Money-Growing: Investors’ Arch of Triumph

As long as the city center was considered the main building site of Moscow, that zone remained somewhat underrated and generally ignored by major developers until the Moscow City Business Center began to grow. The projects launched there are likely to prove very successful.

The new commercial district – commonly referred to as Kievsky-Kutuzovsky by real estate analysts – is conveniently located on a bend in the Moskva River. On the one side it borders the Berezhkovskaya Naberezhnaya [embankment], with several hectares of industrial estates squeezed in between the embankment and Kievskaya Street. On the other side, the district’s border runs along Taras Shevchenko Embankment.

In that part, two more industrial zones can be found: a plot previously occupied by the Badayev Brewery at 12 Kutuzovsky Prospekt and the estate of the Fili-Krovlya plant, situated in a triangle formed by a rail line of the Belorusskaya railroad and the Moskva River.

Lengthwise, the commercial zone stretches from Smolenskaya Embankment and the Kievsky train station square to Victory Park (Park Pobedy). Those are the borders of the district, as defined by commercial property market analysts. Kutuzovsky Prospekt is a busy and prestigious thoroughfare. That means that future offices – to be built along the avenue and on the neighboring streets – will enjoy the convenient transport facilities already available.

The location, compared to that of Krasnaya Presnya on the other bank of the river, or the Moscow City International Business Center, has proved even more advantageous, property analysts say. Unlike the opposite bank where the exhibition center Expocenter is also situated, Kievsky-Kutuzovsky has yet to see construction on such a grand scale; the location is convenient for office development in many aspects, one of which is the low volume of traffic.

Denis Sokolov, leading consultant at Cushman & Wakefield / Stiles & Riabokobylko (CWSR), says that the current transport situation in the district is favorable. Although, in his opinion, the City [Business Center] and Krasnaya Presnaya are no less attractive for the business community. Kutuzovsky, nevertheless, offers a number of advantages and has its own potential, regardless of its proximity to the City, downtown Moscow or Krasnaya Presnya. If need be, it would be possible to launch a successful promotion campaign for the area, Sokolov says.

Against the background of all the office sub-markets being formed in Moscow, Kievsky-Kutuzovsky already enjoys particular attention from developers and tenants. A great future is in store for that zone, provided that all the projects launched there make it onto the market in the long run, says Irina Gerasimova, head of research at Noble Gibbons / CB Richard Ellis.

Andrei Petrov, head of office property at Knight Frank, agrees. For the time being, the area is short of prime office space. But investors plan to build at least 900,000sqm of new offices within three years, including business centers and complexes featuring office space.

Regina Lochmele, top office real estate analyst at Colliers International, says the area appeals to developers because, although supply is scarce, demand for office space is soaring. Many businessmen would be happy to have an office in that area, given the prestigious neighborhood and proximity to the city center, the Third Ring Road and the Garden Ring.

Ruben Alchudzhyan, managing director at Praedium, agrees that the development of that business zone was partially influenced by its location. Analysts note also the role of the embankments and great views of the river that are always popular with developers.

The key characteristics of the area are: favorable conditions for large-scale development, high demand for building plots and offices under construction, competition between market players and somewhat protracted project implementation.

The History of the District

Today, the Kievsky-Kutuzovsky sub-market is growing. But until recently it remained underrated while developers and investors focused their attention on the city center, within the Garden Ring, maintains Denis Sokolov.

In recent years the area began to witness rapid development, with new projects being launched one after the other. The new class A and B offices built here are snapped up by tenants almost immediately. A financial center at 9, 2nd Poklonnaya Street, being constructed by Eurasia Investment & Industrial Group and at least two properties by Legion Development at 6 Kulnev Street and 3-7 Kievskaya are among those numerous projects.

A new business center by Mirax Group is being developed at 11 Poklonnaya Street. The International Center company (Mezhdunarodny Tsentr) is working on a redevelopment project at 36 Kutuzovsky. Then, there are the ambitious projects at 1 Kievskaya Square, by JSC Kievskaya Square (Kievskaya Ploshchad), and Park City on Taras Shevchenko Embankment, being built by the PIK Group.

Active construction work began in that area in 1999, says Ruben Alchudzhyan. The first projects included a building at 3 Studenchesky Lane (class B, 2,200sqm) and the Millhouse complex on Kutuzovsky Lane, built in 2000 (7,500sqm).

One of the first properties where a multitude of offices of more or less decent quality were available for rent was Radisson SAS Slavyanskaya Hotel (2 Europe Square). The hotel features a total of 12,000sqm of office space that can be rated as class B, according to Alchudzhyan.

Office facilities of the latest generation emerged after 2001. For example, the Tower-2000 (Bashnya-2000) at 23A Taras Shevchenko, viewed as a model property in those days, still remains a symbol of the Moscow office market.

It could be said that the tower was developed by the city hall. While the construction work was being carried out by the state-run company GUP UEZ, set up by the authorities as part of the city’s construction complex, the company OAO City managed the property until sufficient investments were raised.

The Tower is the only part of the Moscow City project built on the opposite bank of the river. In 2004, an office complex by Mirax Group (formerly, Stroimontazh) was built on Bryanskaya Street.

Large building projects launched in the area in recent years are taking a long time to be completed. The above-mentioned Eurasia Group’s complex on 2nd Poklonnaya, Legion Development’s building on Kulnev Street, Park City on Taras Shevchenko Embankment and a retail and business center on Kievskaya Square are all business centers that have been under construction for over three years, or new projects whose implementation will take 3 to 4 years.

City hall, however, sees nothing extraordinary in that. There is no doubt as to the attractiveness of the building plots in the area, a source at the Moscow construction complex said; delays in project implementation are due largely to red tape.

Besides, since developers have been required – in addition to preparing other building documents – to apply for what is called an act of sanctioned use of a plot, which can take at least 6 months to issue. Quite often, before authorizing construction in central Moscow the city hall additionally convenes sessions of town-planning and public councils under the Mayor of Moscow. Some projects are submitted for discussion at such sessions more than once.

The Land Factor

After the commercial core of the city moves to the City, the land around it is likely to grow in value, a source in the construction complex predicts. Natalia Chukayeva, head of marketing at Realty Trade (the company owns a number of properties in the capital), agrees.

At the same time, consultants point out that not all the plots in the Kievsky-Kutuzovsky area are equally good for office development. The best plots are along Kutuzovsky, on the Poklonnaya Streets, Kulneva Street and along the embankments.

The prime cost of construction ranges from $1,200 to $1,900 per square meter of prime (class A) office space, says Andrei Petrov. But the total investment depends also on the price of land. The cost of land stands at approximately $17 million per hectare (2.47 acres) for commercial property development around Kievsky train station, and runs as high as $20 million for some of the plots along Kutuzovsky Prospekt.

Admittedly, the cost of land differs along Kutuzovsky: plots along Taras Shevchenko Embankment, where Tower-2000 and the future Park City are situated, can cost up to $25 million, but locations closer to Poklonnaya Gora are sometimes available at rates of $12-15 million. Industrial estates requiring re-cultivation cost even less.

“Also, much depends on the type of construction. Land designated for residential development is more expensive than plots allotted for business centers (as housing projects pay back sooner),” Chukayeva explains.

Fashion Sets the Tone

Potential tenants of class A and B offices traditionally generate low demand for building plots next to train stations and markets. Yet, there are exceptions to that rule. For example, Mirax Group has raised the Europe Building complex on Bryanskaya Street, next to the Kievsky train station and Swiss Realty Group rents office space at 14 Bolshaya Dorogomilovskaya Street.

All the properties at the class A Europe Building (2004), at 6 Bryanskaya have been leased out. The average rental rate stands at $650 per sqm, excl. VAT, Denis Sokolov reports.

Among the tenants are SKF Eurotrading, involved in machine-building, the Moscow Institute for Town-planning Architecture and Construction Inspectorate (IGASN); Mirax Group occupies nearly 50% of all office space. The one-way Bryanskaya Street is not a very convenient location – it is hard to reach by car and always busy given its proximity to the train station, some property analysts say. Offices at SAS Slavyanskaya are rented at $800 per sqm, excl. VAT.

Properties redeveloped for office use along Kutuzovsky, such as 36 Kutuzovsky, not far from Victory Park, are rented at $650sqm per sqm incl. VAT, says Maxim Zhulikov, leading consultant at Penny Lane Realty. Class B, B- offices on the avenue are available at an average rental rate of $550 per sqm, incl. VAT.

Rentals are higher on Taras Shevchenko Embankment, running up to $1,000 per sqm of prime office space at Tower-2000 – nearly as high as on Tverskaya and the adjacent side-streets facing the Kremlin. The sale price of one square meter runs as high as $10,000. In 2005, offices at Europe Building were rented at $760 per sqm (incl. VAT); $850 to $1,200 at Radisson and $550 at 12 Kutuzovsky Prospekt, Andrei Petrov reports.

The Future of Industrial Estates

An attractive district will not remain a no man’s land. Over the years the plots have been distributed between leading development companies. Usually, in order to figure out what project is being developed by whom one ought to take a closer look at the players already active in the neighborhood, property analysts say. Quite often major developers seek to take over several plots in the same district.

Kievsky-Kutuzovsky has three industrial estates, potentially suitable both for housing and office development. On one of those, previously occupied by the Badayev Brewery and the Sacco & Vanzetti pencil factory at 14A and 12 Kutuzovsky Prospekt, PIK Group is planning to erect Park City.

For several years 12, Kutuzovsky housed the offices of Mirax Group (formerly Stroimontazh). The industrial estate occupies 14.3 hectares of land. These days, PIK holds the freehold to the brewery and the factory and is acting as co-investor and developer of the Park City project along with Vneshagrobank and Absolut Bank, Daromir Obukhanich, general director of the First Mortgage Company (a part of PIK Group), reported.

The company plans to build the multifunctional complex by the year 2010, according Obukhanich. The facility will feature 85,000sqm of prime class A offices, 5,000sqm of shops, and 220,000sqm of residential space and public amenities. The project was designed by the U.S. studio Kohn Pedersen Fox; Hines is acting in the capacity of a consultant for the project. The production facilities have yet to be withdrawn from the territory, Obukhanich added.

In line with the Moscow government decree No. 109-RP, of Jan. 30, 2006 both enterprises will undergo a self-overhaul, i.e. to move their production facilities to a new location and develop a residential compound on the vacated territory at their own expense and by raising external financing. That work is to be carried out by the new owners of both enterprises.

Market analysts believe the project has good prospects and estimate it to be worth approximately $350 million.

The second industrial estate lies between the Victory Park and the Moscow River, to the right from Kutuzovsky (traveling along the avenue from the city center), not far from Kulnev Street. The area is occupied by the Fili-Krovlya plant, also slated for withdrawal. The third estate stretches along Berezhkovskaya Embankment. For the time being, market analysts do not have exact data regarding the projects due to be implemented on those two plots.

However, certain data are available on the Berezhkovskaya estate. For example, part of the area will be used for the development of a class B office center, of 40,000sqm, by early 2007. Property brokers have refused to divulge the name of the developer.

It has been reported that the title to 29 hectares of industrial facilities along Berezhkovskaya and the facilities on the site are held by the international holding Liral Group. Liral refused to elaborate. The information about the company is available on the group’s official Web site.

The group is made up of 50 companies involved in production, retail, finance, construction, and R&D in many countries across the globe. Judging by its project portfolio, the group is a major producer and proprietor. In particular, the group is involved in the production of plastics and polymer products (both OOO Polimery XXI Veka (21st Century Polymers) and OOO MPT Plastic R companies are a part of the group).

Liral is also active in the property sector, obtaining real estate and plots of land, leasing offices and warehouse facilities. It has gained experience in restructuring problem companies. The group specializes in comprehensive urban development and is currently involved in the building of a suburb (a micro-district) near the River Port – 350,000sqm of business-class residential space on a plot of 22.13 hectares.

Liral Logistics, which is part of the group, owns several storage facilities in northern Moscow. As early as in the 1990s, the group secured the title to a number of properties in the city, according to information posted on Liral’s Web site.

Berezhkovskaya Naberezhnaya is Liral’s new comprehensive development project. Incidentally, Liral’s offices are situated at the same address, 20A Berezhkovskaya. Today, Liral is financing the project for the development of the micro-district. The future compound is expected to feature a hotel, two office buildings, a shopping center (a total of 150,000sqm) and 660,000sqm of apartments. Liral’s strategic partner is Renta-Bank, according to the group.

City hall plans to preserve the Berezhkovskaya industrial estate, but its territory is to be overhauled, according to the city’s town-planning program for western Moscow and decree No. 1031-PP, of Nov. 13, 2001.

European Quarters

City hall first came up with a plan to redevelop the square near the Kievsky train station and the adjacent territories in the 1990s. In those days, the Moscow institute for the general planning of the city’s development published a colored booklet for distribution at town-planning exhibitions and among the media community. Even then, the booklet contained draft drawings of the future Europe Square and the European complex to be built at 1, Kievskaya Square (the total projected size is 90,000sqm).

More than five years elapsed from the day the plan was first announced till the moment the builders set about digging the foundation pit. The facility is currently under construction, the first two floor levels having been nearly completed. The developer of the project is hidden behind the shield of ZAO Kievskaya Ploshchad (or the Kievskaya Square company). Market analysts report that the obscure firm is owned by the same company that recently took over the Ukraine Hotel and owns an outlet of the Eldorado retail chain. The bid for the title to Ukraine was won by the Biskvit company, according to an earlier Vedomosti report.

Another large-scale project, currently on the drawing board, to be launched next to the European complex is a new hotel to replace the Soviet-era Kievskaya Hotel, built here in 1930. Owned by the city’s property department, in recent years the hotel was managed by Belcom Communication, the company that now intends to spend $120 million on building a 80,500sqm property, replacing the old 10,000sqm hotel. The new facility will feature some 32,000sqm of class B+ offices.

By 2008, the Infostroiservis company plans to build a 12,100sqm class B commercial center on Bryanskaya Street where the Europe Building is situated.

Two projects are under construction on Mozhaisky Val street. They are a class B office center at 6A (9,500sqm), to be commissioned by United Developments by the end of this year, and a new office by Forum Properties – one of the few development firms already experienced in the relocation of production facilities away from the city center. Earlier, Forum Properties developed Aurora Business Park on a site earlier occupied by a production facility on Sadovnicheskaya Embankment.

Now Forum Properties is raising a prime business center (class A, 50,000sqm), estimated to be worth $80-90 million, at 8 Mozhaisky Val on the plot earlier used by the Institute for Allround Automation, a spokesperson for the development firm has confirmed.

Changing Hands

For many years now a development at 9, 2nd Poklonnaya Street has been referred to as a “long player”. The property has changed hands many times. Construction work on the site began even before the 1998 financial crisis, Maxim Zhulikov says. Nowadays, Eurasia Group is planning to build a class A property featuring offices and a hotel, of 102,000sqm, on the site, by mid-2007.

Eurasia Group confirmed the report but refused to elaborate. Earlier the title to the property (then known as Triumfalny) was held by the KV Engineering development company. Its board chairman, Irog Branovitsky, told Vedomosti that his company had built only 22,000sqm out of the projected 100,000sqm, whereupon the unfinished development was sold to Eurasia. According to some reports, the previous owner had failed to raise the required $150 million for the project.

The project for the development of what was to become a state-of-the-art high-rise office facility was initiated by MICEX, the Moscow Inter-bank Stock Exchange in the mid-1990s. Afterwards, KV Engineering bought the property from MICEX for over $10 million.

A new building site being exploited by Mirax Group is situated not far from Eurasia’s development. In a recent press statement Mirax Grop announced its plans to develop the 104,000-square-meter Poklonnaya-11 complex featuring 60,000sqm of prime office space on Poklonnaya Street. Construction work is to begin in the 3rd quarter of 2007. The total projected investment stands at $100 million.

Legion’s Track Record

Legion Development, or Legion, despite only being known since the early 2000s, has already proved itself as a developer of large class A and B business centers including projects on the sites of industrial estates (13 Bolshaya Tatarskaya Street). The 2004 deal, estimated to be worth $180-200 million, made the company famous.

Then, Legion purchased the company Bolshaya Ordynka from AFK Sistema whose core asset at that time was a 67,000-square-meter business center under construction at 40, Ulitsa Bolshaya Ordynka. Next to the development Legion had already built its first property – the 45,940-square-meter office center Legion-1.

Today, Legion is developing the Legion-3 business center in the Kievsky-Kutuzovsky zone, at 6 Kulnev Street, and Legion-4 at 3-7 Kievskaya Street. Both projects are to be commissioned by late 2008. Legion-3 (70,000sqm) is rated as class A. Earlier, IKEA had been keeping an eye on the site, with a view to establishing a new retail center there. Legion-4 (110,000sqm) is also rated as a class A property.

Although Legion Development refused to elaborate on its projects, it is a known that one of the co-owners of Binbank was involved in setting up the company. The bank is a part of Bin Group made up of oil and construction firms, including the development corporation A.N.D. run by Sait Gutseriyev, a relative of famous entrepreneur Mikhail Gutseriyev.

Broker Pool

Domestic and international consulting firms are particularly active in the Kutuzovsky commercial zone. None of them, however, hold the so-called exclusive right to any project. Perhaps, that can be explained by the fact that hitherto the area has not seen any office facility that would require some uniform business concept, CWSR analysts suggest.

For the time being, most business centers in the area are leased out by brokers representing two or three real estate companies. For example, offices at Tower-2000 were sold to several landlords, some of which rented out their facilities later on.

Tenancies at Europe Building were brokered by all agents willing to participate, because Mirax Group had announced an open listing. Cushman & Wakefield / Stiles & Riabokobylko, ABN Realty and Blackwood realties brokered tenancies at the office center.

Knight Frank, too, brokers a number of projects in the zone. One of those is the future office at 6A Mozhaisky Val where the company acts as an exclusive consultant. Offices (of 1,000sqm and larger) will be available for rent at $620 per square meter and higher, Andrei Petrov has reported. Several realty firms will broker tenancies at the complex.

Tomorrow’s Projects

At least 20 new top-class office buildings are due to be commissioned within the Kievsky-Kutuzovsky zone by the end of 2010, Ruben Alchudzhyan reports. In addition to industrial estates, sites currently occupied by obsolete or failed developments, will be used. A prominent developer involved in purchasing industrial estates suggested to Vedomosti, speaking on conditions of anonymity, that industrial estates are no longer as popular as before.

All the building sites in Moscow have already been snapped up by major players. For example, IKEA sought to secure a freehold to a plot near Poklonnaya Gora but the chain was denied permission. The latest trend on the commercial property market is redevelopment.

Office redevelopment projects pay back within five years, i.e. with a rate of return of 20% per year. Certain strategies make it possible to attain a target of 40%. In other words, the project could pay back within two to three years, which is comparable to rates of return from new developments. But the primary market of properties available for redevelopment is also shrinking.

For example, Moscow is running out of vacant buildings that were once used by Soviet-era research institutes and industrial estates with facilities available for redevelopment. One of the last sites – that of the Moscow Cotton Printing Factory near Paveletskaya Embankment – was recently sold.