PEOPLE IN THE KNOW: Civil Servants Merge into the Market

Its new head has brought along a team of top executives from private companies, paid more attention to publicity and promotion of what the fund had to offer – the city’s shares, real estate properties and land – and set out to turn privatization auctions into real shows. Stepanenko’s revolutionary approach has met the expectations of Smolny as the city government works towards the implementation of its privatization plans.

The progress made by the city officials in that sphere over the past twelve months is indeed impressive. The city has earned huge revenues by selling off its stakes in St. Petersburg hotels, succeeded in attracting foreign and Moscow-based investors while the list of properties for sale has continued to grow.

- What have you achieved over the past twelve months?

Most importantly, we have been able to prove that the property fund is capable of tackling serious tasks set by the government. It is no secret that two years ago everyone doubted the ability of our agency to successfully sell even the most attractive properties.

Some recalled the 2002 sale of 40% of the shares in the city’s leading hotel, Grand Hotel Europe. The stake was sold for $1 million or so subject to the condition that the amount would be used for a specially defined purpose.

Incidentally, today, too, following auctions for the controlling stakes in the hotels Moskva and Oktyabrskaya – for $40 million and $50 million respectively – some doubted that the investors would pay those amounts in full. But the money was transferred to the budget without any delays.

It turned out that it is still possible to employ market mechanisms while working in the public sector, although initially many were skeptical, saying that getting to the bottom of things is extremely difficult in the labyrinths of bureaucratic structures. I hope that these days our potential clients are revising their opinion.

On the whole, the year was successful although there were some problems and failures, too. For example, the idea of holding a video conference with Moscow for the sale of leaseholds to plots of land in short packages (for the right to develop town-planning documents and determining the scope of construction).

But, as we all know, only he who does not work does not err. The results speak for themselves. In the year 2004 the city budget earned 2.285 billion rubles from privatization auctions – five times more than in 2003.

But it would not be fair to speak of the achievements of the fund alone. It is the achievement of all the departments in charge of property relations at Smolny. Our role is only to implement the managerial decisions adopted by the St. Petersburg government, in particular KUGI (Committee for City Property Management).

The city began putting highly liquid properties up for sale, and in doing so sparked keen interest on the part both of private individuals and market majors.

Incidentally, the fund has begun receiving requests from the federal government as well. For example, this fall we will hold an auction for the sale of an unfinished development of the Medical Academy of Postgraduate Education (MAPO) occupying an enormous plot of 12.7 hectares in a prestigious commuter area in northern St. Petersburg. That property is federally owned.

- The new team at the property fund is much younger now than it used to be, by about 25 years, I think.

Maybe even 35. For example, the new head of the privatization department is only 23 years old; his predecessor had already reached retirement age. This does not mean, of course, that we are hiring younger staff on purpose and getting rid of experienced specialists.

It is just that some dive into that ‘new wave’ easily while the others fail because they belong to the old guard. We have achieved a sort of a balance between the young and the experienced. The new employees have blended smoothly into the team of professionals who have been working with us for about a decade. The main thing is, we all understand one another well.

That means we have built a team of people who think alike. The government has given us the go-ahead to build that team and I have managed to bring together people I have known since my days at KUGI and in business.

For example, the recently established commercial property department is headed by the former head of a realty firm. We render mediation services to proprietors, offering them the choice of selling their properties either at an auction or by commission.

- Aren’t sellers and buyers frightened off by the transparency of the fund’s operations?

Partially, yes. For example, with a property sold through an auction the taxes can be as high as 40-50% of the total amount of the deal. That is why properties are sold at an auction if the owner sells 100% of his shares in the company or a share in its chartered capital. In most cases, sellers opt for a commission sale.

- Why do landlords opt for a sale through the fund instead of hiring real estate agents? Is it because their properties are in a hopeless condition?

I would not say so. Today, we have several mansions on sale, on Furshtadskaya Street, on 6th Sovetskaya, etc. Those properties are liquid, but very expensive. And who else if not our fund has an extensive data base of would-be buyers capable of paying tens of millions of dollars.

For example, the buyers who have bought the city hotels are still our clients and we continue working with them finding other properties [for them]. By the way, some of the hotels sold through our auctions are likely to be put up for sale on the secondary market and we will try to broker the deals for their new owners.

- What commission does the fund charge private proprietors?

Approximately 2-3% of the sale price of the property.

- Over the past twelve months the fund sold state-owned properties mostly at open auctions. What are the advantages of such auctions? Is it the transparency and the fact that illegal schemes where cash is paid in sealed envelopes are impossible?

I think that nobody doubts now that the sealed auctions where bidders submit their sealed price bids – in envelopes – are absolutely legal, as well. We receive the bids and open them during the auction. The old procedure where the fund received bids on the eve of the auction or even earlier is no longer practiced.

Thus, the sealed bid procedure, too, has become transparent. By the way, sometimes some basement is sold at a sealed auction for 10 times the face value. Such things are rare even at open auctions.

That is why we chose not to give up tenders altogether, although, of course those schemes lack the suspense – an auction without action. Where the large properties such as hotels are concerned, action is necessary. Today, open auctions account for about 70% of all our deals. Clearly, that figure will grow.

- And did you find your auctioneer? He is a very striking personality. The audience enjoys his performance, but a privatization auction is a serious affair….

When I was still in private business my favourite radio station was Radio Modern and my favourite DJs were Rost, Nagiev and Yanishevsky. Their jokes were worth listening to. We found mutual acquaintances, we discussed the prospects of cooperation with Yanishevsky and he agreed to take on the role. You need some entertainment during an auction, you know. The atmosphere is so strained.

- For the first time in the fund’s history companies that buy large stakes in the city’s hotels receive Korloff watches. Whose idea was that?

We studied the experience of certain international auctions, Sotheby’s in particular, and tried to make our auctions feel like a special occasion as well. The proposal came from the Korloff jewelry firm. The company viewed its participation as a form of promotion and part of an advertising campaign. As for the watches, we did not pay a cent. They were presents from Korloff.

- And have you received offers from Dior or Versace?

No, but we did receive offers from several jeweler’s stores.

- What has changed in the way properties are advertised and promoted?

We have redesigned our website and increased the circulation of our [bulletin] Vestnik. Incidentally, now we post information about Moscow properties while data on St. Petersburg offers are published in Moskovskiye Torgi. We also inform construction firms, chains, realtors and others of our offers by mail. As for the end buyers, our data base includes over 500 companies.

- What about your relationship with your Moscow counterparts?

We are working to establish closer cooperation. Admittedly, the situation here is different from that in Moscow. The St. Petersburg property fund has taken over the entire market of state-owned property. We sell properties, shares, commercial properties, residential apartments, leaseholds, rights to develop building plots, etc.

In short, we work with all kinds of properties, down to vehicles. We are a kind of monopoly holder. By local laws state-owned property can only be put up for sale by an authorized company founded by the St. Petersburg government. Our fund is the only entity that meets that requirement.

In Moscow, as far as I know, the authority is distributed differently. The Moscow property fund oversees the sale of shareholdings, non-residential properties and leaseholds. Plots of land are sold through the land committee; investment deals are effected through a specialized agency. In other words, their field of action is restricted.

I think, we could bring potential buyers of land plots to Moscow. We have received such applications. St. Petersburg, on the one hand, is short of vacant building plots, on the other, the solvent demand is lower and local developers are willing to enter the Moscow market. The potential of our investors is quite significant.

- Moscow-based investors participated quite actively in recent auctions in St. Petersburg. What properties are they mostly interested in?

Their prime interest is construction. The Moscow firms also take an interest in the properties within the historic center for redevelopment as hotels or prime residential estates. Large plots of land – 10 to 50 hectares – in commuter areas are also in high demand, especially in the Primorsky and Vyborgsky districts.

- Do you find it difficult to work with Moscow buyers?

It’s okay. For some reason, though, they always suspect some fraud. When we sold Moskva [hotel] at a clearly fair auction, the Moscow bidders claimed it was just a coincidence.

- Do you plan new video links with Moscow?

Yes, I think we will do so in the near future. Perhaps, we will try to sell the federally-owned unfinished development of MAPO, which I have already spoken about. We expect Muscovites to show keen interest in the property.

- And why did the first video conference fail?

The locations of plots offered for sale in short packages were not that attractive – the Nevsky District – and the price was a bit too high. We have reduced the price.

- Short packages must be a lot more difficult to sell? After all, potential investors first have to pay a significant amount for a plot of land and only afterwards they find out if they will be allowed to develop their project, and at what price…

I would not say it is a difficult lot [to sell]. Everything depends on the specific plot of land. Of course, the 30% of the 6-year lease payment for a spot (plot) that the bidder is required to pay immediately after the auction is a lot of money.

But then there is a leasehold to a plot on Barochnaya Ulitsa [street] in Petrogradsky District that earlier housed a tram depot that was sold for 7-times more than the face value. This is because the city has virtually run out of such attractive sites. The first short package auction was held in the summer of 2004. 39 plots were put up for sale last year, of which 24 were sold.

- And what are the prospects of the sale of plots with investment and tender documents in place, the so-called full package?

We have already sold two plots on such terms. I think about 20 sites will be put up for sale in summer. The investment department is working on the packaging of those lots. We are ready to sell as many as 50 plots per month.

Besides that, the construction committee invites bids from privately-owned companies for the right to prepare tender documents for specific sites. The winners of such bids are entitled to compensation of 5% of the sale price at future auctions.

I regret to admit, however, that for the time being private companies are not very active. Quite often the compensation of 5% is insufficient, especially where small plots are concerned, like, for example, in the case of gas stations. The amount of spending on the preparation of documents does not depend greatly on the size of the plot, which is why companies are not interested in small plots if they are not sure they will win the right to develop them.

On the whole, investors have been somewhat less active with regards to the plots allotted for mass housing construction of late. I think this is the impact of the new federal law on share holdings. Developers need time to adjust to its requirements, although the target-oriented allocation of building plots for housing construction will stop altogether on October 1 and bids will grow.

- Which spheres of the fund’s operations do you consider most interesting?

Last year we began to sell freeholds for condemned buildings through auctions, along with the plots of land under them. The winners undertake either to renovate them within a period of 3.5 years or to demolish them and to build something new on the site.

If the new owner fails to honor his commitments the deal is cancelled. Those houses have found demand on the market. We have already sold titles to 33 developments. Not long ago, the city government approved a new list of 42 buildings to be put up for sale shortly. It is possible that along with the vacated dilapidated buildings we will also be selling houses partially occupied by tenants. The new owners will undertake to provide their residents with new living quarters.

In the near future we will begin to sell non-residential properties where rentals are paid for months ahead. The city earns nothing from them, but has to keep the tenancy files and prepare reports for controlling bodies.

Some of those properties are quite large, like the Passazh department store, for example, the buildings of the Industrial-Construction Bank, or PSB, and Sberbank, properties at 24 Nevsky Prospekt (the Atrium business center) and at 58 Nevsky (the International Banking Institute). Clearly, given the long-term leases in place the price of those properties cannot be high and the tenants will have priority.

- This spring the fund began selling non-residential properties leased out by the city government at rates below 30 c.c.u. per square meter per year. (One conventional currency unit is the equivalent of 35 rubles, in 2005. – Vedomosti.) However, those lots also come with tenancies and the tenants do not always win the auctions. Meanwhile, some of them have spent huge funds on renovation of those properties. Does the fund plan to continue that practice?

This procedure applies only to short-term tenancies. Properties leased out at such low rates are for the most part situated deep inside the courtyards of residential estates, in basements and on ground floors, or on the outskirts of the city. Most of them require huge investment. Some tenants do renovate the properties at their own expense without the costs being offset or rates increased.

But those tenants do take part in auctions and win them, in most cases. Initially, those firms and sole proprietors feared competition, but in the long run they were grateful to us. By federal law an auction is the only means of securing the titles to those properties. The target-oriented sale to a tenant is impossible.

We are mulling the possibility of attracting banks to take part in those auctions. They could extend loans to entrepreneurs interested in purchasing the properties they are renting, with the future title as collateral.

In May 31 properties were put up for sale, 23 of which were sold. The average price of one square meter stood at $646. The smallest lots were sold at prices significantly higher. For example, a liquid ‘built-in’ property on Moskovsky Prospekt was sold for $2,000 per square meter. Some tenants, of course, have overpaid.

But then, the city government has benefited from the sale. The amount earned from the auctions exceeded the total annual rentals for those properties 20-fold. Undoubtedly, we will continue holding auctions. Besides, we plan to sell other types of property.

Andrei Stepanenko was born in Leningrad, in 1972. He graduated with honours from the nautical school and the St. Petersburg University of Economics and Finance. Stepanenko defended a Ph.D. thesis on urban real estate management and worked as executive director at the Burgomistr real estate agency.

In 1999, Stepanenko joined the civil service. He worked at the economics department for the city property at KUGI. He then became the head of KUGI’s Vyborg District Agency. In 2001 Stepanenko was appointed chairman of the Petrogradsky District Agency. In May 2004 he became the head of the Property Fund. His favorite pastime is football and hunting. He has a 13-year-old daughter, and a 2-year-old son.

“As far as I know, neither the buyers nor the valuers have had any complaints against the Property Fund,” says Mikhail Zeldin, president of Avers Group. “There is a feeling that the city agencies in charge of property relations are working as a single team. The hotel auctions were a great success, with high prices, and with no failures or controversy.”