRENTLY BEING LEASED OUT /CUSHMAN & WAKEFIELD O1 Properties Invests In icube icube is the new name of Nakhimovsky, 58 Business Center, which O1 is purchasing, subject to the center being fully leased out. The complex, close to Profsoyuznaya metro station, covers 25,000 square meters over 11 floors and has underground parking for 288 cars. Dmitry Mints, Chairman of the Board of O1 Properties, said the acquisition conforms to the company s strategy of buying the most liquid high class objects of A and B Plus, the capitalization of which he expects to keep growing. The deal is reported to be worth $90 million to $110 million. The consultant was Cushman & Wakefield. The building is currently being leased out, while the public areas are being redesigned. Office premises are ready for fitting out and tenants are expected to start occupying the building in the first quarter of O1 Properties successfully concluded an issue of five year bonds with a 12 percent coupon and a three year put option in August, raising 6 billion rubles or the equivalent of about $180 million. The placement, managed by Otkritie Bank, NOMOS Bank, Raiffeisenbank and Sberbank CIB, was oversubscribed. Largest Premium Industrial Complex Under Construction In Moscow Region. A T Real Estate has started building Moscow Region s largest Class A warehouse and industrial complex. Sofino Logistics Park to the south east of Moscow will comprise more than 840,000 square meters and cost about $600 million. It is being developed on 137 hectares 32 kilometers from the Mkad circular highway, near Novoryazanskoye shosse (M5). The nearest airport is Domodedovo. AT Real Estate expects to commission the first phase of 89,000 square meters in the second quarter of Sofino is being built to the plans of British architects and will use seamless floor technology which is increasingly used in Europe though still fairly new to Russia. The buildings will meet FM Global and BREEAM standards. Colliers International is handling leasing and sales. AT Real Estate perviously built the Bykovo logistics park near Zhukovsky, covering 420,000 square meters. Aerodom Set For Take Off PSN group is on course to complete the business center Aerodom, on Leningradskoe Prospect, in the first quarter of The 36,000 square meter building over 13 floor is within walking distance of Aeroport and Dynamo metro stations. It takes its name from the fact that it is built on an old airport terminal and the former Khodynka Airfield, which was built in In 1922 Russia s first international flight took off from the airport for Berlin. Marketed as an ergonomic work space, it joins a growing business district already occupied by companies like Kaspersky Lab, Mail.ru and BMW. Metropolis Stake Changes Hands Morgan Stanley sold half of the Metropolis shopping mall on Leningradskoe shosse to Hines CalPERS Russia Long Term Hold Fund, formed by US real estate company Hines and the California Public Employees Retirement System. Hines country manager and managing director for Russia Lee Timmins did not disclose the price but Morgan Stanley had paid $1.2 billion for the entire property in February. Morgan Stanley bought the property from developer Capital Partners. Multi-brand Hotel Complex Deal Signed A ccor will manage a hotel complex combining three different hotel brands near Kievsky railway station. PSN GROUP S BRANDING OF ITS CLASS A AERODOM BUILDING MAKES USE OF THE SITE S HERITAGE AS AN AIRFIELD THAT SAW RUSSIA S FIRST INTERNATIONAL FLIGHT / PSN GROUP 6

7 Q WHAT S UP? Huaming Cultural And Business Hub To Bring The Best From China To Moscow A ECOM is to project manage a Chinese cultural and business hub for Moscow. The CBC Park Huaming complex, will feature a 5 star hotel, two high-rise buildings of 32 and 45 storys, restaurants and a landscaped park with traditional Chinese pavilions and bridges. The development will cover a total of 8.2 ha. The China Huaming International Investment Corporation (CHMIIC), includes the Chinese state oil and gas corporation CNPC, Chinese national food corporation COFCO and the Chinese industrial company the Great Wall. TATARSTAN BROUGHT OUT ITS FINEST BRAND AMBASSADORS TO WELCOME GUESTS DURING THE GROUND BREAKING EVENT AT THE ALABUGA ZONE IN SEPTEMBER. GUENNADI MOUKINE / MT St. Petersburg Developer Builds Industrial Park In Tatarstan Economic Zone By Guennadi Moukine S t. Petersburg developer A Plus Development has become the first private company to fund and build an industrial park at the Alabuga Special Economic Zone in Tatarstan. Its subsidiary A Plus Alabuga will construct three facilities totaling 200,000 square meters, which will be partitioned into smaller warehouses and production units a turn key solution for companies looking for floor space but not yet ready to build their own. Tatarstan President Rustam Minnikhanov said: Our job is to create [attractive] conditions for new businesses, and we are thankful to and offer our support to the investor A Plus. Businesses in the zone benefit from a 10-year tax holiday, reduced income tax, simplified customs procedures and inexpensive labor in the special economic zone and the communities around it. The average monthly wage in Alabuga is about $400, and staff are trained in advance, ready to work for new companies as soon as they open their doors. David Izett, chief operations officer of real estate services firm Cushman & Wakefield, which is handling the project, said: This is a place where positive political, economic, demographic and location factors combine; where an established domestic and international reputation and beneficial tax and customs regime, strong government support, affordable land, and established infrastructure combine to provide highly attractive opportunities for manufacturing and industrial companies. The first 50,000 square meters of the three-stage project, scheduled for completion in the first quarter of 2014, has already been leased out, with the rest scheduled to be finished by As you can see, this is not a virtual idea with a photoshop presentation. It is a real project, said Timur Shagivaleyev, CEO of the Alabuga Special Economic Zone. Special Economic Zone Alabuga was set up in an area originally planned as home to the largest tractor factory in the U.S.S.R., with an independent power plant, gas pipeline and rail link. Alabuga belongs to the federal government, 51 percent, and Tatarstan Republic, 49 percent, who invested a total of $600 million. Currently it has 35 business residents who have committed $3 billion in investments, with $1.3 billion already in play. Department Store Chain Continues Its Rapid Expansion Into The Russian Market T he Russian partner of British retailer Debenhams is opening a flagship store in Moscow. It occupies three-storys at the Avia Park shopping center in north-western Moscow, at the junction of the Third Transport Ring and Leningradskoe shosse. Debruss is leasing 8,400 square meters over three floors, through Jones Lang LaSalle as the leasing agent. It will be Debenhams biggest store in Russia. Nick Hill, Managing Director of Debruss, said: We believe that Avia Park is destined to become the shopping destination in Moscow, the hub for all the big international brands. Debenhams opened its first shop in Russia last year, in Belaya Dacha shopping center after pulling out of the country in themoscowtimes.com/realestate 7

8 NEWSMAKER Q Foreign Capital Helps Drive Big Transactions To Record Levels By Mark Gay DENIS ABRAMOV / VEDOMOSTI Large transactions like the Metropolis shopping center in Moscow and Aura in Novosibirsk have made retail a strong challenger to the prime office market. Investors continue to diversify risk while high prices in the capitals throw a spotlight on the regions. Retail investments continue to grow in popularity, accounting for more than half of all transactions by volume. And while domestic investors continue to focus on offices and hotels, foreign investors are more active in retail. It s a sector that travels more easily, with investors more comfortable with exploring regional capitals. 8

9 Q NEWSMAKER Generally, investors try to diversify, even if their strategy implies a particular sector to invest in. For example it is difficult find an investor/developer who would not be interested in residential highend project projects, said Tom Devonshire-Griffin, Jones Lang LaSalle s Head of Capital Markets. The geographical spread of international brands across the country means investors can and are looking for already operating shopping centers with experienced tenants, in areas of high footfall. Key investors include Morgan Stanley, which this year bought, from Capital Partners, the 205,000 square-meters Metropolis shopping mall on Leningradskoe shosse and later sold half of it to Hines. RosEvrodevelopment bought Aura shopping center in Novosibirsk from Amstar of the US. Other investors include Immofinanz, Complexnie Investicii, RB Invest and Real Invest. Immofinanz took 100 percent of Europe s biggest shopping and entertainment center Golden Babylon, on Prospect Mira, from codeveloper Patero, for a price based on 2013 s net operating income for the almost-fully-rented property. Alexander Beloborodov, representative of Rusinkom, part of Bin Group, which is developing Galactica Park, an entertainment, shopping, business and hotel complex in southern Moscow, points out that in 1997 there were 15 The difference is that the approach to risk management and the end product has changed. 1 Ten Largest Investment Markets in Europe, H Turnover Change on % of European ( m) H Market* London % 21.5 Paris % 8.0 Moscow % 4.1 Stockholm % 3.6 Munich % 3.0 Frankfurt % 2.4 Hamburg % 2.2 Berlin % 2.2 Oslo % 2.1 Dusseldorf % 2.0 * Excluding indivisible multi-city portfolios 2 100% 80% 60% 40% 20% 0% shopping centers in Moscow. Now there are 50. We have a wide variety of brands but in every shopping center customers find more or less the same thing which means they attract Sources: CBRE Research Source of Investment in Europe s Major Markets London Domestic Other European AsiaPac Middle East Americas Africa Paris Moscow Stockholm Munich Frankfurt Hamburg Berlin Oslo Dusseldorf Sources: CBRE Research customers just from the surrounding area. So from the point of view of the renting cost of the whole object, we want to surprise the customer. That s why there was a necessity to create something unique and themoscowtimes.com/realestate 9

10 NEWSMAKER Q Total Investments by Real Estate Sector 4% 1.4% 12.3% something which will change the whole district. Something that they certainly cannot get from online shopping. The development will include an NBC Universal Studios park as well as sports and entertainment facilities. The delivery of new retail space will accelerate in the next two years, according to CBRE, to more than 500,000 square meters per year, although 2013 is expected to see a more modest 280,000 square meters. About 20 new international brands are expected to enter the Russian market in 2013, and 9 percent yields on prime retail property should continue to attract investors, says CBRE. WAREHOUSES Retail development is also driving logistics and warehousing. Development outside the capitals is slow, and international investors tend to act as developers rather than investors. Deals are few, mostly featuring Raven Russia and Bin Group. But for those chasing yield, warehouses continue to offer higher returns, according to Jones Lang LaSalle. In Moscow, warehouses command an average of 11 percent, and 13 percent in St Petersburg. That compares with office and retail in the range of 8.75 percent to % % % Industrial Office 42.2% 40.1% Retail 39.4% 49.3% Hotel Residential We maintain our Russian real estate investments volume forecast for this year at USD7.5bn. Bright spots are available financing, sectoral undersupply and stability as well as trading at a premium to other European markets. Industrial Office Retail Mixed Hotel Sources: Jones Lang LaSalle percent. CBRE expects investment in the sector to grow at around $6 billion per year. OFFICES The office market still suffers from a lack of demand from international companies as tenants or investors. Despite this, transactions have set new records. Moscow s Central Business District still dominates the investment market in prime office buildings but with growing activity around the third transport ring. The purchase of Moscow s White Square complex by O1 properties in March was the country s biggestever office transaction. It comprises three buildings on Lesnaya Street, near Belorusskiy train station, with 75,000 square meters of rented space. Developer AIG/Lincoln, and fellow consortium members TGP Holdings and VTB Capital completed the sale in March, which Jones Lang LaSalle described as one of the top-five global deals. Tycoon Roman Abramovich s Millhouse Company bought the Four Winds business center at the start of the year, from AFI and Snegiri Development. It comprises 22,000 square meters of rentable space on 1st Tverskaya Yamskaya. In a further development, Abramovich is now reported to be eyeing the White Gardens complex, next to White Square, according to sources at VTB Capital and Coalco, quoted by Reuters and Kommersant. At an estimated $800, it would be second only to the White Square transaction by value. It comprises 65,000 square meters of rentable space. Other active investors on the market include Hines, PPF and MR Group. Foreign investors have not yet recovered to anything like the level of 2008, when they accounted for two thirds of the market (though some Russians purchasing from offshore would have accounted for the share). Today foreign investors account for about one-fifth of the market. MARKET OVERVIEW Across the market as a whole, international investors took part in a growing number of deals in the first half of 2013, accounting for just over half of transaction volumes, compared with a third in the same period of Deals over $300 million climbed to 12 per cent of transaction volume, twice the level of early Devonshire-Griffin, of Jones Lang LaSalle, said, Several deals with foreign capital participation have been closed in H We expect several more in the second half of the year, about 30 to 40 percent of all investment deals will be closed by internationals in Bright spots are available financing, sectorial under supply and stability as well as trading at a premium to other European markets. Overall, Jones Lang LaSalle says first half real estate transactions grew 31 percent over the same half of 2012, though second quarter investment was down 8 percent. Offices accounted for 49 percent, retail for 39 percent We see several deals under active negotiation process and expect them to close by the end 10

11 Q NEWSMAKER of year. Unlike much of Europe, the market is not being constrained by a lack of debt, which is freely available. Comparatively higher prime yields in Moscow, at about 8.75 percent, are clearly offering a significant premium relative to other European markets of 500 bps to London, of 450 bps to Paris, of 420 bps to Frankfurt, and 275 bps to Warsaw, said Devonshire- Griffin. St Petersburg grabbed a greater share of second quarter real estate investment accounting for 4.8 percent of total turnover according to Jones Lang LaSalle. REGIONS In terms of trends, David Whitehouse, Managing Director of Aecom for the Commonwealth of Independent States, Moscow, Russia, commented: I don t see different trends. I see a different approach to investment. The trends we are seeing now are similar to what we saw in the mid nineties and the mid 2000s: as the bubble grows and bursts the next bubble starts. The difference is that the approach to risk management and the end product has changed. We have gone from, say, lower capital costs and short-term returns, in other words putting something up quickly so that you can make your money and get out, to long term investment grade buildings for pension funds. So the risk management to the market has changed but in terms of trends, where money is going, it is always going to follow retail and commercial offices. The other big trend that I see, and it has been happening for five years or more, is regionalization. It is a real challenge to build in Moscow city because of land prices and the permit process so a lot of investment is going to regional cities like Yekaterinburg, Vladivostok, and Rostov. And compared to the early nineties where 90 percent of investment was in Moscow, it s now 10 to 20 percent in Moscow and 80 percent outside. I think that is a very positive trend for Russia and for developers because in most cases it is an easier process outside. Regional markets see lower demand for quality offices but manufacturing and retail is a different story. While investment in the major markets slowed in the second quarter, the regions saw the largest ever retail real estate transaction outside Moscow and St Petersburg. US-based Amstar sold the Aura Shopping Center in Russia s thirdbiggest city Novosibirsk, to RosEuro Development in August. Amstar built the Aura Shopping Center with Renaissance Development, close to the city s main street, Krasniy Prospect. It covers 61,000 square meters of leasable area and 200 stores occupy four floors. Aura is RosEuro s second upand-running shopping center. RosEuro owns and operates Planeta Shopping Center, Krasnoyarsk and is developing three additional Planeta shopping centers in Ufa, Novokuznetsk and Perm. Omsk, Nizhniy Novgorod and Kaliningrad saw hotel and retail transactions. Investment in Russia s regions continued to grow in the second quarter of 2013 (capturing 13 percent of the total as measured by Jones Lang LaSalle. The macroeconomic data behind retailing in Russia is mixed, but still more positive than many other markets, both established and developing. The Russian economy still leads its emerging market rivals, with Gross Domestic Product per head of about $17,000, almost twice the level of China. Forecasts for the growth of retail turnover in Russia are the second highest in the Europe and its borders, with only Turkey expected to grow faster, according to CBRE. Because of high prices in Moscow a lot of investment is going to Yekaterinburg, Vladivostok and Rostov. The issue of consumer credit has stabilized since the decline in the second half of 2012, growing at about 20 percent annually. Likewise retail sales, which are growing at about 3.5 percent. Unemployment of about 5 percent nationally, according to Rosstat, and lower in the capitals, underpins both borrowing and shopping. GDP growth stands at about 3 per cent. Inflation and the exchange rate are the flies in the ointment: for most of the past 12 months inflation has outstripped wage growth. The ruble has dropped sharply this year. However the Russian government retains the ability to defend the currency. It has rebuilt national reserves of foreign exchange and gold, which are approaching the peaks seen before the financial crisis. Government debt is low by international standards and the budget is narrowly in surplus. themoscowtimes.com/realestate 11

12 NEWSMAKER Q Stadiums Seek The Holy Grail Of Long Term Use By Mark Gay Russia is embarking on a massive project to upgrade and build sports stadiums for the first time since the Soviet era. That lack of experience is an opportunity for international architects, consultants and management companies. The Spartak Otkritie Arena will be the soccer team s first permanent home. AECOM L egacy use is the buzz phrase in major international sporting events: how to ensure that once the four-week competition is over, the stadiums and transport infrastructure is not simply used, but remains financially viable. Several major private developers are building stadiums, including VTB Development at the VTB Arena, IFD Capital at Spartak Stadium and Gazprom at the Zenit Arena. The state corporation Sport Inzhiniring will build seven of the new stadiums for the 2018 World Cup. Supervised by the Sports and Tourism Ministry, the corporation was charged in August with spending $3 billion on new build and reconstruc- tors are expected to remove the natural pitch which FIFA requires, and substitute all-weather surfaces. Russia will be hosting the FIFA World Cup 2018 in July of that year, in 12 stadiums, located in 11 cities. The final list comprises Moscow, St Petersburg, Kaliningrad, Kazan, Volgograd, Nizhny Novgorod, Samara, Saransk, Rostov-on-Don, Sochi and Yekaterinburg. The scale of the challenge is illustrated by the fact that the new Spartak stadium in Tushino, due to open in 2014, with a capacity of 47,000 seats, is the first such project since the Soviet era, though Lokomotiv stadium was rebuilt in Scott Antel, partner at lawyers DLA Piper in Moscow, specializing tion. Sport Inzhiniring will build six stadiums, in Volgograd, Kaliningrad, Nizhny Novgorod, Rostov-on-Don, Samara and Saransk. It will also redevelop the Yekaterinburg stadium. FIFA requires a minimum seating capacity of 45,000. Those hosting semi-finals and finals require at least 60,000 seats according to FIFA s regulations. However, architects and developers consider this too big for regular use after the end of the World Cup. So several designs, especially in regional capitals, include plans to reduce the seating and even the height of stadiums after the close of the World Cup. Fully closing roofs have so far been ruled out as too expensive, even for a Russian winter. But operain hospitality and sports, warns that many sports organizations lack the marketing skills and fan base to fill stadiums after the World Cup. If you look at the legacy of the Olympics: Barcelona reinvented itself as a tourist destination, and Los Angeles built into existing university infrastructure. But Atlanta? No. Athens and Beijing; ghost towns. Sydney, a decade later is developing a viable residential zone near the main site. London was fabulous. I ve been to the last seven Olympics. It was incredibly well organized; but is Stratford really going to be regenerated? The jury is out. And that s after a very extensively thought through legacy plan. Many regions do have a huge demand for sports and entertainment 12

13 Q NEWSMAKER facilities: ice rinks, pools and quality gyms for the public. But these arenas can be too big, says Antel. If you look at the existing demand in these cities and what the World Cup requirements are, there is a big mismatch between the two. Alf Oschatz, head of sports in EMEA for AECOM, worked on World Cup projects for Germany 2006 and South Africa He also agrees that FIFA s interests are quite different from those of the local football federation, which is the contractor. Countries who have no recent experience in hosting a major sports event can find themselves in a weak position and doomed to repeat the mistakes of other countries. Oschatz insists that the building of sports and transport infrastructure for the four-week World Cup must be a catalyst. There should be no development linked to these events that is not needed afterwards. If there is a need for an upgraded airport or train system and this can be accelerated or can be realized in preparation for an event then its great. But if there is no need, and it is just for the event, then it makes no sense. And if it is a stadium or any other facility it must be used afterwards to avoid a situation where the city ends up with a white elephant. Kazan, which has already built its stadiums, also constructed a new airport, and aero express train from the city center, and new roads in time for this summers Universiade. Kaliningrad has also built new transport infrastructure. On the other hand Sochi, like Rio, is belatedly addressing transport infrastructure. If you cannot get people to and from the games it does not matter how good your stadium is. You have to know how to organize the transport in your city in the tournament period, said Oschatz. Even when the stadiums and infrastructure are complete, police and municipalities will still need to improve their methods of crowd control, says Antel. At the Olympic Games in London, Sydney, Athens they were controlling people so that not too many people waited on the train platform. They had volunteers telling jokes and passing the time. Or at the athletics world championships in Helsinki and Berlin. What did they do at the Moscow athletics last month for crowd control? They locked all the doors to the metro except one so you had to funnel your way through, one by one. Policing a crowd in a non-intimidating way is a lesson to be learned if you want to leave a good impression. AECOM s team examined the development strategy of Samara and Nizhny Novgorod. You have to look at the market situation, does it make sense to put a shopping mall next to the stadium and another hotel if hotels already oversupply the city? Does the development of the city focus on sports, culture or tourism? City center and suburban locations for stadiums each have their advantages. Rostov has gone for the suburban option, Nizhny Novgorod for the city center. It is important to integrate the stadium into the city environment. In Nizhny Novgorod the stadium is planned to be in a very attractive position on the river with beautiful views and it should be integrated into a waterfront development otherwise it does not make sense to put a stadium in such a nice position and then not develop it. City center stadiums can be an attraction in their own right, says Antel. If I visit the Millennium Stadium in Cardiff, Wales, it is central. I can go for a walk, find a restaurant and it works. Technical design, from the roof to surrounding facilities, is critical. But maintenance can be even more important. Only 20 to 25 percent of the cost of a stadium is construction, says Oschatz. Maintenance and running costs are 75 to 80 percent. There is a huge difference between a modern stadium and one built 30 The population also needs to be able to afford ticket prices which are high enough for promoters to make a profit. years ago, not just in terms of the spectators but everything which is behind the scenes, and needed from a technical perspective to run a modern stadium. Professionals in the entertainment business stress that content is king, more important than the most high tech stadium. People think if you build the stadium you will be a great football club and people will come. No, you have to develop that through a business model, not just state funding. You need a marketing plan, a fan base. The television marketing of sports events is undeveloped in Russia, and even the timing of hockey matches, beginning at 6pm on a weekday is too early for fans just leaving the office. Most sports teams have been funded by state companies/organizations as a side line rather than a going business concern, says Antel. Commercial running of sports teams has not yet become the business model. Maybe that will change it has to. Events and stadiums share the need for sponsors. Russian venues will almost certainly be branded with the name of a corporate sponsor, but the level of income the stadium attracts depends on the strength of the team, and the stadium s character and appeal. The naming rights, soft drinks and liquor, maximizing all forms of revenue are crucial. You won t make it from 30 football games and a few rock concerts, says Antel. The population also needs to be able to afford ticket prices which are high enough for promoters to make a profit, says Mikhail Yakubov, Associate Director, Strategic Consulting, Jones Lang LaSalle. Traditionally in Russia sport and entertainment, especially for the mass sector, is considered to be affordable. That is why it s sometimes shocking for Russians to become aware of the cost of a football season ticket for the English Premier League for example. Due to current themoscowtimes.com/realestate 13

14 NEWSMAKER Q income levels it is only Moscow and St. Petersburg that can provide sufficient demand for a commerciallypriced, quality mass entertainment and sports. VTB Arena Park is one of the higest profile development projects, although it is not one of the venues for the World Cup. With a more modest 27,000 seat capacity, instead of the originally planned 45,000, the project includes a new Dynamo stadium (the 1928 stadium was demolished), a sports academy, and a combined hotel, office and apartment complex. The new Dynamo stadium is scheduled for completion in Though, in terms of hotel accommodation it is not in the center, it combines the type of mixed use and all-year-round attraction that industry experts say is essential to long-term financial success. Br ian Kabatznick, Vice President Business Development, AEG Facilities Europe, leads the team that is helping to develop the VTB Arena & Dynamo Moscow Stadium. AEG s highest profile project is the redevelopment If you take 25 home football matches and, if you are lucky, you get 10 more dates that s a challenge and its difficult. Kazan s stadium is built: it hosted the international university games this summer of downtown Los Angeles to create one of the world s biggest entertainment complexes. AEG s expansion into Europe began with the O2 in London, developed at a cost of 370 million. It operates four venues in Stockholm on a long-term partnership, including two football teams, but also the Ahoy in Amsterdam, and Glasgow s Hydro. Speaking at the Adam Smith Conferences Russian Real Estate and Urban Development Summit, Kabatznick explained how the project differed from, for example, its other projects like Rio s Maracana, Baixada Fluminense and in Sao Paolo and Recife. CSK basketball, they do 30 matches a year, in a 20,000 seat arena. If you look at Moscow football they do 25 home matches per year with a much bigger stadium. The economics to building an indoor building is very different to building a much larger outdoor building. For indoor buildings not only do you have one or two teams playing in FOR REQ Russia will be hosting the FIFA World Cup 2018 in July of that year, in 12 stadiums, located in 11 cities. The final list comprises Moscow, St Petersburg, Kaliningrad, Kazan, Volgograd, Nizhny Novgorod, Samara, Saransk, Rostov-on-Don, Sochi and Ekaterinburg. 1. Moscow s Luzhniki stadium will host opening and closing matches. (See separate story) 2. The Spartak stadium in Tushino will open in 2014, with a capacity of 47,000 along with a metro station. Named the Spartak Otkritie Arena. A six year sponsorship deal. 3. Kaliningrad s 45,000-seat stadium is part of a scheme to redevelop Oktyabr Island, building a new bridge and marina. A flat, sliding roof and is intended to accommodate concerts and conferences as well as sports. The media center and sports village will be incorporated nto the surrounding city after the event. 4. Samara starts construction of its stadium in 2014, with a capacity of 45,000 on a 27-hectare plot. Regional authorities plan a sports and recreation area with high-speed links to subway, rail and water tranport. 5. Rostov-On-Don s new stadium will act as a magnet for the city s left bank, which will include a hotel, business area, office buildings and bus stations. A sports village will operate during the tournament and later be redeveloped. 6. The completion of St Petersburg s New Zenit stadium on Krestovsky Island will be delayed until 2016 or 2017, according to Russia s Audit Chamber. Plans for construction began in 2006, but changes to the design, indlcing a retractable roof, required the demolition of some already completed segments. Transtroi is bilding the stadium which will accommodate 69,000 spectators. At $1.1 billion, it may yet overtake London s Wembley as the world s most expensive stadium. 7. Yekaterinburg s Central Stadium was rebuilt over the five years to However this remodelling did not meet FIFA s standards, requiring reconstruction. 8. Kazan, on the Volga, was the first of the host cities to declare its 2018 FIFA World Cup stadium open. The stadium hosted the opening and closing ceremonies for the 2013 World University Games. In 2017, the arena will host matches at the FIFA Confederations Cup. 9. Nizhny Novgorod s stadium is to be built in the Strelka a western district, where the Oka meets the Volga. It offers several transport options and would renovate a former industrial site. The stadium would seat 45,000 during the World Cup but the design allows for the removal of seats in the upper tiers and at the two ends. As with its rival stadiums, the roof only covers the seating area. Gas and infrared headers will raise the temperature by degrees compared with the outside temperature. 10. Saransk likewise plans to remove the higest tiers of seats after the tournament, replacing the area with a promenade and commercial space. As with Nizhny Novgorod this is expected to lower capacity by 20,000 from around 45, The Sochi 2014 Olympic Stadium will be reconfigured for football. 12. In the Urals city of Yekaterinburg, Sport Inzhiniring will redevelop the stadium. 14

15 Q NEWSMAKER there, so that is 30 or 60 events per year but you will also have 30 concerts or family events so 100 to 150 dates. That s pretty good: one out of every two days. For big stadia the challenge is: you ll have 25 sporting events but after that there are very few concert events, very few family events so if you take 25 football matches and if you are lucky you get 10 more dates. That s the challenge and it s difficult. The core of AEG s business is 15,000 to 20,000 seat arenas or sports stadiums from 30,000 to 50,000 seats. But Katatznick cautions that a typical, mid-sized performance venue would be 2,000 to 4,000 seats for concerts or the performing arts. VIP boxes for 500 to 1,000 people can also have a corporate or social function, such as weddings. Our sports and entertainments business delivers 200 live events a year. What happens to the other 150 days? Well, with restaurants, cinemas, museums and retail you are able to drive additional footfall and traffic even on a quiet day. Arenas and stadiums are very expensive to build and expensive to operate. You need a lot to go right or else the legacy impact is difficult and the cost on the owners, whether municipalities, state governments or private ownership is difficult. We love Moscow like Berlin, Shanghai or London because it s a major market. The question is when you look at Rostov on Don or Yekaterinburg that is where the challenge comes in, Kabatznick said. As well as the VTB Arena Park, AEG is helping to develop the Galactica Park and a theatre near Skolkovo. Another development with a strong entertainment focus is Galactica Park, which covers 22 hectares at the junction of Mkad with Varshavskoye shosse. Developer Rusinkom plans about 1 million square meters of buildings, Scheduled to open in 2018, it will include an indoor Universal Studios theme park, an indoor Universal Studios water park, hockey and basketball arenas, a dining, shopping and entertainment complex, two hotels with 1100 room capacity, 250 metre-tall office towers, a 120,000 square meter retail shopping complex and four levels of underground parking. Alexander Beloborodov, representative of Rusinkom, the owner and developer of Galactica Park said the challenges range from restrictive legislation and protection for intellectual property, to demographics. When you start talking about investment projects that have a maturity to 10 to 15 years, then you start speaking about a customer deficit. One of the reasons we chose NBC Universal over Disneyland is because when we open the whole thing, there won t be many children when you come down to the numbers, that s what it is. As we hit the demographic trough there will be a lot of elderly people and those who don t have children, so we are counting on the demographic boom which we have just had, turning into teenagers. The difficulty of measuring the potential tourist market in Moscow has already caused one investor to leave the project. The standard estimate of four million tourists annually includes an unknown number of business people traveling on tourist visas. On the positive side, the developers are confident that they can create something different. Beloborodov said customers find the same brands at every shopping center and therefore rarely stray from their local mall. Galactica Park would change that, he said, helped by its proximity to two airports, Domodedovo and Vnukovo, 30 minutes or less away. One of the benefits of our project is that in Russia, everything is concentrated in Moscow and within three hours drive of our project we have one seventh of the country s entire population and the wealthiest part. Iconic Luzhniki Gets Set for Makeover as Championships End By Lena Smirnova The heart of the 1980 Moscow Olympics escaped complete demolition and the 1956 façade of Luzhniki stadium is now to be incorporated into a new arena, with capacity increasing to 81,000 instead of 89,000. The project was pitched to investors, but they all rejected it after deeming the plan unprofitable. Authorities will instead use budget funds. Estimates of the cost range from 10 to 28 billion rubles ($303 million to $850 million). Deputy Mayor Marat Khusnullin said on 6th August that the reconstruction costs would be 20 billion rubles, Interfax reported. Ground work on the reconstruction will begin this year to lower the level of the field. Veterans of the 1980 Olympics remain unconvinced that Luzhniki s Olympic spirit will survive the ambitious plans. When someone starts talking about reconstruction, my heart starts bleeding, said Galina Gorokhova, three-time Olympic gold medalist in fencing and president of the Russian Athletes Union. We keep demolishing everything. Gorokhova is also concerned that the stadium facilities, already expensive for city residents, will become even less accessible after reconstruction. She lives close to the sports complex but cannot use any of its services because of the high prices. In Gorokhova s view, the reconstructed stadium should have as many sports clubs as during the Soviet period, so that people can easily take part in physical activity throughout the day, using the area as magnet for visitors similar to Gorky Park. What nonsense is it that you have to pay 300 rubles ($9) to swim at an inconvenient time. Only pensioners can come in during those times, and they can t pay 300 rubles. So the pool stands unused, but they still don t lower prices. Local residents are worried about the scale of construction plans, which include a hotel and a shopping mall. City Hall has dismissed the worries as groundless. Alexander Zhukov, president of the Russian Olympic Committee, is more optimistic about the potential to preserve Luzhniki s historical value. The demands for hosting the opening and final matches of the World Cup, and football matches in general, are somewhat different from what we see now at Luzhniki, so there will be reconstruction to fulfill FIFA requirements, Zhukov told The Moscow Times. But I hope [Luzhniki] will still maintain its character as a historic stadium. VLADIMIR FILONOV / MT themoscowtimes.com/realestate 15

16 INSIDE VIEW Q Over the past 20 years Russia has seen great advances in the quality of construction. The reasons are diverse greater technical skill, higher land prices and rising expectations among clients. Despite the ebb and flow of foreign investment, the capitals and now the regions have modernised thanks to the emergence of younger, welltraveled politicians. David Whitehouse has observed and helped drive the change during two decades in the country. In 2009, Savant, the project and cost management company he founded, became part of AECOM, a giant in the sector. Its activities in Russia range from offices and stadiums to transport infrastructure: motorways, high-speed rail and bridges. Other projects include the stadiums and infrastructure for the FIFA World Cup in Mark Gay discussed the trends, challenges and technical issues of the Russian market with David Whitehouse, Regional Managing Director for AECOM Russia & CIS. 16 A Challenging Market With Great Potential But Confidence Is Key AECOM

17 Q INSIDE VIEW TRENDS AND OPPORTUNITIES How does renovation of the twin capitals compare with what s happening regionally? David Whitehouse: From the inner city perspective, Moscow and St Petersburg, aside from road traffic, are pretty good. Moscow has one of the best metro systems in the world, along with trolleybuses and trams. What it probably lacks now is light rapid transit, over ground that is quicker and more efficient. The infrastructure outside the city centers is largely in decay. There are not enough rail links and they are pretty slow. In Russia you often need an overnight train where in other countries you could travel the same distance in 6 hours on a normal train, not even high speed. So rail is an area that is focused on upgrade, as are regional roads, arterial main roads, and highways from Moscow to regional cities. In terms of airports, Moscow is well equipped, though there are plans to expand the main airports. As for regional airports, we built new terminals in Vladivostok and Moscow, but there are 15 tier two cities with above a million population and the tier three cities, where there are 300,000 to half a million people, have a challenge with airports. Why is Russia s infrastructure improving so slowly? What holds people back, is it lack of experience? DW: It is lack of investment. I think regional and federal governments know exactly what s needed because you can see it in other parts of the world but there is so much needed and investment is finite. So the choice now is high-speed rail, or four new regional airports or six new arterial highways. One issue that s being resolved right now is the legislative framework for public private partnership. Countries that have strong infrastructure have The problem with Russia is not what your risk is today but knowing what it could be tomorrow. Things can change rapidly. gone down the PPP route. The M11 is PPP; the high-speed rail may not be PPP. If you take a typical toll road and you have trucks running between Moscow and St Petersburg, are they going to pay x to get there four hours quicker or are they going to go along the existing route free of charge. Some of the surveys were mixed but generally they were positive, hence the project is going ahead. It s not just about linking one city to another it is what happens around that link. Instead of the past strategy of building a city around something like a river delta or below a mountain, and then building the infrastructure to fit, what a lot of countries do is build the infrastructure, then put in the houses, hospitals and schools. And that is how cities and linkages develop. Several cities are rethinking their historic centers, moving business, or certain types of development away from historic centers. Does Russia need to do the same? DW: Many cities that were built centuries ago around rivers for transport have since moved. Almaty moved to Astana, Istanbul moved to Ankara, Moscow has been to St Petersburg and back. As for business districts, London is expanding and Canary Wharf is becoming the finance district. Moscow has moved business out of the center to Moskva City. It may move further as the agglomeration spreads to the south and west. I think there is a good case to move government. Turkey and Kazakhstan did it to ease traffic, increase business in the center, and create a better hub for the public with more pedestrian space. I think the southwest is an obvious choice. We contribute to a consortium committee for the Urban Land Institute, which advises on the agglomeration. Given the airports and the highways going through Moscow south it seems to be an obvious choice. There is a lot of industry in the east so that limits expansion there. Would a move out of the center make any difference to the high cost of land in Moscow? DW: I don t think it will have much bearing on land prices in Moscow which in a lot of cases are prohibitively high, which is why a lot of projects don t get financial close and if they do it impacts what you put on it. This is driving the changing investor approach. They are building investment grade, with a 50-year life they are doing that because the land prices are so high that you have to put A class offices in order to get long term returns because you can no longer make money on a quick get out as you could 20 years ago when land was very quickly privatized. What is driving the trend to invest in Russia s regions? DW: The fact that development inside Moscow is difficult is not Russia specific; it is no different to any capital in the world, New York, London, Tokyo, Paris where because of the capital s size, its ability to control and dictate is much greater. But the regional governments in many places are very investor-friendly because one of their KPIs is to develop the region and they are not going to do that if they are not investor-friendly. What kinds of business are being attracted to regions? DW: Manufacturing industry. That develops regionally, it provides workforce and revenues and, on the back of that, there is a need for housing, hotels and infrastructure. Twenty years ago everybody outside Moscow wanted to get to the capital and it was a lifelong dream just to get to Moscow. Now people are moving between themoscowtimes.com/realestate 17

18 INSIDE VIEW Q regional cities and there is competition between regions. Ten years ago it was Novosibirsk and Yekaterinburg. Now there is a big push on Vladivostok region and if there are investment and jobs, people will move. Foreign investors are not as present as they were. Is it the cost of land, the fact that local develops hold the land banks, is it confidence or perception of risk? DW: Some investors and developers came here and for want of a better word were burned or had a bad experience. The ones that have remained here are the ones who are confident, can manage the risk, and have been through the process numerous times, the likes of Hines or AIG. They are doing building after building and they know the expectations. To come back in the second time is harder because you need a far greater confidence level than you had the first time. And land prices are higher. Some outsiders cannot understand the level of risk because they struggle to measure the risks in Russia. What is your advice? DW: There is also the fact that some developers just are a more trustful. I think there is trust. The problem with Russia is not what your risk is today but knowing what it could be tomorrow. Things can change rapidly. In London or New York change takes place slowly, in consultation with business, where here it might be: as of Monday morning we are putting a motorway by your office and there is nothing you can do about it or we are moving the business district to the southwest of Moscow so whoever has just developed in Moskva City, what are you going to do with those buildings? It s faith and a lot of the developers have good contacts and can see more easily than someone who has just come to the country. PROBLEMS AND CHALLENGES How is Moscow changing? DW: Moscow has a high ratio of inner city residential which is why you see a lot of business centers AECOM is working on the privately funded Moscow to St. Petersburg motorway and is now bidding the sections from St. Petersburg. Regional governments in many places are very investor-friendly because one of their KPIs is to develop the region and they are not going to do that if they are not investor-friendly. spread out. It s changing in Moskva City where you are getting a commercial district. It is not like some cities where you have a commercial district, a retail district and residential. The residential is being pushed out of the city but that is being hampered by the transport links back into the city. It takes decades to build homogenous districts and transport links. The center still has a big problems with poor roads, and bad drainage and when you get out of the city, a lot of roads should probably be ripped up and totally rebuilt. Why is it so difficult to get around to fixing basic utilities? DW: Highway maintenance is a contentious issue. The problem is the budget available and the quality of product and workmanship that is putting it down is inferior, in terms of the design and base of the road: compaction, how deep is the base. I often get told Moscow is not like London because we have climatic swings from plus 30 to minus 30 Celsius. Which is true but it is no different to Canada, Finland, Sweden AECOM 18

19 Q INSIDE VIEW or Norway who have exactly the same temperature issues. The other aspect is the same companies put the same inferior roads down year after year and then maintain them the following year so there is a revenue stream. Instead of putting a road down with a lifespan of five to 10 years. It s about lifetime costing: you pay a lot more in the beginning but your maintenance costs are lower and that whole philosophy has not yet arrived here in terms of federal government roads. It is here in terms of privatization roads. If you look in 10 years time at the maintenance needed on the M10 it will be far different to an arterial road that was laid down two years before. Will the use of PPP to create more privatized roads change things? DW: I think that alone will change attitudes because government ministers will ask why are we spending so much maintenance on this road and not that one. They ll weigh up that it would have cost them 40 percent more to build but they ll see that the actual costs are lower over the lifetime. That also brings into question the transparency issue. There has to be the will and if the will is there the money is there. Is this problem common to all the countries you oversee in the CIS and Turkey: what is the difference in attitudes? DW: It is different in different countries. For example, if you look at parts of Kiev, like the highway to the airport, or Baku, which is a prime example of quality in road infrastructure for new main arterial roads. If you go there you do not see annual repairs to roads. Generally it s well built because they ve done it properly in the first place, paid a premium to put quality down and they recognize in the longer term it is a better investment. Kazakhstan is different. There are Having been here 20 years I ve seen improvement continually and I still think that while challenging it is a good investment market for local and international businesses and will continue to be. some decent aspects around Astana but if you go to other cities you see the old style strategy. Turkey is not CIS but it is in my region. Their major road infrastructure is good. In Moscow, there is a lot of progress with the introduction of bikes and the greening of the city but a lot of the districts are still islands, cut off by poor roads. There are competing organizations responsible for different elements to the road. What is the way around that? DW: We have worked with Moscow city government in a bid to ease traffic congestion. Cycle ways is an example of where we are working with the city. They ll be on the edge of the road in most cases. We also are working with pavements and sidewalks. We have advised a whole host of issues to alleviate traffic: parking issues, locations of bus stops, traffic light control, turning strategies off main roads, whether you turn left right. It is a difficult city in terms of tunnels because of what is underground in Moscow: the metro, gas and water utilities. All sorts of things have been proposed from elevated rail on top or under roads, or light rapid transit. But there is a finite amount of money that can be spent and when you are doing that you are not doing your high speed inter city rail. Many international architects and designers have been engaged and the city has adopted a lot of their ideas but it seems the nice-to-have are being adopted first and the harder problems are being addressed slowly. Should investors pay a lot of attention to these visions of a future Moscow or should they just take the city as it is, and live with the problems? DW: I don t see a massive change any time soon. I see slow progressive change so investors will accept what it is and build around it. But there are some quick wins on traffic congestion: legislative change so if you have an accident you don t have to leave your cars where they are, hold up the traffic and wait for the police for four hours. You can move your cars to the side of the road, exchange insurance details, and drive on. Cultural change. This is not with disrespect, but if I am in England and driving I will not park on a double-yellow line because I know it s wrong. In Moscow in some cases you cannot walk along the pavement because of parked cars. And that cultural thing will take time. That is more of a generational thing; you are talking about a potential 25-year change in generations. That is why you are seeing change from what I saw 20 years ago. Younger people are coming into government. What changes are we seeing? DW: We re seeing more innovation and the use of technology in buildings and infrastructure. The whole point of Skolkovo is to accelerate that change. We re seeing a change in political stance a lot of the younger politicians are now willing to accept that something from outside of Russia works well, so why not try to replicate it as opposed to the fixed-in-a-rut attitude of it s got to be right because it s in Russia. I ve spoken to several ministers and deputy ministers who are between 35 and 40 years old, which is young for any country and you can see a difference in passion for change. It is no different to any country. TECHNICAL ISSUES How competitive is the construction consultancy business and does the high cost of construction mean clients want more for their money, not because of regulatory standards, but because of expectations? themoscowtimes.com/realestate 19

20 INSIDE VIEW Q DW: We saw a rapid rise in construction costs in the 90s then a plateau, then a drop in the crisis of 98, and then we saw a rapid rise, plateau and drop in Now we re seeing a rise again. Pricing now is very similar to pre crisis levels of 2007 and But while prices are no higher than their peak, what you get for your money is better therefore margins must be coming down and competition is growing which is good for Moscow and the industry. Is it changes in the labor force and has something changed in the construction teams and the Russian skills. It has changed: materials first. In the past you used to buy steel and concrete here and everything else was imported but now the vast majority of components are being produced in country, except for some finishing materials, marble etc. The second thing on labor is you always had your internal decorators form Ukraine, ground workers from Tajikistan. All of that is changing because in the past 20 years the Russian workforce has 20 been trained on the job. At mid management level there has been a strong advance in Russian labor and contracting management. The construction teams are still foreign but the management is local? DW: A lot of the contractors in the past acted as a contractor and subcontracted the work. That is changing, especially with the big Turkish contractors who will self-perform because they have the ability to bring large teams in. If they do that competitively and they have confidence then that same team goes from project to project. What about the difference between Russian and international regulations? DW: There is a misconception outside Russia that everything has to be built to Soviet snip codes and you are not going to get great quality and everything will take a lot of time. I think that s wrong. The Snip codes are here as a minimum standard and in some cases are more stringent than the west, certainly in The Ice Cube Curling Center in Sochi is a 3,000 seat multi purpose arena. terms of fire, sanitary and, in certain parts of Russia, seismic issues. A lot of projects are built to international standards, Euro code or US standards, which are sometimes higher than snip, code so you then revert to snip codes as a minimum standard. If we were to design something purely to soviet snip codes as opposed to a blended mix it would be more expensive, likely longer and likely the lifecycle costs would be more expensive. Russian developers understand this and so they allow blended codes and more likely Russian codes will be rewritten to be closer to international codes, as Turkey has done. What change has there been in the time to complete a project? DW: Building used to stop in November and restart in March. Projects used to finish the design stage in October but not start groundwork until March but that s changed. We re building right through the winter because of better practices: you can heat concrete, you can put chemicals in it it all adds to the price and the AECOM time but you can build right the way through unless it gets below minus 25, which is not that often in Moscow nowadays. Russian contractors have developed over two decades, you are seeing more fast track development due to better processing, just-intime ordering, less reordering of damaged materials, better planning, better supply chain, and a better-trained workforce. I think we will see an even greater improvement in the timetable. But there is still a significant difference in costs compared with other countries, isn t there? DW: It is probably 20 percent more than North America, 20 percent less than the UK. I always tend to benchmark against Europe and North America because that is our client base. Construction in the UK is expensive but the product is good. Construction in say Germany is probably not far off a par with Russia. In terms of time, to physically build a project here is probably 30 percent longer than in London. If you take the whole project cycle it s probably more like 40-plus percent because of the statutory approvals process and because you cannot work with overlaps as you can in other countries. Also you have the infrastructure issues. In a European country the privatized electricity provider will bring the power to your site. Here it is not privatized so you either have to pay for it yourself or agree they bring it to you as part of the contract with the municipality. Apart from the comparison with Europe and the challenges, what s your outlook for Russia after your decades here? DW: Having been here 20 years I ve seen improvement continually and I still think that while challenging it is a good investment market for local and international businesses and will continue to be.

21 Q INNOVATION Flexible Rooms, Sliding Walls and Breakout Zones Are The Must- Have Features Of A Modern Office If the façade of a modern office building is part of a company s image, it s even more true of the interior, from the reception lobby to the working environment. Tetris is a turnkey, design and build company, recently acquired by Jones Lang LaSalle. Martin Kienberger, Managing Director of Tetris Solutions, Russia & CIS, spoke to Mark Gay about the latest trends in fitting out. When you talk about the supply of a turnkey product the supply of a ready-to-use building to clients what does your role involve? Martin Kienberger: Shell and core is about 10 percent of our business, the rest is fitting out and refurbishment. We work mainly with foreign clients: international companies. We have a lot of requests from Russian clients but it has been difficult to accommodate everyone and we try to avoid growing too fast. We are also working with old or existing buildings. We do site surveys and technical due diligence even on new ones because we need to know exactly the condition of the building and the parameters of what we can do there. Each building, especially in Russia, is individual and you have to do a site survey in each case. Are you working for the developer or the tenant? MK: We work mostly for the tenant, working with floors rather than the whole building. In the core of the building are the connection points to the ventilation, the smoke exhaust system, sprinkler system, the heating, water supply and so on and then we follow up with the distribution along the floors. There is basic heating for the winter when the floor is empty and fire fighting systems that are built in as without that the landlord won t get a certificate to use the building. What are the demands, in terms of fitting out, of certifications in BREEAM or LEED? MK: There is a trend among corporate clients n Russia to go with BREEAM and LEED and we are certified. Clients are ready to spend The trend is to have flexible and transforming offices where you can create a small meeting room or move the walls to make a zone for speeches, parties or seminars. TETRIS money and it is a question of cost because you do not have simple lighting fixtures but instead motion sensors and cells to measure the levels of natural light coming into the room which dim the lights accordingly. Certification also affects the heating system, the air conditioning, the ventilation, and the mechanical and electrical engineering systems, which are more efficient. In Russia, saving energy is not people s first expectation but it is increasing. What about office fittings, the painting and final finishing? MK: If it is a turnkey fit out that we are providing we have in house designers and we work with international and European architects to provide high quality international design. There s a big focus on the informal nowadays meeting rooms, cafes, even rest and play areas. Do you see that in Russia? MK: We work with many corporate clients and they expect this. We are doing some nice coffee kitchens with lunch zones and breakout areas. The trend is to have flexible and transforming offices where you can create a small meeting room or move the partition walls to make bigger meeting rooms or a large zone for speeches, birthday parties or seminars. That is a big trend. The walls are on rails at ceiling level. It is very soundproof. There are already good room divider systems available in Russia which park in cupboards next to the walls. When you remove them what is left is just a slot in the ceiling and floor. themoscowtimes.com/realestate 21

22 INNOVATION Q The volume of fresh air provided by the venilation system is the first limit on how many people an office can hold. TETRIS How much do you import? MK: We are still importing quite a lot because we want to provide high quality and although some companies are producing in Russia the quality is not the same as you get from Europe. I would say, excluding the building materials like plaster board or suspended ceilings (though even ceilings are sometimes imported) on average 60 to 70 percent is imported: carpets, floor tiles, kitchen equipment, desks etc. Obviously it adds cost, but does it add a lot of time to a project? MK: The delivering time is six to eight weeks but if you plan it from the beginning and think about it during the design phase and fit it into the time schedule, everything is possible. It just takes more organizing and is one of the challenges of doing business in Russia. Is it true that Russian building standards can be higher than European standards? MK: Because of what people expect for the money, yes. Standards according to a Class A office building in Russia are one of the highest because the rent or lease is one of the highest globally and the client is expecting a very high quality building to a very good technical standard. There can be 24-7 cooling ventilation, two independent power supplies, with triple back up. These can be crazy standards. You say you expect to add more Russian clients with time but do you expect the demands of Russian clients to be different. Russian companies are a bit more individual. Those which can afford a Class A building in Moskva City are investing money in what they call a VIP office. They often expect higher standards. What other kinds of projects do you handle? MK: We do all kinds of fit out work office, retail, residential, industrial, hotels and resorts. Tetris may be involved in the fit out of the arenas but more likely it would come under the project management of Jones Lang LaSalle. At the moment 90 percent is office, the rest is divided up. We have a warehouse in Moscow region of 20,000 square meters with an adjoining office of 1,500 square We are still importing quite a lot because we want to provide high quality and although some companies are producing in Russia the quality is not the same as you get from Europe. meters fitted out to very high standard. In Chekov there is a laminate plant. They have an office park with a Class A office. They all want fit out to a high standard. For the moment we are focusing on Moscow and Moscow region. How have office interiors changed over recent decades? MK: Some companies developed their own office strategy and design, a house style in terms of layout and look. Most important today is high efficiently offices which are transformable, the ability to have a meeting room one day, and put six work stations there tomorrow. Hot-desking is a growing trend. How do you see the market developing? MK: There is a huge office pipeline over the next three years and from our side we expect to deliver some big projects. And half of this will be class A, and out of around 12 million square meters to be delivered globally in 2013 to 2015, each year about 6 percent of that will be in Moscow, which is one of the highest global pipelines. 22

23 Q INNOVATION Tetris is now in 13 countries, and is expanding to Germany, Switzerland, and South Africa. We have access to team of 50 architects in Tetris EMEA. How does the retail market differ from the office market, when we talk about fitting out? MK: It is very important to figure out the needs of the client and the timeline and to be open about what we can and we cannot do. In retail, many shops are from 150 to 1,000 square meters, sometimes bigger, but in the smaller shops you can only do so much. You can never put more than a certain number of people in one place. A lot of clients will go to another company that promises to do the impossible and then they come back to us. Do companies still tend to try to squeeze as many people as possible into offices or has this changed? MK: According to the lease prices in Moscow everyone tries go get as much as possible on one floor but there is a limit according to the building capacity. There is a limited volume of cubic meters of fresh air per hour: this is my first limit. Then we have norms, standards, and if the client wants two square meters per workspace we are going to decline that because we would be a guilty Sliding walls can form offices and meeting rooms. When not in use, they fold away. International companies now expect to offer hot desking and rooms for impromtu meetings. Kitchen and lunch zones offer a change of style and pace. party. The health and safety norms in Russia are of a high standard and even more difficult to implement than in Europe because the requirements of the fire marshal are very high. They check everything carefully. Is it true that renovating older buildings is necessarily more expensive? MK: It is partly true because if you are doing a refurbishment or a refit you have an existing office which is theoretically ready to use but the headcount and how departments are laid out is very different between companies. Clients might think it is a slight modification carpets and modifying the air-conditioning but there can be associated engineering works and usually about 70 per cent has to be demolished or newly installed. Once you complete a fit out are you retained to maintain the office? MK: We hand over the keys. The landlord has his maintenance company. We are handing over the premises not just to the tenant, who is the client, but also to the landlord. We have to deal with two clients. We have to agree the working documentation with the landlord before we start then hand the systems over to the maintenance company. We provide a guarantee but they maintain it. TETRIS TETRIS TETRIS themoscowtimes.com/realestate 23

24 FOREIGN MARKETS Q Russian Investors Buy Into Premier International Locations But Wait For Resort Markets To Bottom Out By Marina Marshenkulova MORGUEFILE/HOT BLACK Central Bank figures suggest that purchases of international real estate by Russians fell at the start of this year. Experts say Russian buyers are maturing, and paying greater attention to investment potential though holiday homes still dominate in terms of volume. Real estate purchases by Russians fell in the first quarter of 2013 for the first time in four years. The decline, to $413 billion, from $428 billion in the same period the previous year, according to the Central Bank of Russia, may have been influenced by the bank on public officials owning overseas property. But experts say there are several other reasons. Konstantin Kovalev, Managing Partner at Blackwood Real Estate and VP of the Russian Engineering Union thinks Russians are becoming more mature and cautious buyers. And that means that nowadays it takes longer for the transaction to happen, he told Real Estate Quarterly. They now see property abroad more as an investment rather than just a second house by the sea. Yet, in comparison, purchases of holiday accommodation still prevail over purchases of property in large cites. Kovalev says the central bank s findings also reflected fluctuating levels of interest in both foreign property abroad and commercial real estate in Russia. The financial crisis caused prices to drop in weak European economies, yet investors believe that prices will eventually recover. It is now lucrative to splash out $50,000 to $70,000 for an apartment in Spain and wait for prices to go up. Many Russians are taking advantage of the situation. According to Blackwood Real Estate, the top four countries where Russians like to buy property are England (the majority transactions are made in prime locations of London), along with France, Italy and Spain. London is an interesting case, continues Kovalev. One in four homes bought in London is bought by a buyer from Russia or CIS. Russians are hungry for prime areas in London and can spend 2-6 million pounds and more on their properties in central boroughs. The lack of balance between supply and demand generates a rise in prices in central London. Purchases are made in record time and at prices close to the offered. London still remains a safe haven for the investors. 24

25 Q FOREIGN MARKETS Alexander Shatalov, Managing Partner at International agency of elite real estate Intermark Savills Moscow adds that London remains one of the most attractive cities in the world to live and invest in real estate by foreign buyers. Today, in the most prestigious areas of London, the share of real estate purchases made by foreigners is more than 60 percent. Among Russians new housing projects are very popular, where the prices go ahead of the market in the whole. Property in London is a reserve currency in the global real estate market, says Shatalov. The secret of that popularity is in its global financial center status, and that it s a good way to preserve money. London is also attractive to the buyers as a city to live in, to educate children, and run a business. In other words, real estate purchase motives are often intertwined with personal reasons. Some families buy property abroad for children who are studying in university. According to Knight Frank Russia & CIS, the most popular countries for education-related purchases are the UK, U.S., Germany and Switzerland. In addition to all of the above there is another significant reason It is important for the investor to understand where the funding comes from, and what guarantees banks, developers and insurance companies give. Lake Maggiore in Italy is a popular market for Russians but many of those who want to buy have done so. London s Kensington continues to attract investors and expats. for those purchases, says Elena Yurgenova, the head of the department of the elite real estate of Knight Frank Russia & CIS. The transactions are made in order to obtain a residence permit. For the same reason that buyers used to purchase a house in Latvia, for example, changing laws mean we can expect an increase in such transactions in Spain as well. Yurgenova says that a lot of would-be and current pensioners prefer to buy houses by the sea, paying attention to the good environment and stress free locations: Jurmala, the coasts of France and Italy, Monaco, Spain and Montenegro are in great demand. Baltic countries in particular are popular, says Yurgenova. Mild summers without sweltering heat typical of other countries is an attractive choice the older generation. Another factor in favor is the lack of the language barrier, mental, social and cultural proximity with the local population as much as attractive lending rates compared to Russian ones. Along with foreign property, there is an increasing demand for domestic real estate. From an investment point of view, one of the most attractive options now is commercial property in Moscow and Moscow region. At a cost of Class A office rent in Moscow ranks second in Europe after London, and the rate of return is even higher than in some Western countries. According to Savills, in the next 5 years, the prices for the premium property in the heart of London will rise another 24.3 %. Julia Ovchinnikova, the foreign real estate director of Intermark Savills says there are some risks that the Russians and other foreigners face when buying property abroad. They tend to be common risks but they should not be underestimated. If we are talking about a newlybuilt facility in the project, the developer might not get funding for the construction, there might be violation in the commissioning of the facility. Of course, in times of crisis, these risks increase. Therefore, it is important for the investor to understand where the funding comes from, and what guarantees banks, developers and insurance companies give. As for the commercial real estate purchases such as hotels or office spaces, in a crisis, of course, there is a risk that the number of visitors, tenants will drop down, i.e. the profit will drop down as well. MORGUEFILE/PEPE69 MARIA GEORGIYEVSKAYA/MT themoscowtimes.com/realestate 25

26 EMERGING MARKETS Q Georgian Developers Use Thaw To Draw Russians To Southern Climes By Alexander Bratersky Construction in some Georgian resorts has slowed down during the final months of Mikhail Saakashvili s presidency but not in Batumi, where developers are completing and marketing a seafront hotel complex. When Russians and Georgian expats living in Moscow came to Crocus City this April to see the long-awaited performance of Rustavi folk dance group, the concert s main sponsor was urging them to buy real-estate in Batumi, the Black sea resort in Georgia. Georgian developer Orbi Group, recently opened an office in Moscow following a thaw in Georgian-Russian relationship after the short military conflict in 2008 over the breakaway republic of Ossetia. There is no diplomatic relationship between Georgia and Russia, ORBI GROUP 26

27 Q EMERGING MARKETS but people were coming to Batumi and looking to buy apartments, learning about them on the grapevine. So we decided to come over, said Nana Kassa, Orbi group representative in Moscow, based in Baumanskaya. Fifty percent of the buyers of real estate projects offered by Orbi Group are Russians. While Georgian companies still have a low profile in Russia due to political uncertainty, Orbi Group which entered the construction business in 1997, became the first major Georgian developer on the Russian market. Kassa said that the company will soon open an office in St. Petersburg catering to Russian clients who are ready to pay up to $1,500 per square meter to own an apartment in a residential complex in Batumi, a Black Sea resort and the capital of the autonomous Georgian republic of Ajara. The price gap is such that some wealthier Russians did a double take, mistaking $21,999 as the price per square meter. In fact, small studio apartments within the residential complex start from between $20,000 and $30,000. Owners can rent them out for around $100 per day. The company provides loans to foreigners through Georgian banks, although rates, starting from 11.9 to 13 percent are high, even by Russia s own elevated standards. While some from the older generations are driven by nostalgia to spend time in what was once a popular resort of the Soviet Union, others are driven by quality of life and the chance for entertainment. Batumi is known for its nightlife, bars and casinos. A city of 180,000 people, Batumi attracted half a million foreign tourists in The resort has undergone a facelift during the rule of outgoing Georgian President Mikhail Saakashvili who visited the complex construction site last August. This is how Donald Trump began his business and he is now building half of the world, Tourism dominates the economy of Batumi, which also includs shipbuilding, food processing and light maufacturing. Even if sales drop, we have the money to complete the project. Saakashvili enthused during his visit. People often say that foreigners have bought everything in Batumi and they are constructing it. I would like to point out that Orbi Group is a completely Georgian company, In March, the company unveiled the 22-story Orbi Plaza aparthotel of 850 suites which sold out and it is currently finishing the construction of its main project the Sea Towers residential hotel complex, which consists of two 25-storey towers and another of one 34 storeys. The Sea Towers complex of 1,900 suites will be completed by November. The company has other projects in Georgia including a 4 star hotel in Bukuriani ski resort, to be unveiled soon. But it sees Batumi, where it owns its own cement plant, as its home base. Even if sales were to drop, we have the money to complete the project, said Kassa. The developers claim to have attracted as purchasers several Russian celebrities, television hosts and even a well known film director. ORBI GROUP MORGUEFILE/JESSICA G themoscowtimes.com/realestate 27

28 ST. PETE SCENE Q FRANCESCO PIRANEO G / WIKIMEDIA COMMONS Older Two-bedroom Apartments Hold Their Value As Residential Market Slips By Olga Kalashnikova New, inexpensive apartments are pushing down the price of residential real estate in Moscow and St. Petersburg. While the first half of 2013 has seen an overall increase in the indexes for residential real estate in Russia, the country s two biggest cities have struggled. We saw a lot of budget-priced apartments introduced onto the market at prices lower than we have ever seen before, so of course this has significantly influenced the overall real estate market, said Igor Petrov, CEO of Matrix Real Estate. According to data from Matrix, most in demand are studios from 24 to 28 square meters priced at around 1.9 million rubles ($57,913); one-bedroom apartments from 33 to 40 square meters, priced from 2.2 to 3 million rubles ($67,058-$91,443); and small two-bedroom apartments from 52 to 60 square meters priced from 3.1 to 3.8 million rubles ($94,491-$115,827). Three- and four-bedroom apartments are less in demand and therefore difficult to sell. By the end of the second quarter of 2013, 18,500 apartments had been sold in the St. Petersburg and Leningrad Oblast regions on the primary real estate market. This was a 16.1 percent increase compared to sales figures for the first quarter in 2013, according to data provided by the St. Petersburg Real Estate Consulting Center. However, the growth in sales for the same period in 2012 was markedly higher, sitting at 28.2 percent. A reduction in sales was noticed in spring due to the financial collapse in Cyprus, where wealthy Russians hold 40 percent of all bank deposits., said Pavel Pikalev, head of Penny Lane Realty in St. Petersburg. While the price per square meter has not changed, additional discounts offered by developers affect the final price of the property, said Polina Yakovleva, head of new developments at NAI Becar. In the first quarter of 2013, the price index for all resale apartments in Russia rose by 10.3 percent, according to Rosstat, the Russian Federal Statistics Service. However, when this figure is adjusted for inflation, the actual price increase falls to 3.05 percent. In St. Petersburg, the overall price for resale apartments rose 5.3 percent but again, when adjusted with inflation, actually fell by 1.6 percent. There is a decline in demand for one-bedroom apartments in old concrete-panel buildings, commonly known as Khrushchyovki [1960s Sovietera three- to five-story residential apartment blocks constructed with concrete or brick paneling and named after Nikita Khrushchev] and korabli [popular 1970s Soviet-era apartment blocks with nine to 15 stories]. These apartments are priced from 2.6 to 2.7 million rubles ($79,250-$82,298), said Sergey Drozdov, the general director of the Petersburg Real Estate agency. Two bedroom apartments in older panel buildings are still in demand and cost 3.2 to 3.3 million rubles ($97,539-$100,587). However, there is still a high level of interest in the resale of high-end apartments of at least 100 square meters and priced from 13 to 15 million rubles ($396,253-$477,215). When you look at these prices, the price per square meter is stable, he said. This year, the usual decline we see in summer started much earlier, in the spring, and we are still experiencing a decline. However, we can t just blame the season for this we also have to factor in external economic and political factors that can influence the real estate market, said Leonid Sandalov, deputy director of NAI Becar. From 2000 to 2007, Russia experienced a housing boom with secondary market prices increasing by 436 percent while primary market prices rose by 362 percent. Property prices started to decrease by the end of 2008 and began falling further in the second quarter of Today the average price of a square meter in a new apartment is 48,795 rubles ($1,487), which is down 7.6 percent from the price in the first quarter of 2008, which was 52,799 rubles per square meter ($1,609). The overall space available on the resale market is about 150,000 square meters less than double the space in newly built apartments, which is about 280,000 square meters, said Pikalev. Real estate is most in demand in the Moskovsky, Nevsky, Primorsky and Kalininsky districts. The largest boom in newly constructed apartments is in the district near Devyatkino metro station, where a majority of St. Petersburg developers have property. According to data from Colliers International released in early June, 55 percent of new elite housing is found in the Central and Admiralteisky district, 33 percent on the Petrograd Side and 11 percent on Krestovsky Island. The data also shows that the average price of high-end property has also increased by seven percent. According to a forecast by Matrix, no significant changes on the market are expected for the second half of While prices are expected to be stable, it will be up to the developers to offer special incentives to attract customers. Suburbs Are First Choice For Some Buyers By Olga Kalashnikova The St. Petersburg suburbs have not always appealed to residents who struggle to afford the city center. But now investors are devloping residential real estate, close to the ring road, providing suburbanites with their own lifestyle. Homes with gardens, and other types of suburban living accounted for almost half of all residential real estate put on the market in 2012 within St. Petersburg and the Leningrad Oblast. According to the Petersburg Real Estate Consulting Center, in 2012 these areas accounted for 1.45 million square meters of residential space on the market, while the inner city areas accounted for 1.9 million square meters. By the end of 2012, the suburbs were home to 16.5 percent of the total residential real estate available in St. Petersburg, a figure that has grown to 26 percent today. There is a remote area, just 20 to 25 kilometers from the ring road, that provides an alternative to inner city living. Townhouses in these areas are 28

29 Q ST. PETE SCENE becoming more popular and competitively priced compared to city apartments, said Yelena Karaseva, marketing director at Petrostyle Development Company. Usually the price per square meter in these areas is much less when compared to areas in the center of St. Petersburg. This means that with the same budget, one can either buy a flat in the city or a house of about 100 to 110 square meters with two parking spaces, she said. Data from Matrix Real Estate suggests the price of residential real estate in the same class segment in St. Petersburg and Leningrad Oblast can vary by up to 20 to 30 percent. According to Petersburg Real Estate, for example, the average price per square meter in the suburbs is 67,020 rubles ($2,037) while in the centre of St. Petersburg the average price is around 88,690 rubles ($2,696). One can buy a townhouse near Gatchina for 1.1 million rubles ($33,436). We get a lot of interest in real estate like this due to the convenient location as it s only 10 minutes by car to the Moskovskaya metro station, said Igor Petrov, CEO of Matrix Real Estate. The average price for townhouses in the popular Vsevolozhsk district is slightly higher, costing from 1.7 to 3 million rubles ($51,673 - $91,188). The high demand in this location is due to its pastoral setting. Inner city real estate does not offer pine trees and lakes. We call the Vsevolozhsk district the golden triangle for townhouses, said Karaseva. In 2012, more than 1 million square meters of residential housing was put on the market in the Vsevolozhsk district, the highest figure of any area. This year, however, remote regions in the Leningrad Oblast, such as Gatchina and Kirov, as well as the Kolpino district of the city, have started to develop while real estate in Pushkin, Pavlovsk and Lomonosov are more popular. These towns already have a developed infrastructure, so customers have an opportunity to live within an established city while enjoying the satisfaction of living closer to nature. This type of lifestyle choice becomes more important when a customer has a family with children, said Sergei Mkrtchyan, sales and marketing director at the Alexandrovsky residential complex in Pushkin. Here in the suburbs, people have fewer neighbors, which allows for more camaraderie, he said. Almost all of our customers who purchase townhouses live in them year-round, regarding them as a better alternative to city apartments, said Karaseva of Petrostyle. Investors Tout The Benefits Of Hotel Living By Olga Kalashnikova More developers are including residential elements in commercial properties, but they come with a twist. As the law limits the locations where they can build residential properties, real estate companies are starting to build units that are, in effect, apartments, but where residents cannot get local registration. The taxes on these units are also higher than on residential properties but the prices of the apartments themselves are usually lower. In Moscow the sector has already taken off, and purchasers buy commercial apartments as primary residences as they cost 15 percent less on average than apartments in residential buildings in the same location. In St. Petersburg, the market for these apartments is just beginning to develop but it follows a different pattern, according to Maris, part of the CBRE Affiliate Network real estate company. The highest demand for apartments in commercial spaces is among investors who plan to lease them out with the help of a management company. The main feature [of the St. Petersburg market] is the presence of profitable programs for investors and a whole range of hotel-like services that will be provided by the managing company for serviced apartment tenants, said Natalia Skalandis, managing director of property management at NAI Becar in St. Petersburg. The market will develop with a special focus on quality, as living in a hotel is a dream come true for most people due to the high level of service. People often don t want to leave hotels when their holidays end. So-called apart-hotels have already gained popularity in Europe, especially in London. Apart-hotels offer rooms for stays from one day to one year. Hotel services are available upon request, though are more limited than in traditional hotels. Usually apartments belong to a single owner, though sometimes they are co-owned. A professional hotel operator manages the residence, joining the project in its beginning and adding the standards of the hotel chain. In St. Petersburg, the Staybridge Suites apart-hotel operates as part of the InterContinental group, according to data from Maris. For a long-term stay, serviced apartments are more suitable than aparthotels. The average Russian is more comfortable renting a regular apartment; however, serviced apartments have a number of advantages. First of all, there are a wide range of additional services available: Food delivery, housekeeping, parking and dry cleaning, said Kirill Akinshin, head of the consulting and evaluations department at Maris. Another benefit is the security of the agreement. You won t be told at any moment that you have to vacate the premises next month because an owner decides to sell an apartment. Also, the rent is often lower [in serviced apartments] than in the same residential apartments. The owner earns on the additional services, he said. Such apartments are common in Scandinavian countries, where tenants can rent out apartments of different sizes and prices in multi-flat residential buildings. In St. Petersburg, the company Sato represents this segment with more than 200 apartments in the central part of the city. The elite Monferran apart-hotel offers apartments from 255,000 rubles ($7656) per square meter. Prices for business-class apart-hotel rooms on Moskovsky Prospect vary from 130,000 to 155,000 rubles ($3,903 $4,654) per square meter, according to data from Colliers International. The other three projects are in the mass-market class of apartments. Given the shortage of land appropriate for residential construction, more and more apartments that are legally considered non-residential properties will emerge, said Akinshin. FOBY SIMKIN / FLICKR themoscowtimes.com/realestate 29

30 30 MONEY MATTERS The year 2013 has been a difficult one for emerging markets. Equities have shed some 12 percent so far and debt fared hardly better. The average yield on 10-year EM government debt has expanded by some 100 basis points since Ben Bernanke proposed tapering off quantitative easing. EM bond funds have seen 14 straight weeks of outflows. Such an extended run on debt has not been seen since the global financial crisis in Russia has not been immune. Equities are down 12 percent this year, though this looks respectable compared to India and Brazil which are both down over 20 percent. In line with EM peers, debt has suffered too. The benchmark Russia 30 sovereign debt has traded up to 4.4 percent versus 2.6 at the start of the year with, of course, most of that jump coming after Bernanke s QE tapering comments. The ruble is holding up a little better. Undoubtedly the conflict in Syria and the threat of Western military intervention has been the anchor, rather than any positive domestic growth driver. Fortunately with the average price for Brent through August at over $110 a barrel and little near term hope for resolution to Syria s troubles, this position is unlikely to change any time soon. Nonetheless Russia is in a precarious position. The oil price cycle Q Available Finance and the Chance of a Rate Cut are Positive Signals for Market By Tom Mundy, National Director, Head of Research, Jones Lang LaSalle, Russia & CIS The economy is increasingly dependent on the oil price to support fading growth but real estate continues to benefit from a strong consumer market and potential for greater mortgage lending. There appears to be ready access to financing for large deals... you have some strong positives. of the last decade has been an important factor in the growth in the Russian economy, but provides no guarantee for the future and Russia can no longer rely on the factors from which it has benefited over the past 10 years. Apart from oil, the other factors that have supported the country s economic boom are: the massive growth in private sector debt which has funded investment by Russia s largest companies; the growth in capacity utilization by Russian companies after the economic woes of the Yeltsin years; a switch to a 13 percent income tax rate which has been hugely positive for the State s tax revenues and, importantly, growth in per capita income which was heavily impacted after the 1998 ruble default. The momentum of these other drivers has faded and this is evident in the economic dynamics this year. Despite the stellar oil price the economic ministry recently downgraded its full year GDP growth forecast from 2.4 percent to 1.8: better than Europe, but a long way from the nearly 9 percent growth levels before the crisis. The Russian economy appears to be stagnating and the country s current weak manufacturing profile and low levels of investment growth have combined with a soft external environment particularly demand for Russia s exports to push down expectations for Russian growth further and further. This brings us to the exception that is the real estate market. Perversely this low growth environment is contributing to a pretty robust backdrop for the sector. In the first half of this year, Russian real estate investment grew by 31 percent compared to the same period of 2012, with total investment volumes at $3.7 billion, with the majority of activity in the office and retail segments. This included record high investment volume of $2 billion in the first quarter, and second quarter investment volumes of $1.7 billion very close to the record levels seen in the first half of Russian borrowers also have access to financing and, assuming no inflation shocks, the Central Bank has room to move rates down from the current level of 8.25 percent. A move during the autumn is not impossible and developers are willing to bet that with the country s growth profile as precarious as it is there is little or no chance of a rate hike from the Central Bank in the foreseeable future. Indeed there appears to be ready access to financing for large deals. In the first half of this year the number of deals over $300 million accounted for 12 percent of the total number (61 percent of the total investment volume for the period) pretty much double that of the same period last year. Combined with this, even if GDP growth is sluggish, the consumer is still a powerful force with the average Russian devoting an astonishing 60 percent of their private spending to retail. Add to this the fact that Russian mortgage penetration has barely taken off and you have some strong positives.

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32 LEGAL NOTE Q The Civil Code Subject To New Regulation By Natalia Stenina, Head of Real Estate and Construction Practice, Pepeliaev Group Laws on leasehold provide new forms of ownership title but proposals to automatically transfer leases to the new kind of title could be a headache as much as a benefit. The main change going on in Russia is the new civil code and this has huge implications, inter alia, for construction and development. Generally the legal system is developing, the government is trying to make the regulations more efficient, transparent and honest. A number of new types of limited property rights to the land have been adopted from the European codes and practice, for example the right of permanent enjoyment of the land plot known as emphyteusis (mostly used for agricultural lands) on condition that the right holder takes care of the estate and pays rent; the right of enjoyment, enabling a holder to derive profit or benefit from property that either is owned by another person or which is held in common ownership, as long as the property is not damaged or destroyed (usufruct)., etc. It is probably the case that now that there are two or three other titles comparable to ownership title, the most remarkable new title is superficies (the right to possess and use a land plot owned by a third party to develop a building which such tenant will then own). It provides a right to construct, meaning that if you are constructing the building on the land Such significant changes hardly correspond to one of the principles of the legal system, which is stability. you have certain limited rights to the land. However in 50 or 100 years you have to give the building and the land to the landowner It needs to be noted that the draft civil code is not yet approved; it s being widely discussed in conferences, in the duma, and of course among lawyers. There is also a proposal to make all developers transfer their lease into this new kind of title. If they don t transfer it to the new right to construct (superficies) then it would be automatically transferred to such a right, granted for 50 years. Such significant changes hardly correspond to one of the principles of the legal system, which is stability, but investors do realise that Russia is still an emerging market. With the world crisis developing in the background, it remains one of the markets with potential for investment. Foreign tenants and landlords are used to being able to approve more or less any term in a contract unless it violates general legal principles. The Russian Supreme Commercial Court issued a legal opinion clarifying the legal framework of landlord-tenant relations on March 21, In its attempts to tailor its approach to the developing practice on the Russian market, the court is trying to meet the needs of both tenants and landlords. The opinion covers both specific and general issues, the most notable of which are: A lease agreement may be entered into for future real estate, meaning that the lease agreement may apply to premises or a building that does not physically exist when the lease agreement is made (e.g. buildings under construction). The same applies to buildings that have already become operational but whose ownership title has yet to be registered. Importantly, the court ruled that the tenant may recover damages if the landlord fails to hand over the premises because the building has not been constructed (Resolution No.13 of the Plenum of the Russian Supreme Commercial Court dated On Amending Resolution No. 73 of the Plenum of the Russian Supreme Commercial Court dated 17 November 2011 On Several Issues in Applying the Rules of Civil Code Related to Lease Agreements). Nevertheless, no lease agreement may be entered into for future real estate (and any lease that is concluded will be void) should it be proved that the premises/the building are, in fact, an unauthorized construction (According to Russian legislation, this term denotes structures erected on a land plot that was allocated for other purposes, as well as facilities constructed without the requisite permits being received or in material breach of town planning and construction rules and regulations: such structures should be demolished (article 222 of the Russian Civil Code). 32

33 Q APPOINTMENTS Russia. She holds LEED certification. Her responsibilities have included transactions, large-scale relocation and lease acquisitions. She has a Master s degree in International Public Law from Far Eastern State University in Vladivostok. Goltsblat BLP CBRE Andrey Krysanov has been appointed Technical Director in the Property Management Department of CBRE. He will be responsible for developing new property and facility management projects, organizing maintenance works and the standardizing processes. He has 17 years of experience in facility management and the technical audit of commercial real estate, beginning as an engineer. After working as head of facility management in a state company, he joined Knight Frank in 2006 consulting on reconstruction projects and developments, including Park City residential complex, the Moscow City Transport Terminal, and BC Park Huamin, among others. Before joining CBRE, he was Technical Director at NAI Becar, responsible for facility management of projects including Fifth Avenue shopping center, and business centers including Dominikov and Perevedenovsky. He graduated from Orenburg State University with specialization in electric drive and automation of industrial and technological complexes. Darya Afanasieva as been appointed Associate Director in the Office Agency team of CBRE. She will be responsible for cooperation with landlords and lead a team of consultants. Her 13 years of experience in commercial real estate market, includes project manager of the K2 business park for Storm Properties, where her role encompassed land acquisition, concept development and obtaining construction permits. She was also project manager of the Krylatsky Hills business park for CMI Development. Before joining CBRE she worked as Associate Director of Strategic Consulting Department at Jones Lang LaSalle where she was responsible for development consultancy. She is a graduate of the State Academy of Finance and the State University of Land Use Planning. Irina Nevrova has been appointed Director in the Global Corporate Services Department and a team leader of three consultants. She will be responsible for developing relationships with local and international clients. She has a decade s experience in commercial real estate, working previously at Cushman & Wakefield. She was also the head of legal projects for Greenpeace Dmitry Ilyin has joined the Real Estate and Construction Team at Goltsblat BLP. Before joining Goltsblat BLP he worked for seven years at Baker & McKenzie, most recently as Senior Associate. His experience includes counseling as part of greenfield and brownfield projects, tracing transactions for the acquisition and leasing of real estate, and legal support of design and construction. He has worked on the acquisition of an international airport, and the construction of hotels and medical centers as well as leasing premium office space. He is an alumnus of the Moscow State Institute of International Relations (MGIMO), the Russian Ministry of Foreign Affairs and the Institute of Legislation and Comparative Law under the Government of the Russian Federation. Jones Lang LaSalle Martin Kienberger has joined the Tetris Solutions team, a subsidiary of Jones Lang LaSalle, as Managing Director in Russia and CIS. He has more than 15 years of experience in the real estate market. He started his career with PKP Group in Austria where he worked on the rebuilding of an office area for insurance company Allianz Vienna. Since then he has worked for different companies, with a focus on Austria and Russia. Prior to joining Tetris Solutions he was a partner at GEHA construction and engineering. He has worked on projects from townhouses and apartment to hotels and hockey arenas, as well as logistics, office, shopping and entertainment centers. Shannon Quilty has joined the property management business of Jones Lang LaSalle as Head of the Retail Property Management Department, Russia & CIS. She has international business and leadership experience with retail and real estate companies. She started building her career in 1990 in the USA and moved to Russia in Projects that she has managed range from major shopping centers in California, Turkey and in Russia (including Moscow, Yaroslavl and Novosibirsk). themoscowtimes.com/realestate 33

34 APPOINTMENTS Q Dmitry Sennychenko has been appointed Head of Country Office, Ukraine, for Jones Lang LaSalle. He has more than 15 years' experience in the real estate and public sectors. Before joining Jones Lang LaSalle he was Expansion Director of investment & development company Eastgate Development, initiating start-up projects including Asia Trade & Technology Park and Kiev Business Harbour industrial park. Prior to that he was Managing Director of a British company Parkridge Development, responsible for shopping center projects in the major Ukrainian cities. Tom Mundy joins Jones Lang LaSalle as head of research, where he will provide macroeconomic analysis and commentary to support business decisions in the real estate market. He joins from Otkritie Capital where he was head of equity strategy. Before that, he worked for Renaissance Capital. He has over 11 years of experience in the sphere of macroeconomic, political and investment analysis. He graduated from University College London, and took a Master s degree in Russian & east European studies at Oxford University. Jones Lang LaSalle, Russia & CIS has made a number of promotions. Alexey Kuchvalsky (Head of Office Agency), Alexey Efimov (Head of Corporate Solutions), Kate McMurtrie (Head of International Client Services, Corporate Solutions) and Natalia Tischendorf (Head of Corporate Finance) are promoted to Regional Director. INDEX AIG...10 Accor...6 AECOM... 7, 11, 13, Alexandrovsky Complex Amstar...11 Anschutz Entertainment (AEG)...14 A Plus...7 AT Real Estate...6 Blackwood...24 Capital Partners...9 CBRE , 33 Cushman & Wakefield...6, 7 Debriss...7 DLA PIPER...2, 13 Gazprom...12 Goltsblat BLP...33 Hines...6 IFD...12 Immofinanz...9 Intermark Savills Jones Lang LaSalle , 13, 30 knight Frank Maris Matrix...28, 29 Millhouse...10 Morgan Stanley...9 NAI Becar O1...6 Orbi...26, 27 Penny Lane Pepeliaev...32 Petersburg Real Estate PSN Group...6 RosEvrodevelopment...9, 11 Rusinkom...9, 15, Tetris VTB...12, 14 34

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