Money-Growing: Coming out of the shadows

Experts believe such secrecy on the part of the investors is their response to the city authorities’ covert attempts to disrupt the development of the Kutuzovsky-Kievskaya project, as the city fears that competition would undermine its most ambitious project, the Moskva-City International Business Centre, which requires a total of $7 billion to $12 billion to be implemented, according to initial estimates.

It was not until the Moskva-City project passed “the point of no return” that the first reports of the Kutuzovsky-Kievskaya project appeared. However, the nascent business zone is still likely to provoke competition. If everything goes to plan, six office buildings with a total space of 527,000sqm will be commissioned in 2007, when the first stage of the Moskva-City Business Center is expected to have been completed, offering over 500,000sqm.

No serious offers

The clients of Moscow real estate companies have expressed a keen interest in the office space on Kutuzovsky Prospekt and its adjoining areas. The highest demand is for class A and class B office space. Such interest is understandable and natural, given the proximity of Kutuzovsky Prospekt to the elite residential areas along Rublyovskoye Shosse [highway].

“There are no serious offers in that area, and there wasn’t anything worthy to offer in that area a year ago, or two years ago,” claims Vladimir Kudryavtsev, a leading analyst with Paul’s Yard. According to Kudryavtsev, up until now all the area had to offer were poor quality premises on the ground floors of residential buildings and class C administrative buildings that failed to satisfy the increasing demand. The Tower-2000 office tower, the only business center in the area offering top class office space, was fully leased out long ago.

Stroimontazh was the second company to launch the development of commercial real estate in the area. The Europa Building business centre offers class A office space. “The rent is comparable to prices in the city centre; to rent an office in that business center would cost $585-650 per square meter excluding VAT,” says Tatiana Suslova, the head of the client service department at ABN-Realty.

“The lack of class A and A1 office space is particularly felt in the Kutuzovsky Prospekt area, and new premises are snapped up immediately, at the earliest stages of development,” says Mikhail Gets, head of the commercial real estate department at Blackwood. For instance, the class A office centre at 21, Osenny Bulvar was filled up in a split second despite its remote location.

Viktoria Bekasova, market research consultant with Colliers International, believes that western Moscow is one of the most prestigious areas in the capital in terms of both commercial and residential real estate. “At the beginning of 2004 some 8 percent of the total volume of class A and B office real estate was concentrated here, whereas the central business district accounts for two-thirds of the total volume,” Bekasova points out.

The location and competitiveness of the project are not the only factors taken into consideration when awarding a certain class to an office building under construction. Such factors as local environment, proximity to metro stations, as well as the quality of local utilities play a crucial role.

“Today all the vacant land plots and dilapidated buildings potentially fit for development have already been snapped up by investors, and the general concepts of the projects defined,” Kudryavtsev explains. However, according to market analysts, today most investors engaged in developments of that area prefer not to publicize their intentions, keeping even the essence of their projects secret.

“In our opinion, this is explained by their awareness that new projects are likely to compete with Moskva-City,” a real estate consultant told Vedomosti, speaking on condition of anonymity.

Legion takes over IKEA’s dream site

Legion Development, registered in 2003, has become a serious player in the real estate market in western Moscow. The company has launched two major projects in the area, Stiles & Riabokobylko said in its analytical report.

One of the sites to be developed by Legion is the much-talked-about plot at the intersection of Kutuzovsky Prospekt and Ulitsa [street] Kulneva at 6, Ulitsa Kulneva. Many companies had wanted to develop the site, even though at a one time it was thought to have been set aside for construction of the capital’s Third Ring Road.

The local authorities – the prefecture of Dorogomilovsky District – had planned to build the International Center for Intellectuals here. The famous Swedish firm IKEA, too, had been keeping an eye on the site, with a view to establishing a new retail center there. The Swedes retreated only after the Moscow city government parceled out alternative construction sites for them.

Before the end of 2007 Legion Development plans to erect a 70,000-sqm business center with two underground floors at 6, Ulitsa Kulneva, Vedomosti was told by several real estate consultants whom Legion had informed of its plans. The center will include two edifices – a 30-story high-rise with 25,500sqm of office space and a 7-story building with 13,000sqm of office space.

The first step is always the hardest

Market analysts believe Legion Development, a new player on the commercial real estate market, has a great future. The company began by purchasing the company Bolshaya Ordynka from AFK Sistema, whose core asset at that time was a 67,000-sqm business center under construction at 40, Ulitsa Bolshaya Ordynka, where the Rosgosstrakh insurance company occupies 11,900sqm, and 45,940sqm of office space is occupied by the Legion-1 business center. Market experts estimate the center’s value from around $180 million to $200 million.

Not much is known about the company and its owners. Market participants believe it is linked to Mikhail Gutseriyev, the founder and co-owner of BIN-Bank and RussNeft.

JSC Legion Development, with a chartered capital of 100,000 rubles, was set up by Dmitry Burov and Andrei Aidinov in 2003, according to the Russian Tax Ministry’s inspectorate No.6 for the Central Administrative District of Moscow.

In 2002 JSC Zubari, controlled by Andrei Aidinov, co-founded BIN-Bank, according to the Moscow Registration Chamber. Market participants say that Andrei Aidinov is the son of Nikolai Aidinov, the special envoy of the acting president of Chechnya to Moscow. Both Aidinovs neither refuted nor confirmed the report to Vedomosti. BIN-Bank’s vice president Camilla Spence refused to comment on whether there was any link between the bank owners and the developer. At the same time, she emphasized that the BIN group “has long been successfully investing in commercial real estate”, citing the Chaika-Plaza project as an example.

Apart from its plans for the development of the Kutuzovsky-Kiyevskaya business area, Legion is set to continue the construction of a 145,000-sqm building at 13, Bolshaya Tatarskaya in the Zamoskvorechye district of the city. The territory, currently occupied by a plant producing hydraulic machinery, is to be vacated shortly, as the authorities plan to move the plant beyond the city boundaries, clearing the way for a 100,000-sqm residential compound to be built by 2006, in line with a decree by the Moscow city government.

In the meantime, the plant has been embroiled in a series of scandals triggered by disagreements between its owners and certain individuals close to JSC Stroimontazh, in particular, Vice-president Aleksei Adikayev. On 21 May the premises of the plant were seized by a group of security guards, employed by the privately-owned security firm Feniks, as court bailiffs informed the plant owners of a Yakutia court ruling ordering the incumbent management not to obstruct operation of the newly elected governing structures of the plant.

Legion Development will provide financing to the Dzhi-Invest company that has won the tender for co-investment in the relocation of the plant, the board chairman of the plant said. One of the development companies, talking on condition of anonymity, explained to Vedomosti that the reason it plans to participate in the project is that it has also invested in the development of the area adjacent to the plant. An informed source in the Moscow city government informally confirmed that information to Vedomosti. Legion declined to comment on the issue.

City of Kitezh rising to the surface

Yet another project that Legion plans to carry out is the construction of a 110,000-sqm retail-business center at 3-7, Ulitsa Kievskaya, near the Kievsky train station. Some market participants believe at least two contract killings have been connected with the development of the area.

In 2001 deputy prefect of the Western Administrative District of Moscow Sergei Balashov was killed; co-founder of JSC Kitezh Yuri Zamorin was shot dead a year later. However, since 2003 the development work has proceeded in a more civilized way, with the Moscow city government issuing a decree “On measures to ensure the joint construction of a mini-metro railway and the Kitezh retail and office center” in October of that year.

In line with the decree, JSC Kitezh was awarded an investment contract and a month later the project was endorsed by the public town-planning council of the Moscow mayor’s office. The general director of one of the development firms involved in the business area told Vedomosti that Legion became one of the co-investors in the Kitezh project by purchasing a stake in JSC Kitezh through its affiliated firms. Two other advisory firms confirmed this, though Legion refused to comment.

Although the area in question is believed to be highly attractive, experts believe the successful implementation of the project will not be easy. According to Kudryavtsev, it is necessary to plan thoroughly so the “mistakes made in the implementation of a similar project at another train station in the city” are not repeated. “After all, the building will be facing the rear of the Kievsky train station, the platforms, market stalls – places where marginalized people congregate,” he explains.

Anna Shiryayeva, the general director of Magazin Magazinov, believes that architects and designers have a challenge on their hands. “They will have to overcome the disadvantage of the site’s shape, it being narrow and long. But the future center may have good development prospects provided the concept turns out well,” Shiryayeva says.

Protracted construction on Kutuzovsky Prospekt

However, all the development projects carried out in the area tend to be fraught with difficulties. Construction of the Triumfalny office center at 9, 2nd Poklonnaya Ulitsa, financed by the KV Engineering development company, is no exception.

Development of the major office center, with a total space of over 100,000sqm, was initiated by the Moscow Interbank Currency Exchange (MICEX) in the mid 90s. The foundation was laid in 1997, but less than a year later work was suspended after the 5-level underground parking lot had been built. In 2001 KV-Engineering purchased the site along with the land plot and the work already completed by MICEX for more than $10 million.

Subsequently, KV-Engineering signed an agreement with a major US real estate firm Cushman&Wakefield / Healey&Baker, whereby the latter undertook to raise financing of over $150 million and to prepare the architectural design, says Igor Branovitsky, director general of KV-Engineering. Swanke Hayden Connell Architects, known for its design of the 202-meter high Trump Tower in New York, was contracted to prepare the design for the Triumfalny project.

“But the conditions the US real estate firm proposed failed to suit us and the contract was terminated last year,” Branovitsky explains. However, informed market insiders claim that in actual fact the US firm had failed to get along with the local architects involved in the project.

The new project for a 30-storey Triumfalny office center, including 80,000sqm of office space, and a 350-space 22,000-sqm underground parking lot, was designed by Russian architects inspired by the capital’s Stalin-era high-rises. Yet, despite their efforts, the design came in for harsh criticism at the April session of the public town-planning council, when Moscow Mayor Yuri Luzhkov said that the future center looked like a “pregnant Moskva Hotel”, adding that the building ought to be downsized and the concept revised. However, the companies involved hope that despite all the obstacles, the project will receive the go-ahead and will be commissioned by 2007.

Backyard neighbors

Speaking at the same session of the town-planning council, Yuri Alpatov, prefect of the West Administrative District of the capital, noted that the development of transport networks should be considered a prerequisite before authorization for the project is granted, since two more business centers with a total space of 112,000sqm and 80,000sqm respectively are set to appear in the same area in the future.

Not much is known of those plans, though. The Architectural Design Bureau of Timur Bashkayev has already prepared three alternative designs for one of the projects, but so far even the precise location of the future compound remains a mystery. All that is known is that it is likely to be erected at 11, Poklonnaya Ulitsa – the area earlier occupied by ROSTO (formerly DOSAAF).

Another business center is expected to appear nearby at 8, Poklonnaya Ulitsa, on the territory of the plastics-producing plant Termo, which is to be moved beyond the city limits. Even the investors behind the project refuse to disclose their identity.

Yet another interesting project due to go ahead in the new business area is the construction of the 30,000-sqm Fisherman’s Club. The club, including a sports club and a retail-office center, is expected to be built by 2005 on an area of one hectare at 66, Kutuzovsky Prospekt, allotted by the city authorities to JSC Mosrybkhoz. According to ABN-Realty, the documents necessary to start the project are being drawn up, with its total projected area having already been expanded to 50,000sqm.

Promising but risky

Given the certain ambiguity surrounding the prospects of all the aforementioned projects and the caution of the investors, one could say that the competition between those business areas has already begun.

To prevent costly mistakes while developing the Kutuzovsky-Kiyevskaya business area, market analysts strongly recommend conducting in-depth market research, so as to determine the impact the Moskva-City business center will have on the area in question, as well as on the other areas likely to be affected by that project. Those are the territories along Khoroshovskoye Shosse, Bolshaya Filyovskaya Ulitsa, Naberezhnaya Tarasa Shevchenko, etc.

However, this is easier said than done. “With most developers worried about publicizing their involvement in the projects, conducting impartial market research – either for an individual business center or the entire business area – is extremely difficult, with too many factors may be left out,” says Anna Shiryayeva. “The developers are the first to suffer from their own reticence.”

Analysts emphasize that the development of this business area is fraught with serious transportation problems. “Given the heavy traffic on Kutuzovsky Prospekt and the narrow side streets any slight increase in transport activity brought about even by the commission of 50,000-60,000sqm of office space is likely to paralyze traffic completely,” Kudryavtsev from Paul’s Yard is convinced.

A complex approach towards real estate development and the balanced appetites of investors may help solve that problem, the analyst believes. At the same time, today the Kutuzovsky-Kievskaya business area in terms of transportation is not as difficult to access as the Moskva-City area, and if the developers of the latter fail to pay due attention to the development of transport infrastructure, the former may find itself in a relatively more favorable position.