Money-Growing: Ramshackle Walls Draw Investors

Housing construction on the former sites of centrally located plants and factories is also planned by local developers. Timur Tagirov, head of the Hermitage realty firm, says the idea is viable because land in the city center is expensive. As an example Tagirov cites the territories of the Novosibirskmebel furniture maker, plastics plant and the Etalon factory where residential estates are to be built soon.

Nowadays developers still show intense interest in such sites, even though now they are sold at market prices, as vacant plots are scarce and difficult to secure.

Industrial estates in the city center offer good prospects for commercial or residential development as the cost of land there is high. Cheaper factory plots situated on the outskirts of the city are more suitable for redevelopment as warehouses, retail centers or offices.

During the Soviet era, Novosibirsk was developed as major industrial center where construction of production facilities along the city’s main transport routes, in the immediate proximity to residential areas and even in the center of the city was justified, says Igor Lukyanenko, head of the general town-planning department at the Novosibirsk mayor’s office. It was believed that workers should have easy access to the plants and factories where they worked.

But as early as 1994 the Novosibirsk government adopted a new town-planning initiative whereby the majority of the industrial facilities concentrated in the city center were to be moved to the outskirts, Lukyanenko says.

In recent years, many production facilities have started being used as warehouses, offices or shops and the issue of their relocation was dropped automatically, says Vladimir Neretin, general director of Gorproyekt Institute.

Nevertheless, industrial facilities occupy about 40% of the city’s territory and the local government is set to preserve that share so that Novosibirsk retains its status of an industrial center.

However, many industrial sites – heavy industry and metal works, in particular – will be removed to new locations on the outskirts of the city, while processing and food industries will remain within the city.

The city center is set to become a commercial zone with a minimum share of residential properties. In theory, industrial facilities can have central locations provided they are small and clean, such as electronic engineering firms, for example, but all other enterprises will have to move, Neretin is convinced.

Sale of industrial properties on the secondary market began in 1993-1994, a year or so after those enterprises were privatized in 1992-1993.

Former factories and plants are now being purchased from either the new owners of those enterprises or through arbitration court-ordered auctions, says Marina Antonova, member of the Novosibirsk Regional Bar Association.

The new owners of enterprises, faced with a slump in production in the 1990s, were forced to use their workshops not as production facilities but as warehouses, offices or shops, or to sell them off, explains Georgy Andreyev, head of the Belestar management company.

When a core business fails to make sufficient profits the factory owners are forced to rent out their properties for use as offices in order to keep production going, Yelena Tsarik, head of the finance department at the Severyanka factory, says.

Oleg Lugovoi, president of the Siberian Guild of Managers and Developers (SibGUD), believes that purchasing industrial facilities in the 1990s has paid well as most enterprises were sold considerably below their true value. Lugovoi cites Sibtransmash as an example.

In 1999 the plant, occupying an area of 15 hectares, was available for sale for the trifling amount of $1 million. In those days the price seemed exorbitant, but today its properties – in a worse state than they were then – are offered at prices 4-5 times higher.

The prices of industrial facilities dropped significantly in the wake of the 1998 financial crisis, says the head of the Slavyanka development firm Yuri Tiunov. Sibtextilmash’s facilities were offered at 500 to 1,000 rubles per square meter, with potential buyers being allowed to buy much smaller properties within the estate, if they weren’t willing to take over the entire factory.

The factory administration building was offered for sale at 1,000 rubles per square meter. These days, the prices have grown considerably. One of the unfinished workshops of Sibtextilmash is available for 5,000 rubles per square meter, and will require extra investment of at least 5,000 rubles per sqm. On the whole, the prices have gone up 5-10 times, Tiunov concludes.

Several years ago it was still considerably cheaper to buy a factory building than to develop one, agrees Yevgeny Leonenko, development director at ElektroKomplektServis, a regional electrical appliances retail firm.

“Two years ago our company purchased a number of buildings from the Sibstankoelektroprivod plant near Kirov Square. That cost us some 1.5 to 2 times less than construction from scratch would have. It is virtually impossible to find a free plot of 2 hectares in a central location, at the intersection of transport routes,” Leonenko says.

Anton Chikunov, commercial property expert at Avega realty, says that former industrial estates are currently offered for sale at 4,000 to 12,000 rubles per square meter. Derelict properties requiring reconstruction, such as the ZhBI factory building in the village of Matveyevka, are available at 4,000-5,000 rubles. Renovated facilities in good order are sold at 7,000-12,000 per square meter. For example, the properties of Vestfalika were put up for sale at 7,000 rubles per sqm.

Another factor affecting the price is location. Properties situated within the city center are far more expensive than those on the outskirts. A dilapidated installation on the premises of the former Kometa plant, an empty shell, in fact, has been put up for sale at 6,500 per square meter. Given its central location, the property will find a buyer soon, Chikunov is convinced.

Commercial real estate expert at Hermitage Tatiana Boiko believes that the most sought-after facilities are suitable for warehouse use, with convenient access roads and a ceiling height of 6-8 meters; rental rates fluctuate between 170-250 rubles per square meter per month.

Industrial properties on the city outskirts are often used as warehouses rated as class C or even lower, says Sergei Dyachkov, marketing partner at DSO Consulting. Upgrading those storage spaces to a higher class is often impossible as they lack convenient access roads, parking facilities or due to the architectural specifics of the structures, he says.

According to DSO Consulting, the city’s largest class B storage facilities are to be found on the estates of the former plants and factories of Novosibmetall (15,000sqm), Sibstankoelektroprivod (9,000sqm) and ZhBI-1 (17,000sqm).

Siblogics, a local branch of the Tablogics logistics operator, has redeveloped the unheated facilities of Novosibmetall as class B warehouses. With a total space of 10,000sqm, accessible both by car and rail, Nobosibmetall is a perfect site for warehouse development, says Yevgeny Novikov, chief of Siblogics.

The company is set to take over the management of more warehouses, but so far it has failed to find suitable properties, he says. Facilities suitable for warehousing have long been snapped up. “Hitherto, we opted to rent properties but now we will have to build a new terminal ourselves,” Novikov explains.

The former ZZhBI-1 plant is now used as a warehouse terminal by the company Septima, the city’s largest wine and vodka retailer. Septima has established the company Siberian Freight Terminal to oversee logistics.

The head of the Siberian Freight Terminal, Maxim Zhuchkov, reported that Septima purchased the estate of the insolvent ZhBI-1 plant at an auction in the 1990s.

Undoubtedly, that was a fortunate buy, he says. In addition to spacious production facilities (17,000sqm) and convenient access roads, the territory of the plant is large enough for the development of one more terminal. Construction of a 4,000-square-meter storage area, solely for future lease, will begin next year, says Zhuchkov.

ElektroKomplektServis has purchased three idle buildings near Kirov Square from the Sibstankoelektroprivod plant. The administration building was converted into a retail and office center while the unfinished, 9,000-square-meter, workshop was redeveloped into a storage facility.

Another unused workshop, of about 10,000sqm, was sold in March of this year to the Krasnoyarsk-based company Alpi. Alexander Sokolnikov of the Novo-Nikolayevsk realty firm estimates the deal to be worth $1.4-2 million.

For his part, Vyacheslav Dunayev, head of the Novosibirsk branch of the National Logistics Company, or NLK, believes redevelopment of the majority of industrial facilities into warehouses is inexpedient. Most of the workshops are situated close to each other and, as a result, trucks have little space for maneuvering and loading becomes more time-consuming. Using industrial facilities as warehouses is only justified as a temporary option, and in the future they will inevitably lose out to modern terminals, Dunayev says.

Sergei Dyachkov disagrees. Investors are interested in building class A or B warehouses because they pay back faster. In Novosibirsk, however, the highest demand is for warehouses of lower class. Cheaper storage facilities help to almost entirely satisfy the demand, he says.

For example, the new owner of the Albumin milk plant that went idle as early as March has opted for new construction instead of redeveloping existing facilities. The Novosibirskenergo energy company bought a 90% stake in the plant seeking to develop a 30,000-square-meter class B warehouse terminal featuring office and retail properties on the site, Alexei Fetisov, the company’s investment director, reported.

Yevgeny Novikov approves of Novosibirskenergo’s plans. Convenient location and good access roads offer perfect conditions for the development of a prime warehouse facility, he says. The project will be sure to pay back because the shortage of quality storage is growing increasingly acute. Maxim Zhuchkov believes that investors are likely to receive a payback within 5-7 years, by spending $500 per square meter.

Enterprises in the city center have found themselves in a better situation than those on the outskirts. Due to their favorable location ther properties are rented for office and retail use as well, holds Oleg Lugovoi.

For Office and Retail Use

Among the centrally located enterprises that suspended production and turned into shopping centers and offices are the Sibir knitwear factory and Sorevnovaniye clothes factory. Sibir now houses a shopping center while Sorevnovaniye’s facilities have been redeveloped for office use.

One of the properties of Severyanka has been rented out for office and retail use since 2004. For several years now NEVZ-Soyuz has been leasing out about 50,000 square meters of space in its production buildings, facing the city’s main thoroughfare, Krasny Prospekt.

According to Yelena Belanova, commercial property expert at the Doktor Klyuch real estate agency, rental rates at former production facilities stand at 450 rubles per square meter per month, or higher.

Regardless of the high demand for properties on the premises of former industrial estates, in the future such shopping and office centers, which he describes as “ant hills”, will inevitably lose out to modern malls and offices, Lugovoi says. Sooner or later tenants will start moving out, forcing the landlords to either slash rents or to pull down existing properties and develop new ones that meet professional standards.

Business centers on the outskirts, on the other hand, will still attract tenants because of their low rents, he continues. The idea of redeveloping remote factory administration buildings as class C offices has proved viable. Examples include the offices of Sibtextilmash or NVA on Stantsionnaya Street.

There are cases where certain factory administration buildings are used as front offices by companies whose warehouses or production facilities are situated on the premises of plants and factories. As an example, Lugovoi mentions Sibtransmash where workshops are used as warehouses while the administration building is now occupied by the offices of the Holiday Klassik grocery chain.

“The purchase of properties (with a total space of 9,500sqm) has cost us less than new construction would have required,” says director of the chain Alexei Zakharov. “In addition to saving costs we have saved the time and effort needed to find a vacant plot and securing permission for construction.”

The rapid growth of retailing and a shortage of vacant properties have prompted retailers to pay more attention to the city’s former industrial facilities.

Levoberezhny Retail City (20 hectares) opened in the early 1990s on the site of what was once a vegetable store. Initially, the site was occupied by storage areas and a small marketplace, says Vladimir Kalchenko, general director of Levoberezhny. But the favorable location and good returns on retail prompted the owners to increase the retail space. Today, the complex has 35,000 square meters of warehouses and 25,000sqm of shops.

In the late 1990s, the company Sibirsky Gigant (Siberian Giant) bought and redeveloped a former forge shop (about 3,000sqm) into a cash and carry store. Finding a building plot is difficult in the city these days, especially in more central locations and along the city’s main thoroughfares, says Natalia Zamoskovtseva, the company’s marketing director. Industrial estates help to solve the problem, she says.

The Sibiriada retail chain also runs its outlets on the premises of former industrial enterprises. In 1998, the company opened a supermarket in what was once a railway-carriage repair workshop on Stantsionnaya Street, says Alexei Kasimov, the head of the chain. Located at a busy highway the discounter targets shoppers in cars, he says.

But, Kasimov continues, especially popular with retailers are the industrial zones in Berdsk. The workshops of the former Vega plant situated along one of the town’s central roads, are now occupied by outlets owned by the Sibiriada, Pyaterochka, Bystronom and Santino retail chains.

The keen interest shown by retailers in former plants and factories is understandable. Turning a derelict workshop into a shopping area is easier and cheaper, while building a supermarket from scratch can take years and require 20,000-30,000 rubles per square meter, Kasimov explains.

Krasnoyarsk-based Alpi, too, has turned to industrial estates. The company plans to open between four and six hypermarkets in Novosibirsk. The first (10,000 square meters) store of the chain, slated to be opened in late 2005, occupies the former Sibstankoelektroprivod plant. The second outlet (24,000sqm) will be built on the site of a local meat plant.

More and more plants in the city are deciding to develop and redesign their properties for retail use. In the mid-1990s, the Stankosib plant opened a Mercedes–Benz car salon, STS-Avtomobili, on its premises. The plant was gradually reducing its core production and by the year 2004 income from rental proceeds accounted for the lion’s share of its takings - 72.3% in the first quarter of 2004 - according to the company’s financial report.

Stankosib’s largest development project is the 19,000-square-meter Giperon shopping center, opened in the redeveloped main production facility. Sergei Reusov, deputy chief of the company, says that shops at Giperon are rented at 400 rubles per square meter per month.

The plant management also hopes to make extra money by renting out offices at a 7,200-square-meter business center currently under construction. The property is slated to be commissioned in late 2006.

Vladimir Zhenov, a board member at the Novosibirsk tool-making plant, who also heads the Novosibirsk municipal bank, puts the plant’s policy down to a slump in production in the engineering industry.

Development and car trade (STS is an official dealer of Mercedes-Benz), undoubtedly, bring higher returns than Stankosib’s core production, maintains Zhenov. Vladimir Kalchenko believes that the favourable location at a busy thoroughfare makes Stankosib’s project interesting. To succeed it should be enough to develop a spacious parking lot on the plant’s territory, he says.

In summer of this year, the company NMZ Development, controlled by Russky Ugol, plans to launch construction of a shopping mall on the site of the former uncompleted workshop. These days, the company is working on the concept, Nikolai Smyslov, executive director at NMZ Development has reported. The projected size of the property is 20,000-30,000sqm. Smyslov does not rule out that Ramenka, the Ramstore chain of supermarkets, will be an anchor tenant, though no deal has been signed yet.

Dmitry Chibisov, head of the project finance department at Globex Bank believes the idea of building a mall on the site of the Kuzmin NMZ plant is justified. The plant is situated on a busy highway with no large retail centers operating in the neighborhood, he says.

Although the prices of industrial facilities have grown considerably, compared to 1999-2000, developers are still drawn to those sites, holds Yuri Tiunov. These days the cost of new construction approximately equals the cost of buying a derelict workshop, but the time and effort required to find and secure a title to a building plot make the construction option less attractive.

The Housing Option

The first to be withdrawn from central Novosibirsk was the Novosibirskmebel factory. The Zapsibmebel company paid 1.8 million rubles for its facilities, and after the factory was closed down in 2003, launched the development of the 32,000-square-meter Solyaris residential estate on the site. In late 2004 the first phase of 16,500sqm was commissioned; construction of the second stage is currently underway. The price of one square meter stands at 34,000 rubles, Hermitage reports.

The Etalon plant is also set to move its production facilities to the outskirts of the city and to use the vacant plot (0.95 hectares) at the intersection of Shchetinkin and Shamshins Streets for construction of a residential estate of 42,000-43,000sqm. The company plans to spend $20 million on the project, the prime cost of one square meter amounting to 16,500 rubles, the head of capital construction at Etalon, Alevtina Zudina, has reported.

The head of Kvarsis-Realt, Vladimir Serebrennikov, reported that apartments at the Kvarsis estate, under construction nearby on Shchetinkin Street, are now being sold at 24,000 rubles per square meter, and higher.

The local plastics plant also plans to use its territory of approximately one hectare for the development of a prime residential complex (60,000sqm), the head of the plant, Igor Valyukh, told Vedomosti. The project is due to be completed by 2008.