People in the Know: The Fashion for Russian Investment

At a time when Moscow’s property market majors could barely believe they have ended up in the business Michel Pascalis had already brought the retail giant Auchan to the capital, assisted IKEA by launching its first stores here and consulted the developers of the Atrium mall.

His colleagues say Michel Pascalis has opened a window on Europe for them. These days, Paskalis, in his capacity as the chairman and partner at Pascalis, Gardner & Partners (PGP) and Multinational Logistics Partnership (MLP), is focused on warehouses – one of the murkiest, riskiest and highest-paying sectors of the local property market.

-Why did you leave France for Russia?

There were a number of reasons. The first reason lies in my Russian background. There are people in France who are said to be descendants of the White Guard. Perhaps you have heard of the groups established by descendants of emigrants, which are very fashionable nowadays. I was brought up in a spirit of love towards Russia. Both my parents descended from families with Russian blood.

External factors have also played their role. In the wake of the 1993 coup I received an order from the French government to carry out a yearly audit at the ZiL [car-making] plant. That was my first assignment here. In those days ZiL employed 120,000 people, operated 14 workshops producing approximately 150,000 trucks per year. The country had embarked on the transition to a market economy and I saw opportunities here.

-Moscow property market operators say you have opened up Europe for them. Why do they say that?

I am not the only one. But, perhaps, it is true that there are some 10 people who have shaped the property market in Russia. Among those are the founders of today’s major firms, such as real estate consultants Colliers International, Cushman & Wakefield / Stiles & Riabokobylko and Noble Gibbons in association with CB Richard Ellis. I have been taking part in that market since the very early days.

-But you began your career here with Jones Lang LaSalle, didn’t you?

No, I started with CIP Company, or Compagnie Immobiliere Phenix (a French firm involved in property and construction – Vedomosti).

CIP arrived in Moscow back in those days but closed down shortly afterwards. I went back to Paris but later decided to move to Russia and try again. I had $2,000 on me, a car and a friend. In 1994 I set up my own company here, called A.B.M.P.

Then I met Michael Lange and Bradley Garin, we joined forces and launched Jones Lang LaSalle, some time in 1996. At first the company was called Jones Lang Wooton. In those days lots of people were starting up their businesses like that, launching something serious with very little money, the market was only being formed.

-You have been elected president of the Russian Council of Shopping Centers several times and you have always accepted the post. Why do you need those extra functions?

At Jones Lang LaSalle I specialized in retail. Michael Lange was more involved in office properties. In those days we brokered and consulted 70-80% of the retail tenancy deals.

At the time when there were no modern shops, no retail centers on the market, when the first projects were only being launched, our team created Atrium, Mega, Ramstore, Nautilus and many other projects.

We all but held the monopoly as we had the know-how. Incidentally, Tverskaya as a modern retail street is also, in part, our creation. In our capacity as realtors we brought such brands as Benetton and Samsung there. We just realized that the street needed such stores.

All that accomplished, I received an offer from Great Britain, the seat of the ICSC (International Council of Shopping Centers) headquarters, to establish the Russian branch of the council. I saw advantages in the idea as the nascent Russian market lacked rules, standards, etc. Professionalism is a must in any business. Oleg Voitsekhovsky was named the head of the Council on Russia’s behalf.

Did you take part in the Atrium project as a consultant?

We were in from the very first day, because I knew Mikhail Rudyak of Ingeokom very well. Ingeokom was one of the key participants in the project. Our acquaintance with Rudyak was also pure coincidence, an anecdote even.

When I opened my first office here I had only one telephone number; installing an extra line was very expensive in 1993. With my flat being only about 300 meters away from the office, I decided I could pull a telephone cable to the office through the tree branches. But I needed a hoisting crane to do that.

There was a site nearby where a construction firm was doing something and I gave their foreman $20 to let me use the crane, and a business card. It transpired that the crane belonged to Ingeokom. Later Rudyak called him and I arranged for an office tenancy for him on Olimpiisky Prospekt.

Development of the Atrium shopping center was launched before and commissioned during the financial crisis of 1998. All the parties had invested enormous effort in the project. We had no money, no bank loans available, nothing… But then, for us it was the first project on such a scale and format. Our JLL team rented out properties at the mall, hired designers…

-How did you manage to bring Auchan to Moscow?

It was the market that brought them here. People only assist. I admit I was among those who helped Auchan to launch operations here. Some six year ago Vladimir Zembsov, owner of the International Consulting Center (currently developing the Greenwood business park – Vedomosti), and I decided to persuade the Moscow Region governor Boris Gromov that it was necessary to create favorable conditions for the development of large shopping centers in the region.

We devised a plan entitled “Gubernskoye Koltso” (The Provincial Ring) and succeeded in persuading the regional government to issue a decree signed by Gromov whereby we reserved 21 sites for mall development along the Moscow outer ring road (MKAD).

Then Gromov joined us on a trip to France where we were to present the plan to Auchan and to convince them of the government’s backing. Three months later Auchan arrived in Russia. We had known that the company wanted to come to Russia but lacked an impulse. It was a unique project, reasonable, backed by the government and effective.

Today, such radical measures are not always necessary, of course. But in those days Moscow had virtually nothing. Today, there is Mosmart, IKEA, etc., and investors can judge the state of affairs on the local market from their example.

-Still, why did you choose Auchan, and not some other international operator?

To be honest, Auchan has a great advantage, being a privately-owned company. It is run by a single family that does all the decision-making. There are no ‘outsiders’ among the shareholders. The Auchan shares are not floated on a stock exchange. Thus, during the 1998 crisis some of my tenants decided against making any further steps in Russia altogether, fearing they would lose billions on the stock exchange after their shares dropped.

-How far is our market from being saturated with shopping malls?

As for how many shopping centers need to be built, that I cannot say. I simply do not know. But trust me there is still room for more. On the whole, Russia’s potential is still enormous. Certain retail formats known to the world still have not made their way here. But I will not elaborate; I will keep those ideas to myself for a while. Who knows, maybe I will return to the retail sector one day!

-It would be interesting to hear your forecast as to when retail rents will stabilize?

Later than we expect. I see what you mean. Consultants’ reports say that the rates will stabilize in two years. We have now been waiting for about a decade for those two years to pass. It is just that brokers are optimists. If all the developments announced on the market were completed on time the market would reach saturation very quickly indeed. But in real life things are different. Nowadays, our company focuses on warehouse facilities – a sector that differs greatly from retail real estate. We are involved not so much in consulting as in investment and construction. That sector has good prospects, we think.

-In other words, you left JLL with the sole purpose of setting up PGP and to focus on warehouses?

Let me explain. At JLL, I held the post of the Central and Eastern Europe managing director from 2000. I was in charge of four offices – in Russia, Hungary, the Czech Republic and Poland. In those days European property markets saw a slump in returns because rentals were falling.

It became clear that Europe’s potential was shrinking compared to that of Russia. I felt like going back to Russia again.

Moreover, after nearly 10 years of consulting I was willing to build something on my own, my own development projects. After all, when you are nearing 50 you realize that you have to hurry up and do what you want to do before it is too late! And while the market conditions allow it.

And, perhaps, most importantly, I met Bruce [Gardner, one of the co-founders and partners at PGP and MLP]. It transpired that he too had nurtured similar plans. My knowledge of real estate and his expertise in finances proved mutually complementary.

-How did you meet Bruce Gardner?

Through a mutual acquaintance. Actually, when you devise new projects the ideas hover in the air, and become known to colleagues… This is how partners find each other.

-PGP and MLP are now working on the development of a 200,000-square-meter warehouse terminal. Is it your first project?

Yes, MLP stands for the Multinational Logistics Partnership. It was set up as part of PGP especially to implement warehouse development projects. But we are not a logistics company that offers storage services, our job is to build and let. PGP is an investment and management company, which in theory may get involved in many other projects, not just warehouses.

-Have you launched any other projects, in addition to the terminal on Leningradskoye Shosse?

PGP and MLP have big plans. But so far we prefer not to elaborate. Let us talk of what has been done, not about dreams. Besides, it is a bad sign to divulge plans too early.

-We know that you have purchased the 42-hectare site on Leningradskoye Shosse from the BAMO construction firm. Is that the case? And what price did you pay? Experts set the possible price of 1 hectare in that area at $400,000, i.e. over $16 million for the whole site.

It was not BAMO who held the title, although BAMO had tried to work on the site before. As for the seller, I cannot name him, as this information is confidential. The figures you have cited seem credible.

-Your rivals say you hired the ASP design bureau for the project, but after that company reportedly failed to live up to expectations PGP had to invite along another designer…

ASP was and remains the main designer for the Leningradsky terminal. There have been no changes. By the way, usually, changing the project is very difficult. I don’t know who could have told you that.

-How big is the MLP team?

About 30 people are involved in development, finances, marketing and project management.

-Who are your investors, I mean, who is behind you? And who are your other partners, in addition to Gardner? Rumor has it that MLP is owned by Western and Russian banking firms…

Well, they are rumors, and rumors they shall remain. Our priority today is to promote the MLP brand and position it as independent. The investors include me, Bruce Gardner and several other Russian and foreign partners. PGP is only Bruce and me.

-Where did Bruce Gardner work before?

He co-founded the Renaissance Capital bank.

-Nowadays much is being said of the so-called ‘dolgostroi’ projects (developments that are, literally, “long in the building”) on the warehouse property market. Almost every project fails to meet their deadlines. Why is that so?

You see, construction in Russia is extremely difficult to master. Few can succeed. It’s an everyday struggle. Today, it is hard even to connect a building up to power lines, especially in Moscow. And I am not talking of bribes here.

It is just that you need to be versed in the market, to know where to go and who to address to secure permission. Dolgostroi is a fact. That means that the team working on the project has failed. Or that there are some problems beyond the team’s control.

In this context I often recall Lennart Dalgren, IKEA’s Russian CEO, who said that Russia cannot be compared to Central Europe. I think many have already come to understand that. In Russia you need people capable of managing projects.

Why are there so few warehouse sector players? Because you never know what to expect, even on your own site. For example, you dig [a foundation pit] somewhere thinking you have all the information on the plot, you commissioned the geological survey and so on, and suddenly you hit some communication lines that you never expected to find there. And then problems begin.

But failures to meet deadlines are typical of the entire Russian market. Could you cite at least one example where a project was commissioned on time? Enka, perhaps, is the only such company. Atrium took two years to be built, Smolensky Passazh took 18 months.

-What about IKEA?

Yes, but what enormous efforts it had to apply! IKEA had to arrange a meeting between its founder and the Russian president to get the mall opened. I mean, not everyone here can afford this. And still, they fell three weeks behind.

-Are the returns on the warehouse market higher today than in the office or retail sectors?

Rental rates are very high in all three sectors today. The prime cost of construction only differs slightly. The main factor that affects returns is the cost of land, which is subject to strong fluctuations. Building a terminal near MKAD today will not pay because land is expensive there. But there is a favorable factor – new banks have arrived offering loans on better terms than they did a year or two ago.

-Which banks are those?

Until now the sector was dominated by Sberbank, Vneshtorgban, Raiffeisen Bank, the Moscow International Bank, but this year AAreal, EuroHypo and Hypo Real Estate arrived in our sector. They are new and quite serious players.

-What other foreign firms are active on the Moscow warehouse market?

Many say they are “on the market”. I cannot name the exact amount, but I believe there are still fairly few. One of the larger companies is NLK, or the National Logistics Company, where Citygroup has recently secured a stake. Also, there are the owners of the logistics project Pushkino.

-Non-real-estate companies, too, are showing interest in warehouse development. Rostik Group has secured the Pokrovsky marketplace between Varshavskoye and Kashirskoye motorways where it is set to erect a class A storage facility worth about $30 million. What do you think that phenomenon suggests?

I do not know for sure what kind of policy Rostik Group pursues, but it is true that developers from non-real-estate companies are involved in property development. I think that more will follow that example. There is nothing strange about that, as large companies are often willing to diversify their business, and real estate investment pays well. There are plenty of options here – apartments, offices, shops, hotels, warehouses, etc. But what you get as a result is not always what you may have expected to see. Money is not everything. You can build a property, but then you will have to sell it. For a project to bring good returns the team needs builders, marketing experts, financiers, designers, etc. Our company took almost two years to build a team.

-Is it more difficult to build a warehouse than a retail center or an office?

No, on the contrary. Warehouse construction is easier. But still, only people who had already had some experience worked on our project. The criteria when hiring specialists are always the same – experience in that field, experience of working in Russia, reliability and suitable prices.

-Do you think it is possible to develop a system of warehouse classification in Russia?

I think that we don’t yet have any precise classification here. But everyone is familiar with international standards. What especially matters in warehouse construction is the quality of the flooring, internal layout, parking facilities... There are certain generally accepted criteria. Other important issues are location and management.

-Which of the Moscow warehouses meet international standards?

I would name Pushkino although the project has certain problems. By the way, I know the people working on that project and they would not just build any old rubbish. Then, there are projects by NLK, Kulon.

-Do you think it is normal that many projects employ migrant workers as cheap labor?

No, it is not, but I think that there is a difference between inexperienced builders and people hired to work for meager pay only because they are foreigners, although some of them may be very experienced. I worked a lot in Saudi Arabia, about 20 years ago. There, workers of all nationalities, from Pakistan, the Philippines, India, were hired to work on construction sites. Each ethnic group had its rating although all of them were quite skilled. But a Pakistani national was paid better than a Hindu, and a Hindu got more than a national of Bangladesh. Something similar happens in Moscow these days. Legality is quite another matter.

-How would you comment on Citigroup’s move to buy into NLK? Is it possible that other companies will follow their example?

Foreign companies are showing an interest in the market. And the market is growing, namely because the market is still young and underdeveloped. Not long ago I met a colleague who visited the Exporeal show in Munich. He said it was very noticeable that Russia is becoming an increasingly fashionable investment target in international circles.

About 10 years ago, when we attended those shows, nobody would even discuss Russia. Six years ago we heard investors saying “maybe”. Three years ago the situation began to change and banks decided to come to Russia. Today the time has come for proper deals. Investment funds, too, will follow soon.

The arrival of foreign investors is a good sign. Their presence boosts market liquidity. But building here is more difficult than in Europe. Many foreigners are aware that for each step you make in Russia you have to pay. And, don’t forget that Russia also has a lot of money. It is not Poland where most projects are financed by the West.

Michel Pascalis has been working on the Russian property market for over a decade. Today, he heads the Russian Council of Shopping Centers. He is a partner and director at Pascalis, Gardner & Partners, founded in 2003, and Multinational Logistics Partnership.

Born in Paris in 1956, Pascalis earned his MBA at the ESSEC Business School in Paris. In the early 1990s Pascalis arrived in Moscow where he held the post of chief financial officer at Compagnie Immobiliere Phenix in 1992-1994. In 1994 Pascalis founded the real estate agency A.B.M.P. that later merged with Global Properties to form Global A.B.M.P.

In 1996-1997 Pascalis joined Michael Lange and Bradley Garin and sold Global A.B.M.P. to Jones Lang Wooton which the three headed. Later the company was renamed Jones Lang LaSalle. In September 2003 Pascalis stepped down as Central and Eastern Europe managing director at Jones Lang LaSalle to launch his own business, PGP.

PGP, founded in 2003 by Michel Pascalis and Bruce Gardner, focuses on development, property investment and property management in Russia. Multinational Logistics Partnership, as part of PGP, oversees warehouse development projects in Russia. The partnership includes a group of Russian and foreign investors. The first project launched by PGP/MLP was the 200,000-square-meter terminal at the 13th kilometer of Leningradskoye Shosse. The project is estimated to be worth $120 million.