Market Know-How: The Rise of Consulting

These days, with a large variety of projects in the offing investors cannot count on their own intuition alone, because such an approach would be too risky. In these circumstances enlisting the services of a professional market consultant guarantees that upon the implementation of a project the property “will find the market”.

In the Prime of Youth

The commercial real estate market is constantly changing and growing more complicated. Earlier almost any newly built property could be easily sold or leased out and consulting services were regarded as an additional option but not a necessary condition for the development of new office centers. These days the situation is completely different.

“Developers have come to realize that a project can only be successful if it is based on in-depth professional market analysis and a developed concept plan for the new property,” says Mikhail Gets, the head of the commercial real estate department at Blackwood.

The consulting report itself has changed. “Earlier it constituted a set of templates focusing solely on the marketing components, such as what, where and at what price property had been offered or leased, in other words, sales statistics accrued over the years,” Gets continues.

“These days consulting services are becoming more diversified and include several components such as marketing studies, analysis of the location and surroundings of the property, the project and architectural design, the financial and legal auditing of the project, the expertise of a broker and so on.”

Consulting in Russia is relatively young, and few companies offer the full range of services. Konstantin Romanov, head of consulting at Knight Frank, says there are only six companies in the country that possess the necessary resources to provide professional consulting services.

“Affiliation with international consulting agencies is still the key factor that determines the choice of a consultant,” he notes. Today’s investors often use the services of two or three consulting agencies, each of which is experienced in a particular field.

Companies involved in the construction of high quality commercial properties have a big impact on the development of the commercial real estate market. Most of them work in tandem with Western partners and are run by Western managers interested in the rational use of investment resources. Those firms are especially interested in obtaining the entire spectrum of consulting products.

Moreover, major Russian and Western companies display enormous interest in regional markets, especially cities with populations over one million such as Novosibirsk, Rostov-on-Don, Yekaterinburg, and Nizhny Novgorod. “Hitherto, the regional market has remained poorly explored and lacks transparency, which in many respects affects the creation of quality consulting products,” Romanov adds.

Undervalued Assets

Demand for the services of the ‘full-cycle’ consulting companies generated by developers and investment companies is so high that sometimes consultants are forced to turn down potential customers.

Sergei Ryabokobylko, senior executive director at the Cushman & Wakefield/Stiles & Riabokobylko realty consultant company, believes that some of the consulting services remain underestimated. In most cases landlords chose to manage their properties on their own. Such a short-sighted approach will show up in the later results.

As soon as the market achieves a balance between supply and demand, those properties will no longer attract tenants. “It is possible to manage a 30,000-sqm building on your own,” says Sergei Ryabokobylko. “But 300,000 square meters demand quite a different level of professionalism. This is not just a 10-fold difference, they are completely different matters.”

Consulting for corporate clients is another field with good prospects, believes Ryabokobylko. Several big companies with a large amount of their own or leased property on their balance sheets are currently undergoing or planning to undergo restructuring.

Enlisting the services of a consulting firm could help them to use their properties more effectively. For example, a consultant may help minimize taxation by optimizing the use of real estate and raise funds for the development of the company.

Such entities often have land plots in their fixed assets. The best kind of properties to be developed on those plots is another question for the professionals. “Demand for such services will grow,” Ryabokobylko continues. “Russian holdings are breaking into the Western securities market and they will have to meet the standards adhered to by foreign multi-profile companies, including in terms of real estate assessment.”

The future of project development is also bright. “Today we are involved in many projects to develop territories in the regions,” says Sergei Ryabokobylko. “As time goes by the demand for this service will grow.”

In the opinion of Vladimir Kudryavtsev, analyst at Paul’s Yard, there is still a shortage of high-quality investment project consulting products.

“An important feature of investment consulting is its entirely practical approach, because the consultant’s task is not just to recommend the best method of financing but also to offer a specific investor, to oversee the formation of all the agreements and to ensure that the mechanism works as planned,” Konstantin Romanov explains

However, real estate investments are still quite new for Russia. “While in the West real estate investments reach tens of billions of dollars, in Russia only a handful of deals are worth millions,” Romanov continues. “Although, today we can already see minority stakes in successful projects being bought out, and this is acquiring the character of a definite trend.”

The year 2004 saw a considerable number of development projects launched in Russia. Knight Frank believes, those developments are likely to bring about broad opportunities for the investment market in the future: “We think that over the next several years professional investment consulting will become a priority for the leading firms.”

As of today, however, the Moscow investment project market is still too small compared to other world capitals. Russian investors are more willing to spend their money on new construction rather than on purchasing buildings with leases in place. Besides, many companies prefer to own the properties they occupy.

Ilya Shershnev, the development director of the Swiss Realty Group, sees the development of consulting firms not only in the widening range of services but also in the integration of architectural and design components, offered not just as a part of tender consulting but as an independent product.

“That process has already begun,” he adds. “For example, our company employs architects and designers. We also run environmental tests at our customers’ request.”

Vladimir Kudryavtsev also pins hopes on the development of consulting services accompanying key investment projects. That will be especially felt in 2007-2008 when a large number of new properties will enter the market and reach a peak.

Consulting services are expensive. Admittedly, none of the companies polled by Vedomosti agreed to disclose precise figures. “Clients are least concerned about the price,” says Mikhail Gets. “They are largely interested in the quality of consulting that will later enable them to derive maximum profits from their projects.”

Nevertheless, some figures are not secret. According to Blackwood, Western consulting firms charge $20,000 to $50,000 per month, or $800 to $1,000 per day, considering that a month has approximately 21 working days. According to other estimates, the services of a professional Russian consultant cost $150; those of his Western colleague $300.

But the Western practice of an hourly rate has not taken root in Russia. “Of course, the name of a consulting company does affect the cost of services, but the final price depends solely on the size and complexity of the project,” Konstantin Romanov explains.

Nor has Russia adopted the practice of inviting foreign consultants. “Inviting Western consultants is justified for the execution of complicated and landmark projects such as [Moscow International Business Center] Moskva-City, as their expertise in analogous projects may prove very useful. An indicative example is Canary Wharf,” Romanov says.

“But for the development of most projects – i.e. provincial shopping malls, requiring a knowledge of Russian specifics – companies invite professional domestic consultants, Western educated and experienced in foreign markets.”

By the Book

Experts note that the consulting services market is developing in line with the Western model with most players offering products that have already been used abroad.

“The real estate market across the globe follows the same laws of development,” Sergei Ryabokobylko comments. “The differences in details aside, the rules of developing a building that will live on without growing obsolete for many years are the same in all countries.”

The range of services is constantly growing. But, says Ilya Shershnev, it would be more appropriate to say that the spectrum of services is expanding at the expense of other services that were offered by companies involved in other sectors.

Most of the “novelties” are, for the most part, the same old services, but of better quality, or a part of a well known service or consulting product offered as something new. “Sometimes, the same service or consulting product is presented as something new, and at a different price,” Vladimir Kudryavtsev adds. “Whether this amounts to a novelty is a philosophical question.”

Not long ago Paul’s Yard presented the so-called Investor’s Map – a map of Moscow’s districts indicating the current price of each property by area.

The product is designed to inform potential investors of the prospects of development in specific city areas within a period of 5-15 years, the prospects of price changes for each property, the attractiveness of the investment rating, a profitability forecast and other data.

“Initial reports [on the new product] have sparked keen interest on the part of potential customers,” Vladimir Kudryavtsev adds. “We are convinced of the attractiveness of the product and its commercial success, although originally we were not aiming to achieve any specific profit targets.”

Another relatively new service, launched by Paul’s Yard in August 2004, is the development of PR and advertising concepts for promoting commercial and residential properties.

“Today the Russian advertising and public relations market has no specialized players in real estate capable of rendering a highly professional consulting service that guarantees maximum effectiveness,” maintains Kudryavtsev. With purchasing activity decreasing and supply growing, landlords are forced to pay special attention to the proper positioning and promotion of their projects.

Swiss Realty Group has recently launched a new product for retailers on the basis of geo-information systems. “What we offer is a report on the prospects of opening a retail outlet in any part of Moscow,” says Ilya Shershnev. “Doing such analysis without the help of modern geo-information technology is impossible.

“The report includes everything from the number of people passing by and the time required to get to the outlet in various types of transport from other locations, such as metro stations, etc, to the analysis of all the rival retail outlets operating in the vicinity and the advantages they have.

“We also use data on the number of people residing in the area. Unfortunately, in Russia we do not have sufficient data on the population’s income necessary to make an accurate forecast of sales; nonetheless, our conclusions are based on the data available on the market.”

Knight Frank plans to launch several unique products by the end of the year. The company refused to elaborate, however, citing commercial secrecy.

Consulting companies are placing more emphasis on comprehensive services. Ideally, the range of services offered should include consulting, design, assistance in the construction, leasing, sale and management of property. “If some link in the chain is missing, the client will think you are out of your depth and hence unable to provide professional advice,” Sergei Ryabokobylko is convinced.