Market Know-How: Forging Real Estate Alliances

Division of Property

The Best management company has recently undergone reorganization. Despite its name, Best does not confine itself solely to the role of a property manager. The company is known in St. Petersburg as a developer and owner of office centers of the medium category, such as Taims, Resurs, Midel, Granat, and the residential estate Zhelty Ugol (Yellow Corner). The company is currently implementing a number of large projects.

In spring of 2004 Best gave birth to a new firm – MTL Maintenance of Buildings – by reorganizing one of its departments. Andrei Lushnikov, director general of the newly established company, comments on that move as follows: “The number of properties that we manage keeps on growing. Therefore, the maintenance department has expanded with most employees involved in its operations.

“That is why a spin-off was a logical step. The parent company Best with a small staff of 30 experienced and creative specialists has focused on selecting new properties and development, while MTL has focused on the maintenance of buildings. MTL offers landlords a package of property management services, including administration, settling bills with tenants, advertising campaigns, technical maintenance, cleaning and security. A landlord can opt for a basic package, or he can order additional services, such as washing of the facades, the servicing of heating facilities, etc.”

MTL has inherited properties from the parent company. However, Lushnikov emphasizes that the company is building its relations with Best on a purely market basis: “MTL actively offers its services to other landlords as well. The largest deal is an agreement with the company Dubl-2 for the management of the 62,000-sqm Gulliver shopping and entertainment center near the Staraya Derevnya metro station.”

At Gulliver MTL is working with retail, warehouse, office and entertainment facilities. Today the company runs over 100,000sqm of commercial real estate. MTL plans to double that figure each year. MTL works for a fixed fee, with landlords taking part in the calculation of costs.

According to Andrei Lushnikov’s evaluation, the reorganization will help Best to reduce its costs at smaller properties to 35 per cent. “We have already saved a lot by introducing a standard package of services for all the buildings, establishing a singe system of procurement and delivery of equipment and centralizing account management. I believe that spinning off a property maintenance company will pay as long as it is servicing more than 25,000sqm of commercial space,” Lushnikov explains. In his opinion, the market for such services has yet to be formed in the city.

Transparent Vertical

It was also in spring that the Industrial-Construction Bank, or PSB, involved for many years in the investment and lending business on the St. Petersburg commercial real estate market, set up the subsidiary PSB Invest Grupp.

By that time the bank and its affiliated structures, such as PSB Management Company and others, had already implemented several projects for the development of industrial parks and business centers. With the companies brought together under the aegis of PSB Invest Grupp a holding has been established.

PSB Invest Grupp CEO Aleksandr Olkhovsky says: “Firms that have joined the holding are able to carry out the full cycle of operations starting from selecting a suitable investment project to leasing out and servicing properties. This organization of business enables us to considerably minimize the risks outsourcing entails.

“Together those companies employ over 400 people. The functions of each of the participants of the investment process are clearly defined. The bank, in the role as the investment directorate, provides investment resources and exercises control. PSB Invest Grupp develops a strategy and forms a diversified portfolio of projects to ensure a sufficiently high rate of return with risks being reduced to a conservative level. PSB Management Company oversees the implementation of projects and provides property maintenance services.”

As of today, the bank’s portfolio includes projects for the development of as much as 400,000sqm of commercial real estate. And this is only the beginning, PSB says.

The list of PSB’s projects includes, first and foremost, a class A office center at 38, Nevsky Prospekt, to be commissioned in December 2004. Reconstruction of the historic building situated across the street from Grand Hotel Europe and Bolshoi Gostiny Dvor lasted three years and has cost investors 35 million euros.

Other projects include the Admiral class B+ office center at 118, Obvodnoi Kanal Embankment, to be opened at the end of this year, the class B Sheremetev office center at 47, Prospekt Stachek which has already been commissioned, a class B+ office center at 153, Leninsky Prospekt, currently under construction, and several industrial parks. The total amount of investment is over $100 million.

PSB Invest Grupp believes the development of class A and B+ office centers, shopping malls and logistics parks to be the most prospective. It is also active on the land market.

The holding undertakes projects, bringing, on average, the following average rates of return: a year-on-year rate of return of 15 per cent in hard currency proceeding from the net cash flow after tax for the development of existing businesses; 18 to 20 per cent for reconstruction projects and 20 per cent for projects started from scratch.

“Our short-term plan envisages spending hundreds of millions of dollars,” says Olkhovsky. “In the long-term we are set to take part in projects not only on the regional but also on the federal level.”

He believes that the creation of a holding is a normal process that is line with the level of development of the commercial real estate market, in particular, and the economy, as a whole. “St. Petersburg has already seen the arrival of major commercial real estate market players, both from the West and Moscow. But most investors are cautious about investing funds in the development or acquisition of profitable properties. They need a strong local partner and we are ready to become one.

“It is possible to establish investment chains where everyone plays a part in accordance with their preferences and goals in terms of financial return and risks. PSB Invest Grupp is able to join a project at the initial stage, bring it to a stage where conservative players begin to perceive evidence of a real asset, and then sell it to our partners.

“The main requirement serious investors pose to their partners is transparency and a good business reputation. Working with firms that might be quite effective but lack transparency, do not have an established image, a clearly expressed strategy and are not subject to civilized international auditing is no longer the done thing. That is why the consolidation of companies into a holding with a clear-cut structure was, for us, quite a logical step,” Olkhovsky explains.

Commercial Hydra

In autumn a new brand entered the St. Petersburg market – Ai Bi Grupp. Several companies operating under that name are set to work actively as developers, managers, agents and consultants.

The core of the group is the Piter Management Company, operating four business centers in the city – at 2, Lev Tolstoi Street, at 100, Bolshoi Prospekt of the Petrogradskaya Storona district, at 12, Kantemirovskaya Street and at 2, Italyanskaya Street. The company is also involved in several projects currently developing shopping centers.

Until recently the Piter management company was a subsidiary of Commercial Center Piter that owns the Sennnoi and Troitsky markets, and the Sennaya retail center in Yefimova Street. In summer Piter gained independence. The change of status brought about changes in the company’s market strategy and the establishment of Ai Bi Grupp.

“We have deliberately divided our business into several lines, each of which will be developed by a separate firm. Partially, this was done for the purpose of tax optimization. But the main objective is to expand our presence on the market by offering specialized services. Even leasing space has its specifics depending on the type of real estate, not to mention development,” says Sergei Igonin, co-owner of Piter.

The group intends to continue managing business centers, including municipally-owned facilities. The newly established Ai Bi Retail will focus on shopping malls, acting as an agent, consultant or property manager. The new firm will take over the projects currently overseen by Piter. They are the shopping malls Galereya 1814, Yuzhny Polus (South Pole), Grand, Planeta Neptun and others.

Ai Bi Development has been set up to implement investment projects in the office and retail real estate sector. According to Igonin, the firm is currently looking for long-term partners and investors, and for interesting sites. He hopes to launch his first project within the next six months, constrained by a budget of $10 million. Ai Bi Management will focus on consulting and external administration.

Market participants differ in their opinion on their colleagues’ propensity for setting up holdings. Aleksandr Grishin, general director of the VMB-Trust company, believes the reorganization of businesses to be just another fashionable trend. “Centrifugal tendencies are found in this country, as well as abroad. The companies want to offer the whole range of services on the market, while avoiding responsibility for an affiliate’s drawbacks. Apart from that, clients tend to prefer specialized firms. Within VMB-Trust there is also an independent legal entity involved in the maintenance of buildings – OOO DEN. But for the time being we are not promoting it actively on the external market.”

Andrei Tetysh, board chairman of the Bekar group of companies, says: “In the years of reforms Russia has seen the emergence of a variety of holding structures. But experts in holding management are few, while it is still quite difficult to evaluate the performance of such enterprises. Alas, executives from many holdings are firmly convinced that doing everything on their own is much cheaper and more effective.”

“But while the entire group may report positive financial results, a more profound analysis may reveal that some of the firms within the holding eat away at the other companies. For the holding to develop, centrifugal tendencies have to be developed, powers delegated, but at the same time it is necessary to settle the inevitable conflicts between subdivisions, to foster synergy. We have been working on that at Bekar for many years, and this has enabled us to set up an effective business structure.

“Of course, setting up a divisional-matrix structure in companies involved in the commercial real estate market is a normal stage of market development. The main thing is that you have to forget about the idea of making money focusing solely on the sectors where you really lead your rivals.”