Money-Growing: Industrial Estates – Developer’s Dream

The Etalon plant is also set to move its production facilities to the outskirts of the city and use the vacant plot for housing development. The company plans to spend $20 million on the project, the prime cost of one square meter amounting to 16,500 rubles. Etalon was built in the 1930s and has long stopped production, Anatoly Leskov, general director of the plant reported. Etalon has secured a freehold title to the 0.95-hectare plot occupied by its production facilities at the intersection of Shchetinkin and Shamshins Streets and is set to use it for construction of a residential estate of 40,000sqm. The company plans to begin construction this year, Laskov said. Meanwhile, the project is on the drawing board, he adds.

Building plots within the city limits with engineering communications in place is a tasty morsel for any developer while the local authority is happy to see the city freed of environmental hazards, which have long been a cause for concern here.

During the Soviet era, Novosibirsk was developed as major industrial center, hence the authorities’ resolve to build production facilities along the city’s main transport routes, in the immediate proximity to residential areas and even in the center of the city, 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.

In the war years, as defense industry enterprises – Lenin Instrument-making Plant, Novosibirsk Electric Vacuum Plant, Elektrosignal and others – arrived in Novosibirsk little attention was paid to environmental issues. Decades later the local government moved to withdraw those production facilities from the central part of the city.

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. But no detailed plan has ever been adopted. Incidentally, many industrial cities in the Siberian Federal District have not adopted such programs either, Lukyanenko adds.

Fortunately, 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, one of the authors of the general urban development plan. 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 moved 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 be centrally located provided they are small and clean, such as electronic engineering firms, for example, but all other enterprises will have to move, Neretin is convinced.

Production facilities often occupy plots suitable for residential or commercial development, says Viktor Ilyukhin, a lawmaker and chairman of the urban planning commission under the city council of Novosibirsk. But, when deciding on withdrawal of a certain enterprise the city government must act in compliance with the town-planning code that enshrines the rights of freehold owners. In fact, we have no instruments of pressure on owners of enterprises, he says.

“We cannot even file a claim in court, even where the enterprise is polluting environment,” complains Galina Bykova, deputy head of environmental committee at the mayor’s office of Novosibirsk. “We issue orders demanding that detected violations be eliminated, or at worst forward the files to the regional administration. But I don’t remember a single case where an enterprise was moved to the outskirts or beyond the city limits.”

Mass re-profiling of production facilities was launched in the mid-1990s when most enterprises in Novosibirsk plunged into the red, says Georgy Andreyev, an aide to the general director at Sibakademinvest development company. In those days, the demand for warehouse, office and retail space grew and for many enterprises re-profiling or sale of their facilities was the only solution.

The first sell-off deals on the secondary market were registered in the years 1993 to 1994, about a year after privatization began. Plants and factories were available for sale on the secondary market or through auctions, Marina Antonova, a lawyer with YUVED law firm, recalls. In those days, when registering a title to land could take at least a year and the cost of laying engineering and communication lines soared industrial estates were regarded as tasty morsels by developers, says Oleg Lugovoi, president of the Siberian Guild of Managers and Developers (SibGUD). Purchasing industrial facilities in the 1990s has paid well as most enterprises were sold considerably below their true value, he says.

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 (as compared to today’s price of 5,000 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,” he 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 1sqm.

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 and proximity to an important motorway – Dzerzhinsky Prospekt – the property will find a buyer soon, Chikunov is convinced.

Ruins Replaced With Comfort

The fate of centrally located production facilities depends on the investment appeal of the sites they occupy, says Timur Tagirov, head of Hermitage realty, the company that brokers sale of flats at Solyaris residential estate built on the site formerly occupied by a furniture factory. Land in the city center is expensive, at least $2 million per hectare; the price of some plots may run as high as $3 million, Tagirov says. Of course, housing or commercial development pays better.

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 40,000 rubles, Hermitage reports.

The mayor’s office has backed Etalon’s plan. As early as in 1968 the city authorities adopted a town-planning program providing for housing construction on the site of Etalon, Sergei Ivanishchev, chief of the department for development of urban territories at the Novosibirsk mayor office, reported. The mayor’s office and Etalon have signed an agreement on implementation of an investment project entitling the mayor’s office to 5 percent of apartments in the new development. Another 10 percent of flats will be acquired by the city government at prime cost, Ivanishchev explained.

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. The chemical production was fraught with environmental hazards, Valyukh says. He is convinced that the production facility should be moved beyond the city limits where the plant has several industrial estates. The vacated plot on Frunze Street is perfectly suitable for upscale residential development. Construction works are to be launched in 2006.

Apartments at newly built residential estates in the city center are sold at 35,000 to 40,000 rubles per 1sqm, the sale price of retail facilities stands at $5,000 to $7,000 per square meter, offices – $3,000 to $5,000 per 1sqm, Sibakademstroinedvizhimost Realty reports. Centrally located properties are expensive and even the projects requiring demolition of old facilities pay back, says Timur Tagirov. Properties on the outskirts are cheaper, and developers opt for redevelopment of production facilities, as was the case with Sibstankoelektroprivod and Stankosib plants, he explains.

Goods Instead of Machine Tools

Workshops of the Sibstankoelektroprivod plant now house retail outlets of Alpi and Planeta Elektrika. Yevgeny Leonenko, development director at ElektroKomplektServis, a regional electrical appliances retail firm that owns Planeta Elektrika chain, reported that in September 2004 his company purchased three vacant properties - a storage measuring 15,000sqm, a plant administration building (6,000sqm) and a 9,000-square-meter workshop - from Sibstankoelektroprivod on a 10-hectare site at 69 Petukhov Street. “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.

Yevgeny Sayenko, head of capital development at Sibelektroprivod plant, reported that those properties, built in the 1970s for experimental projects, remained vacant since the 1990s when the cash-strapped plant was forced to abandon its experimental programs. The new owner redesigned the building formerly occupied by the plant administration for office and retail use while the warehouse was upgraded to meet class A standards.

Stankoelektroprivod is favorably located in the center of Kirovsky District, next to a bustling thoroughfare – Petukhov Street, with convenient road junctions available, Leonenko says. The 10-hectare plot provides enough space for a large car park and a loading bay. Hitherto, Kirovsky District had no large retail centers. The company has invited the Krasnoyarsk-based Sibirskaya Guberniya retail operator to participate in the project. Sibirskaya Guberniya runs a chain of Alpi hypermarkets.

The retail operator has secured the title to 9,000sqm of space in the 2-storied workshop measuring a total of 10,000 square meters. The sum of the deal remained a secret. The company plans to build 3 to 5 Alpi outlets across the city, says Andrei Gravanov, vice-president of Sibirskaya Guberniya. “We are looking into vacant building plots as well as redevelopment options,” Gravanov says. “The latter make it possible to save time, which is quite important for us, since the market of large retail centers in Novosibirsk is growing rapidly.”

The company acquired the former production facility on the site of Sibstankoelektroprivod in March and launched its first Alpi outlet, worth a total of 450 million rubles, in the city in October. Gravanov reports that the project was financed with the company’s own funds (50%) and by a Sberbank loan. Sibirskaya Guberniya’s second hypermarket, too, will occupy a former industrial facility. The 24,000-square-meter store will be built on the site of the Novosibirsk meat plant, Grivanov said. Officials at the meat plant have confirmed that the new store will occupy a 2-hectare plot on Dusya Kovalchuk Street.

The retailer also plans to open Alpi-Tekhno and Alpi-Moda shops, a sports goods store as well as a bakery, a butchery and a salad bar on the premises of the plant, Gravanov says. Part of the properties will be rented out. Gravanov estimates the project to be worth 650 to 700 million rubles. Construction works will take 9 months.

The industrial estate of the meat plant is a lucky find for retail development, realty analysts believe. Large shopping malls target, first and foremost, motorists and the new Alpi store will be popular as Vladimirskaya and Dusya Kovalchuk streets enjoy high carrying capacity, holds Timofei Melnikov, director of the Kontinent shopping center. But the store will lie at a distance from residential areas, which is likely to undermine attendance, he adds.

Alexei Kasimov, head of Sibiriada grocery chain, disagrees. In his opinion, the remote location is not likely to tell on the project. Sibiriada’s shopping center built in the vicinity of the city airport is popular with buyers attracted by a wide range of goods and low prices, he explains.

Kuzmin NMZ plant also plans to develop retail space on its territory. On the site of an unfinished workshop the company plans to raise a 20,000-square-meter shopping center, Nikolai Smyslov, executive director at NMZ Development, controlled by Russky Ugol, has reported. Smyslov does not rule out that Ramenka (Ramstore supermarket chain) will be an anchor tenant, though no deal has been signed yet. Kuzmin plant is situated on Stantsionnaya Street, one of the main thoroughfares in Leninsky District, Ilya Maslov, commercial director at Hermitage says. Considering its favorable location, heavy car flow and lack of strong rivals in the area the project is bound to succeed, especially with such a powerful tenant as Ramenka in place, Maslov says.

The Stankosib plant has redesigned its production facilities for retail use, too. Of late, Stankosib has launched a number of development projects in the city. 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.

As a production asset, Stankosib is no longer of any interest, holds Vyacheslav Zhabin, analyst at BKS. “Its production units are obsolete and core production has been reduced to a minimum,” he says. (For comparison: in the year 2004 Stankosib produced at 1 woodworker while in the early 1990s the output of such tools stood at 15,000). “The most valuable asset of the plat is retail and office space. Stankosib, situated on Berdskoye Shosse that links Akademgorodok and Pervomaisky districts to the city center is attractive to major retail operators,” the analyst says. Giperon houses Bystronom, Tekhnosila and other retail outlets.

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.

Retail operators take interest in industrial estates, says Kasimov. An acute shortage of retail space is felt in all the big cities across the country. Production facilities are favorably located at the intersection of heavy transport flows; there is enough space for a car park; besides, redevelopment projects are cheaper and less time consuming than construction from scratch, that may take years and cost at least 20,000 to 30,000 rubles per 1sqm depending on the cost of laying engineering communications.

Exhibitions and Fairs

Former workshops of two local plants – NEVZ and Albumin milk plant – will be redeveloped into retail & exhibition halls.

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 class A warehouse terminal – to be run by Tablogix – featuring office and retail properties on the site, Alexei Fetisov, the company’s investment director, reported. Yevgeny Novikov, head of Tablogix Novosibirsk, approves of Novosibirskenergo’s plans. Convenient location and good access roads offer perfect conditions for the development of a prime warehouse facility, he says. In his opinion, the project will be sure to pay back because the shortage of quality storage is growing increasingly acute.

But Dmitry Gerastovsky, senior industrial real estate analyst at Knight Frank doubts that the city hall will sanction the project. “Logistics terminals are rarely built in the city center as they are likely to hinder traffic,” he says. “A couple of vans will be enough to block car traffic in the vicinity.”

NEVZ, situated on Krasny Prospekt, lets 50,000sqm of space. One of the tenants is the Sibirskaya Yarmarka exhibition hall. Novosibirsk-based Sibproyekt Development company plans construction of a shopping mall next to Sibirskaya Yarmarka (Siberian Fair). At an auction held by the Russian Federal Property Fund (RFFI) Sibproyekt Development has purchased a 6,000-square-meter building on the site of NEVZ, at 90 million rubles and plans to open the SibExpo center on its premises, Oleg Shorkin, general director of the company, has reported.

The city suffers an acute shortage of retail and exhibition space, Shorkin says. Sibirskaya Yarmarka is not able to satisfy the growing demand. SibExpo will house an exhibition of industrial and retail equipment. Space will be rented out at “affordable” rate of only 550 rubles per 1sqm, he says. Premises on the 1st floor of the 4-storied building will be put up for sale at 30,000 rubles per 1sqm. If the project proves successful the company will continue to develop similar facilities across the city. The city needs at least 10 more exhibition halls, Shorkin explains.

“The confusing layout of driveways to NEVZ is likely ward off ordinary visitors, as well as exhibitors whose task is to bring bulky equipment to the site and unload it,” notes Alexander Nazarov, head of BrokerKom realty. Although, with Sibirskaya Yarmarka as a neighbor SibExpo is likely to succeed as exhibitions have been held on the site for years and many companies have got used to exhibit their goods there.

But in a more distant future NEVZ will inevitably lose out to modern commercial centers, holds Nazarov. NEVZ rents out most of its properties at the rate of 500 to 600 rubles per 1sqm, some offices are offered at 400 rubles. In the long run NEVZ will no longer be able to keep up with competitors and will have to further reduce the rates, Nazarov concludes. The company will have to slash rates or pull down the existing facilities so as to vacate plots for new construction, Oleg Lugovoi agrees.

Development on industrial sites pays back, holds Yuri Tiunov. Such projects are less time-consuming and less costly as the sum of bribes paid by the developers in exchange for freehold makes up 5 to 15 percent of the total cost of the project, he explains.

While the city hall has in fact distanced itself from the issue of withdrawal of production facilities from the city, such measures could help eliminate environmental hazards and vacate plots for new construction, Tagirov says. “Thanks God, the authorities at least do not impede developers. But then why should they? For, in exchange for loss-making and hazardous production facilities the city gets modern housing, retail and office centers,” Tagirov concludes.