People In The Know: Braced for the Championship

- Leonid, what do you think of the growth of developers’ activities in Russia?

To begin with, there is no development as such in Russia…at the present time. A development company in the true sense is a company that conceives a project, raises money – usually by borrowing from banks – and then implements it. It does not prepare the design, nor does it carry out the construction work itself, but hires contractors and takes responsibility for the quality of the end-product which goes on to the market.

In Russia this classic form of development is impossible, and there are several reasons for that. One of the main reasons is that the terms of financing are different While in the West developers pay 10-25% of the total value of a land plot with the difference and construction costs being covered by banks at a reasonable interest rate, implementing such schemes in Russia is still not possible.

No Russian bank will agree to finance a project at the initial stages; at best it might agree to finance construction after the developer has already incurred all the costs necessary to obtain the title deeds to the plot, a design for the project and other work. In fact, banks are only ready to finance the least risky aspects at the final stages of the project.

That doesn’t really interest developers because by that stage they have already received offers from potential buyers of the new properties. Although in Russia, too, cooperation between developers and banks is growling rapidly, with more and more credit resources being involved in projects, but we still have a long way to go before development in its true sense emerges in Russia.

- What other reasons could you name?

The reasons are gaps in legislation and the high money value. Besides, the West is more experienced in design and construction. Contracts there are insured, disruptions are unlikely as otherwise losses will be incurred not by the developer but by the contractor who misses a deadline, and the insurance firm that insured the contract.

In Russia things are different, which is why a developer who has signed agreements with a designer and contractors and who thinks that all he has to do is pay the bills without looking too deeply into what is going on at the construction site may fail to get the results he had hoped for. The quality and timing may prove to be quite different from what he expected.

Metaphorically speaking, the process of development in Russia is as different from that in the West as the process of assembling a Lada differs from assembling a Mercedes. If you want to get a Mercedes but you order the car at a plant where Lada cars are made, what you will get as a result will most likely be a Lada. The plant is used to making such cars; it has its own assembly standards and its own manufacturing culture.

Unfortunately, to get a quality product here one has to closely monitor the design and construction work and to get to know all the particulars. In other words, you have to assemble the car by hand.

Barkli is a full-cycle company. We have our own financial department, our construction team with all the necessary machinery, our own equipment and workers. Our company acts as the general contractor at each of our construction sites. We also have a real estate agency that leases out and sells our properties, and a property management team. Barkli also has a unit involved in development. We would gladly switch to purely development activities if we were certain that the assembly line could work without any mishaps.

- Barkli Corporation is a commercial structure focused on making profit. Don’t you try to save on quality?

No, this is a matter of principle. If need be, we will assume any costs to achieve the best results. For example, we completely changed the fa?ade of a residential building that had already been commissioned. That cost us $300,000.

- Why did you have to do that?

At first we tried to prove in court that the hired subcontractor had used low-quality materials and the work had been done poorly. Expert examination showed that although the work had indeed been done poorly the fa?ade still conformed to building rules and regulations (SNiP). That is why it was impossible to make the subcontractor redo his work. The court agreed that the work was poorly done, but there was not enough evidence to demand any changes. We were not happy with the result and redid everything at our own expense.

- By resorting to such measures are you trying to boost your company’s prestige?

There is no need to for us to prove anything to anyone. We don’t work to make quick money with no thought for tomorrow. We are building a company invincible in time and space that is why the things we are doing now must be of high quality and we must have confidence in them today, tomorrow and in the years to come.

- Barkli has been involved in construction since 1993. Have revenues increased or dropped compared to the 1990s?

They have dropped drastically. When the market was short of quality residential and office space people were ready to buy anything at any price. Today they have a choice. Open any periodical and you don’t know where to look first! That is why the requirements companies have to meet in terms of their reliability, history, product quality, and the guarantees they can offer have increased considerably. I think we surpass our rivals in many respects. But, of course, the competition is growing stronger. You know, there is the principle: “Grow or leave!”

- Do you think your company is growing?

It is, and quite rapidly. Our clients also think so. When developing new projects we take into account all our previous mistakes.

- What problems that arise during the design and sale of properties are the hardest to tackle?

Those that are beyond our jurisdiction. For example, some fire safety rules are at odds with common sense. In line with current regulations it is prohibited to equip an underground parking area with a lift that connects it to all the other floors of a residential building. The fire services insist that there must be a lift connecting the parking area with an entrance hall, and another lift from the hall upwards.

That means that residents have to get out of their cars, take any bags they may have and use one lift just to get to another lift that will take them to their apartments. Those who drew up those rules must have been guided by security concerns, but there are plenty of similar examples, the most striking of which are those that result from a lack of coordination between different licensing agencies.

Here is another example. Most natural monopolies include the cost of developing utilities systems in their tariffs. Yet, in spite of that, when connecting commercial properties to their networks they try to get extra money or to force investors to pay for renovations on utility lines for the entire residential area.

They understand perfectly well that it is impossible to get connected to some other engineering system. Even the Moscow City Hall is unable to do anything, although in the investment agreements it takes into account payments made by investors for the development of the social infrastructure. Thus, it turns out we pay twice.

- Which niche is Barkli working in today?

We develop residential properties, such as deluxe, class A and business class housing estates, and class A and B offices. We also develop retail properties and are involved in the renovation of hotels. Nowadays we do not take construction orders from other property owners – the Barkli construction complex is involved in projects financed by ourselves.

- The business center being constructed by the company at the intersection of Prechistenskaya Embankment and 1st Zachatyevsky Pereulok bears the name “Barkli-Plaza”. Are you building it for yourself?

We plan to lease out properties there but we will not offer them for sale. There are a number of reasons that make that project especially interesting. It is situated in one of the best locations on the embankment of the Moscow River, with excellent views, convenient approach roads…

I think that Barkli-Plaza has every chance of being included in a ‘gold fund’ of commercial real estate in Moscow, which is why our decision is quite understandable. Maybe, some day in the future, if we receive a very good offer or if we are involved in some other interesting project, we may consider an offer to sell Barkli-Plaza, but for the time being we have decided to keep the center.

- When will properties in Barkli-Plaza be available for rent?

They are available now. The project is to be commissioned only in 2006, but some parts have already been leased out. Altogether, the center will offer 2,450 square meters of office space, the city’s share not included.

- Do you hope to have all the properties leased out before construction is completed?

Yes. Our experience has shown that some 80% of residential space and the same share of office properties are leased out or sold before construction is completed. There have been cases when our clients were willing to pay for apartments even before construction began, and sometimes even before the site was cleared of the previous facilities, as they feared that there would be no vacant apartments left after construction began.

A similar situation occurred with our commercial properties. One bank had been looking for an office property for 18 months and would not buy from anyone else but from us.

- That purchase has already taken place. Can you name the bank?

Yes, it took place last year. I am talking of the Russian Bank for Development, one of the largest state-owned banks situated at 3/1, 1st Zachatyevsky Pereulok. Moreover, the reconstruction project of that building was awarded a diploma “For High Commercial Importance and Other Economic Parameters” at the contest “The Best Investment and Development Project of 2003”.

- Barkli is involved in numerous projects in the city center where securing a land plot for construction is especially difficult. How do you manage to do that?

In some cases we take part in tenders, in others we resort to different measures. By federal law an owner of a property is entitled to dispose of a plot where it is built. We buy property, contact the City Hall and secure permission to dismantle existing facilities and to build new ones provided they conform to town-planning regulations.

- How did you manage to secure such a prestigious location for the construction of Barkli-Plaza?

We purchased all the buildings situated on that site from private owners, thus consolidating several thousand square meters of property, secured a 49-year lease on the land plot, and then, with a title to the buildings and a long-term lease for the land, we submitted our project to the City Hall. The authorities made the necessary calculations and we paid $5 million to the city budget whereupon we were granted permission to build a business center on the site.

- Did you have a free hand when designing your project?

Subject to existing architectural restrictions. Such restrictions are imposed regardless of whether you are an owner or not. The city is a place where people live, where certain requirements have to be observed, and we are not one of those who, in defiance of all the architectural and building regulations, erect monsters in the city center in order to make more money. What we build is not square meters, but apartments and offices. You cannot make money out of ugliness!

- Which is better: making bids or buying a property in order to secure a plot for construction?

That depends on the situation. As owner of the building we are free to consider different possibilities. The market for buildings requiring reconstruction includes almost the entire city. Practically any industrial estate, building, installation may be available for sale. When we are considering sites put up for tender by the city government the choice is smaller.

- What is the percentage of the cost of securing a land plot by buying the facilities built on it in the overall construction costs?

60%. Today the cost of construction proper is less than 40%, sometimes even lower.

- Which plots are more expensive – those to be developed as housing estates or commercial properties?

The former owner does not care what we build on the site. He is interested in getting his money, but the payments we have to make to the city when developing residential estates are slightly higher than when developing administrative buildings.

- As time goes by, is it becoming easier or more complicated to secure sites for construction in Moscow?

Much more complicated. Firstly, land resources are getting scarce, competition is growing stronger, administrative hurdles are increasing, new restrictions are being imposed. In the summer of 2004 Moscow adopted a law “On the special procedure of regulating town-planning activities on historic territories of the city of Moscow and on the territories of protected cultural heritage in the city of Moscow,” restricting construction in protected architectural zones.

In effect, this means that the entire center of Moscow is no longer available. What happens next is easy to forecast. The city center will lie in ruins, because everyone doubts the city government will be able to raise the budget funds to maintain the architectural monuments. And yet, the authorities still rule out any reconstruction or new construction in the center.

- Do you see any solution to the problem?

I don’t know, let City Hall decide.

- So what might happen to the city center in the future?

Construction of residential estates will cease, and as a consequence sale prices will soar. I think we will soon see apartments offered at $50,000 per square meter on the secondary market. When, three years ago, I said that one square meter of space in the city center would cost $15,000 they said I was insane. Today, we have already seen deals made at such prices.

- Your company plans to develop three business-class residential estates that will include office properties. What prompted you to combine residential space and offices?

First and foremost, the requirements for offices and apartments differ greatly. If we build offices in an area where there is a demand for apartments that would mean a loss of money. At the same time, if we build apartments with windows facing noisy thoroughfares, again we will lose money. We build compounds taking into consideration the proper zoning of territories. Those projects are implemented in such a way as to ensure that residents do not mix with the occupants of the commercial properties. For that purpose there are separate entrances and parking areas.

- Is the arrival of developers from St. Pete in Moscow a result of a weakening in the position of Moscow companies?

And why do you place emphasis on the St. Petersburg companies and voice no concern about, say, a team from Rostov that has arrived in the capital and snapped up a share of the city market? I do not understand what the word ‘St. Pete’ means. I know that there are conglomerates active across the entire country, including Moscow, St. Petersburg, Rostov and Sochi. Moscow is a good market that many want to enter. And why not?

Do you think you can build administrative barriers by racial, ethnic or territorial principles? Competition is growing. Why do you think that for someone bringing oil money from Siberia or from the Russian South competition in Moscow will be any different from that which Muscovites are facing? Moscow is a city where everyone has connections.

Or, let’s assume you used to run a collective farm in Krasnodar; then, in Moscow you will probably have about 30 acquaintances in the government structures. Those capable of working do so; those who can’t leave the industry. Moscow developers who fail to work give up their positions and the vacated niche is taken over by other companies, non-Muscovites included.

And then what does a ‘non-Moscow company’ mean? Do you know how many people living permanently in St. Petersburg work for companies developing real estate properties in Moscow? None! Most of them are Moscow residents now. In their time they moved to Moscow, bought flats, married Moscow girls, and established ties in the capital. What does the history of the capital have to do with their business? I, for one, have never seen any decree banning, say, Sochi realtors from Moscow, or ordering the allocation of construction sites only to Kaliningrad firms.

- Leonid, it is clear that you love your work, but what else helps you to keep your energy levels up?

Meeting interesting people – my work makes that possible, good books, good films, sports.

- Do you mean extreme sports? I’ve heard that you used to do parachute jumps, and you are a master of sports of international class, a champion of Russia, a world record-holder. You have made over 1,000 jumps.

Over 2,500. I did parachute jumping for 10 years. Unfortunately, I have given up sports.

- Why? Do you get enough adrenaline without it?

Too busy. To truly achieve something in parachuting you have to jump 600 times a year. If you jump less, it is a waste of time. To me, parachute jumping is a highly intellectual sport. People who make group jumps have so much data in their heads that they could even play chess mentally.

Group acrobats have to remember about 2,000 movements and they never make mistakes. And if only one of them makes a mistake the entire team’s results will be affected. In the 35 seconds of a free fall a person constantly changes his position making 30 figures! As for adrenaline, people usually feel the rush during the first 500 jumps, but afterwards you just get the same amount of adrenaline as a normal person driving a car.

As times go by and you accrue experience you start treating jumping as a chess combination. Parachute jumping develops reactions, memory and concentration.

- What about Alpine skiing?

I still ski, but I do it solely for my own pleasure.

- Don’t you feel that by giving up big-time sports you are losing out on something?

I do.

- There must be something that makes up for it?

Winning the world business championship.

- And when, do you think, it will take place?

It is taking place every day, only we do not notice it. And those who fail to win the business competition become candidates for standing in line at a labor registry office. The most professional management teams are yet to meet on the same pitch, but it is only a matter of time. And while today there are only five or six international developers present in Moscow with the remaining 50 exercising a wait-and-see approach, tomorrow they will be here.

And while we are sitting around here Japanese builders are developing new reinforcement technology, U.S. designers are inventing new decorating materials, and British developers are implementing new mortgage schemes. And that is going on every minute, every second, in offices that we cannot see. Those guys are training management teams that will arrive here tomorrow and will start playing for real on our field.

- What are Barkli’s chances in that championship? Is there a development team stronger than yours?

We are serious contenders. In terms of management, I think, our staff is the strongest. There are teams that surpass us in terms of administrative resources, in the number of secured sites, the volume of free cash, in the ability to build administrative barriers for rivals. In those competitions we lose.

There are teams with billions of dollars earned in other businesses and they need to be invested in something. They have certain advantages, but advantages based on a single resource will not last. Oil money may run out, administrative resources can be exhausted.

The victorious teams will be the ones implementing long-term programs, who realize that the world business championship has always taken place and will continue, and those who are aware that taking part in that championship there are management teams who are ready to play by the rules. Our rivals’ weakest point is that none of the company owners are ready to build a manageable constitutional monarchy.

Establishing a system of management inside a company imposes restrictions not only on employees but also on its owners. Many company owners are not ready to play by the rules, but would rather retain the full freedom of decision-making.

- And are you ready?

I am, and I see myself not as an authoritarian master but as an element of a managment system.

Leonid Aleksandrovich Kazinets, director general of the Barkli Building Corporation. Born 1966 in Moscow. Graduated from the Moscow Institute of Geodesy and Cartography (MIIGAiK). Hobbies – extreme sports, including mountaineering, rock climbing, sailing, alpine skiing, parachute jumping. Parachute sports record-holder. His athletic achievements are included in the Guinness Book of Records.

Established in 1993 as a contractor, today Barkli is a full-cycle investment and building company specializing in the development of upscale residential estates and top-class office centers.