MONEY-GROWING: Sufficient Land

Internal Reserves

There are 83 industrial estates in Moscow, of which 65 are situated within the outer Moscow ring road, or MKAD. “All that the city has for development is its own territorial resources. Industrial zones include production facilities, warehouses, garages, motor depots, etc. Industrial enterprises, as such, account for less than half of all the industrial facilities in the city,” says Sergei Kolegov, head of the city directorate for the development of unused territories and garage construction.

Among the industrial estates yet to be reorganized there are some appealing plots in the city center such as the 194.2-hectare Paveletskaya industrial zone, 51.5 hectares at Gruzinsky Val and a 117.8-hectare site at Botkinsky Proyezd.

Space at some of the city’s industrial estates, such as Kaloshino and Yuzhny Port, exceed 600 hectares and are occupied by hundreds of production companies and organizations. But not all those zones are subject to redevelopment, says Kolegov. Then, there are certain enterprises that will never be withdrawn from the city such as the Zapadnaya water pressure station, for example, or Moscow’s thermoelectric power stations.

The borders of the industrial zones were demarcated as far back as 40 years ago, but these days their contours are fuzzy, parts being occupied with residential blocks and engineering installations. Production facilities are scattered across the capital erratically.

Even in the city center there are vast tracts of waste ground and desolate landscapes dominated by clusters of operating factories amid semi-abandoned buildings used as offices or warehouses. Developing such territories without first shutting down the entire industrial zone makes no sense, as no sane developer would risk building residential quarters or office facilities on a territory whose fate remains undecided.

Development Ahead

Many companies active on the construction market have already denounced the program for the withdrawal of industrial properties from the city as a complete failure.

The high costs have scared off investors who are unwilling to finance the relocation of enterprises, which entails not only the construction of new offices but the dismantling, moving and commissioning of production facilities at a new location, market analysts say.

Besides, the withdrawal process could take years with investors being forced to bear the brunt of the costs themselves.

It is the protracted withdrawal procedure that makes the program unattractive. Examples of successfully relocated enterprises are few and far between. One of the most striking is the project to remove the Krasnokholmsky worsted textile mill, which was replaced with the Avrora business park.

In 1999, the Forum Properties company bought into the mill and offered the city government a plan to relocate it. The withdrawal took three years, whereupon the mill resumed operations in the town of Losino-Petrovsk outside Moscow. According to experts, Forum Properties spent about $25 million on the project.

Another example is the plan to move the Krasny Oktyabr (Red October) confectionery factory situated on Bolotny Island, not far from the Kremlin. Guta Group, the owner of the plant, reached an accord with City Hall on the factory’s relocation to a 40,000-square-meter plot within the industrial estate of the Babayevsky confectionery firm on Malaya Krasnoselskaya Street.

Once that is completed the investor plans to develop a prime residential estate on the vacated spot, as part of the city’s Golden Island project. Incidentally, several years ago the city mayor staunchly opposed plans to relocate Krasny Oktyabr

Such a response is quite understandable because the Moscow mayor’s office has repeatedly said it was willing to move production facilities to new locations in a civilized manner, providing them with appropriate plots of lands that would suit their requirements, and at the same time to modernize production. Lately, however, City Hall has opposed the relocation of efficient production companies, as their withdrawal would entail a loss of tax revenues and jobs.

There are not very many investors willing to take part in such projects anyway. In 2003 SKholding commissioned a survey of a 60-hectare industrial zone in the district of Bogorodskoye. The program proposed by the government on the basis of the survey envisaged the relocation of nine enterprises and four car parks, the closure of three companies, and the self-reorganization of another one, while 19 enterprises remained where they were.

Taking into consideration the proposals made by Moscow’s research institute for the general plan of the city’s development (NIiPI Genplana Moskvy), it was suggested that, once all the work was completed, a spot of approximately 20 hectares should be vacated for housing construction and development of public amenities. Moreover, the zone also houses several federally-owned buildings which meant consulting the federal government.

As a result, the company abandoned the idea. “Too many enterprises had to be left in that zone, while relocation required considerable investment. Developing an industrial estate is worthwhile only where there is a central location and an enterprise in question is subject to closure, not withdrawal,” says Oksana Basova, chief spokesperson for SKholding. The survey commissioned by the company had rendered further calculations useless, she says.

Officials Are In No Rush

As many as 5,300 hectares of Moscow land currently occupied by production facilities are due to be vacated, in line with the general plan for the city development up to 2020. But the area occupied by industrial installations and scientific institutions will increase, according to city officials.

Investment projects for the redevelopment of industrial estates require, first and foremost, availability of precise data on all the existing facilities. The research is being carried out by the Moscow Center for the Development of Reserve Territories, or MTsORT, and the city science and industrial policy department.

The agencies require all the data on each enterprise, including its charter documents, the number of employees, a complete property inventory, nomenclature of goods produced, and financial results. After that NIiPI Genplana decides on the fate of the industrial estate.

On behalf of the city, MTsORT orders the drawing up of pre-project and tender documentation on the reorganization of industrial territories (the Central Administrative Okrug [district] excluded). In practice, however, the owners of the buildings within industrial estates themselves act as developers for their plots while MTsORT’s role is purely formal.

Speaking of the results of Moscow’s efforts, Sergei Kolegov mentions the comprehensive development of the territory between the Lomonosovsky, Vernadsky and Michurinsky avenues, the development of the main library of the Moscow State University, and the construction of the Third Ring Road, the largest stretch of which runs through industrial territories.

The most active efforts are aimed at reorganizing industrial estates in the city center, with a view to vacating plots for new construction. There are no industrial estates left in downtown Moscow, Sergei Kolegov says; only several isolated facilities remain.

But that can hardly be viewed as an achievement of City Hall alone. Land in the city center is expensive and potential investors have long since taken control over the enterprises occupying valuable plots.

Most developers opt to buy ineffective enterprises or production facilities no longer in operation from companies specializing in hostile acquisitions. Such an approach is much more cost efficient.

“One of the acutest problems is small proprietors or tenants unwilling to move out. The procedure can take years,” says an executive of a construction firm who asked for his name to be withheld. Quite often the problem is impossible to solve without the government’s backing, he says.

“In practice, relocation usually proceeds as follows. Acting through intermediaries, investors purchase real estate properties from the owner of a bankrupt plant, and then reconstruction begins. Buying a property is also possible without intermediaries where the enterprise has either gone bankrupt or decided to get rid of redundant properties,” says Mikhail Gets, head of commercial real estate at the Blackwood real estate consulting company.

In this case the developer bears no costs before construction begins, Gets says. Intermediaries – mostly, companies involved in hostile acquisitions – offer them a “cleaned territory”.

“Construction firms are interested solely in the plot while the further fate of factories and workers is City Hall’s problem. Today it is possible to buy an enterprise in the center of Moscow for several million dollars while the cost of the leasehold title to the plot of land under the enterprise may be as high as $10 million. What is the point then of getting involved in a long-term program even if you have official support?” says a spokesperson of a company specializing in hostile takeovers.

Besides, executives reluctant to move out of many enterprises are themselves taking up the role of developers. For example, the territory of the Parizhskaya Kommuna factory on Shlyuzovaya Embankment will be redeveloped into a 140,000-square-meter multifunctional complex. Katerina Hotel has already been opened there. The Gorbushkin Dvor retail center was built on the site of the Rubin plant.

Preserving Industrial Status

“Moscow will not give up its status as an industrial city,” says an official at the city town-planning department. “However, production facilities need to be provided with territories, transport, engineering systems, etc, and that is a town-planning task.” It is difficult to find a free plot in the city to build new production facilities.

Even more difficult is fulfilling all the requests of companies undergoing relocation. Market analysts recall the conditions set by the Mospromstroi construction company to Metro Cash & Carry. The enterprise demanded that six more construction firms be moved to the same territory.

In line with the plan “Prom City Moscow” adopted by Moscow City Hall, all the plants and factories are to be moved to industrial zones in the outskirts of the city. The city plans to spend $1 billion on the project by 2020. So far, the authorities have found only one spot where numerous production facilities are to be moved – the 320-hectare Prom City Moscow North in Molzhaninovsky District.

The government plans to have that territory fully redeveloped for office and industrial use within seven years, investing $4.8 billion in the project. Precise deadlines for relocation have still to be set, but the authorities have already encountered certain difficulties.

There have been cases where investors, after securing rights to the desired plot simply closed down the unwanted enterprise, instead of moving it. Nowadays, a new procedure for withdrawal has been adopted.

The current regulations require investors to submit a feasibility study of withdrawal and to prepare the new location for the production company to be moved. Only after the Moscow experts make sure that the investor is, indeed, intent on maintaining the production company in a new location is he given the green light to begin relocation.

Where ineffective enterprises are closed down landlords will have to pay compensation to the city authorities, the size depending on the company’s financial results over the last few years.

Also, to prevent hostile takeovers the government has imposed a ban on registering freeholds and long-term leaseholds for industrial estates undergoing studies with a view to further relocation.

Leaseholds are only granted till 2007. In other words, the prospective buyer should be aware that he will only enjoy the right to a lease until 2007. And while City Hall is deciding on the prospects of development of an industrial zone, it preserves its “territory of development” status.