People in the Know: The Best of the Best in Commercial Development

Different companies find different ways to success. Some pin hopes on oil money, others stake on publicity, still others simply work hard. The development company Forum Properties was built by workaholics. Once a small firm launched nearly 14 years ago, today Forum Properties claims the title of Moscow’s best developer. Vladimir Zubrilin, chairman of the board at Forum Properties, believes that top quality is the key to success. Thus the company achieves good publicity and taps into sources of financing.

-You company has long been active on the market but for many years it remained obscure. What is the reason?

The company’s deeds speak louder than public statements or advertising. Besides, I think that among those who really need to know about us Forum Properties and its projects are well known. Suffice it to recall that Forum Properties was named the winner in the categories Best Class A Office Property and Best Developer at the Real Estate Awards held by the Commercial Real Estate magazine.

-Does openness help or hinder work?

It is hard for me to judge the others. As to Forum Properties I think that our company has already achieved the level of publicity our customers need. We duly inform real estate market operators of our new projects. In these terms, the company’s approach towards our clients fully conforms to what we believe to be a professional style of work. Sometimes it happens so that without being well known to the public the company encounters certain difficulties at early stages, when acquiring a project. Sellers of building plots require some additional data on the company. But this is not a big problem.

-Earlier your company operated under a different name. What was the reason for renaming it?

The Center of Support for International Exchange and Development – the name used 14 years ago when developing one of our projects, failed to convey the specifics of our operations. At some point we decided it was appropriate to rename the company so as to improve its perception. The new name, Forum Properties, corresponds to the field and nature of our operations on the real estate market and also conveys the democratic spirit and joint work of different people, which we are set to maintain and develop.

-How did you switch to real estate development?

Our company was founded as an independent company, not affiliated with any large financial industrial groups. We began with smaller projects, laying the financial foundation of our business, accruing expertise and expanding our portfolio. The company has already finalized and is working on the projects that are quite noticeable. Those are, for example, Aurora Business Park and Hermitage Plaza, currently under construction on the Garden Ring. I am proud to say that both projects have been named the best class A office properties developed in 2005 to 2006.

-Forum Properties has been active in redevelopment of industrial estates. Why do you take interest in such projects?

What you describe as redevelopment, deals in fact with withdrawal of production enterprises from the city center and development of office complexes on vacated sites. The process is natural for Moscow and is a part of a global tendency. There are many reasons why acquisition of industrial territories is an attractive means of joining new projects. To begin with, that is one of the ways to secure a title to the project. For example, thus we acquired the rights to the Krasnokholmsky worsted textile mill. The site is currently used as a building plot for Aurora Business Park. Securing an investment contract is a complicated and intricate procedure. Secondly, relocation of industrial facilities provides access to a plot where it is possible to carry out a project in several stages, which is convenient both in terms of investment planning and attracting tenants who are offered an opportunity to secure additional space as their operations expand.

-What is the total cost of withdrawal of the Krasnokholmsky worsted textile mill?

The costs of acquiring of an industrial estate, dismantling and moving it to a new location, launching production anew at a new location, run into tens of million of dollars. The price is high but the city hall partially reimburses the costs to the investor by reducing its share of square meters that are usually reserved by the municipality in new developments. To a certain extent, that eases the financial burden on the investor.

-What is the prime cost of 1sqm of space at Aurora Business Park?

The economy of project depends largely on the timing and cost of acquisition of shares in the industrial enterprises subject to withdrawal. We were lucky to have joined the Aurora Business Park project in the time when there was the spirit of the 1998 financial crisis in the air. In those days the price of shares was trifling. That is why the prime cost we achieved during the first stages of development at Aurora Business Park, already finalized, can hardly be used as a basis for calculating the cost of new projects. As to the rate of return on investment for an average class A office project it usually stands at 14% to 17%, provided you have purchased a building plot for a reasonable amount of money, designed the building and done your job well at all stages.

-You do not sell your developments. Why?

Our corporate policy is to retain the title to our developments and manage those properties, while the burden of expenditure incurred is eased through refinancing of projects, i.e. borrowing funds from banks on the security of rental payments and real properties. We don’t think selling a project is a mistake. But, being an investment and development group we consider ownership and property management as an activity no less significant than development proper. At the same time we do not rule out the possibility of sale completely as sale provides extra financing for new projects.

-One of your new projects is the development of office space on the site of the Central Research Institute for Allround Automation. What are the specifics of that project and how did you secure the plot?

The site for the project with a working title Forum Quarters lies at the intersection of Mozhaisky Val and Bryanskaya streets, in the vicinity of Kutuzovsky Prospekt and Kievsky train station. Earlier office projects were rare in that area. Nowadays, other companies, too, have plans to build offices on the site adjacent to our plot. Besides, today with the Kievsky train station square undergoing rapid development the entire district is turning into a zone of active office development.

Our plot is not large, about 1 hectare in size. We plan to build a compound of office buildings measuring a total 50,000sqm. Forum Quarters is a small office quarter comprising several detached buildings, forming a single architectural complex. Each building is individual and designed as a would-be head office of a large Russian or foreign firm. The project is designed in such a manner as to make it possible to run and maintain each of the buildings independently. At this moment we expect the would-be tenants of Forum Quarters to be four major companies. Unlike the case is with other projects, we do not rule out the possibility of investment sale of office buildings at early stages of construction. Forum Quarters meets corporate tenants’ demand for detached office buildings measuring 10,000 to 20,000sqm.

-When do you plan to launch construction of the third stage of Aurora Business Park and when the entire complex is slated to be commissioned?

We plan to begin construction works in late 2006. The third stage is a complex of building measuring a total of 80,000sqm, or 50 percent of the entire project. The third stage will be commissioned in two phases – in 2008 and 2010 respectively, due to specifics of the plot.

-What is the cost of construction of the third stage?

We estimate it at over $100 million, excluding the cost of payment to the city government, which will be quite high. The fourth stage of the project is currently on the drawing board, to be raised on the Garden Ring, measuring 12,000sqm. To all appearances, that will be a beautifully designed modern hotel with breathtaking views.

-The projected size of development has changed. What will be the total size of the business park once it is finalized?

Initially, the government decree provided for construction of 100,000sqm; today, we expect the complex to measure 150,000sqm, underground facilities included. We have expanded the underground car park. Other properties, too, have been increased.

-Properties built by Forum Properties are rented by leading international companies. What makes your developments so appealing to respectable tenants?

My colleagues and I have managed to build a company that holds a leading position in commercial development. We have a good track record of tenancy deals signed at the early stages of the project where tenants had to wait for six months and over before moving in. Western clients’ interest in our business centers results from high quality of properties and property management services provided on the site as tenants want their offices to be run by a professional company, versed in the specifics of operations of a modern office center, capable of making life easier for its occupants. A modern office property is a complex of sophisticated engineering systems, and any malfunction tells negatively on tenants’ operations.

-Forum Properties has several subsidiaries. What are they responsible for?

Forum Properties is a group of companies involved in all stages of development projects. Forum Properties is the umbrella company, responsible for investment and development. The management and construction company Forum Development is an independent company involved in professional management of construction works. It oversees all stages of construction, including design and negotiations with the government, selects contractors and subcontractors and commissions the property. Forum Development also provides construction management services to other clients. In particular, it is responsible for construction of a new office building for Aeroflot. Forum Management is responsible for property management, tenancies, collection of rents, technical maintenance of office buildings. The group employs a workforce of 600.

-When did you decide on establishing a property management company of your own?

Our property management unit was established in 1992. We realized as early as then the importance of managing our properties on our own. In those days there was but a handful of companies offering professional management services and we could not afford the services of Hines, the recognized leader in that field. We planned to build a development group involved in the entire spectrum of work in that field that is why our decision to set up a management company was a natural step towards creating a full-fledged holding. Besides, while we were ready to hire an external contractor to provide technical maintenance, there was no one on the market whom we could entrust with tackling commercial issues. Nowadays it is possible to find good contractors who could provide quality maintenance. But our own company provides services of such a high quality that we do not need to hire anyone.

-What is the total size of properties you run?

We manage over 100,000sqm of properties. That includes 11 business centers and Aurora Business Park; in summer of this year we will take over 40,000sqm at Hermitage Plaza.

-We have been informed that Forum Property Management is ready to enter the open market and offer professional management services to other companies. Is there any progress in that field?

Unfortunately, sometimes where a management company is affiliated with a well known developer its chances to secure contracts on the open market are lower. Investors fear leaks of information on their projects or shun property managers associated with a rival developer. Today, our own projects account for 80 percent of all properties run by Forum Property Management.

-Which of your office complexes charge the highest rental rates?

Offices on upper floors at Aurora Business Park are rented at $750 per 1sqm, VAT and operating costs excluded. But our major tenants who signed deals before the end of construction were granted more favorable terms.

-How long do you expect the growth of rental rates to continue?

The rates are likely to continue growing within the next 12 to 24 months, but afterwards, after a large number of projects is finalized, in particular, office space at the Moskva City business center, the growth will slow down and then the rates will drop. Nevertheless, tenants will always be ready to pay extra for properties in favorable locations, well designed and maintained by professional property managers.

-All the projects carried out by your company both in the office and housing sectors are top class properties. Why have you chosen to work namely with upscale expensive properties?

The higher the requirements for the project are the more interesting it is. Top quality projects make it possible to work with the best architects. We work closely with several design bureaus. Aurora Business Park, for example, was designed by a tandem of architects Mikhail Leonov and Oleg Popov. Mikhail Filippov’s studio jointly with the bureau of Mikhail Leonov have designed a residential compound in Zamoskvorechye, the Roman House. The building is so beautiful, so well-designed that architecture and art students come to the site to make their drawings of it. I think that in terms of architecture the Roman House is one of the best developments of the past decades, not only in Moscow but worldwide. We also work quite closely with the Sergei Kiselyov and Partners studio. They are professionals, well versed in requirements modern properties must meet. SKiP is a general designer at Hermitage Plaza business center. Remarkably, they have won the contract through a tender held by our company. Forum Quarters was designed by Sergei Choban’s design bureau in cooperation with S.P. Proyekt studio. Sergei Choban is a Russian architect. For many years he lived and worked in Germany where he designed a mixed-use complex in Berlin, featuring a lift running through an aquarium. Not long ago we began to work with the design bureau of a famous Moscow-based architect Alexei Vorontsov and the Mosproyekt-4 company.

-The past years have seen a variety of office complexes built across the capital. New developers are entering the market. In the past months alone several major operators earlier focused on housing construction announced their plans to switch to commercial property development and reduce the share of residential projects. You have said that returns on office development projects are comparatively low. Then why do developers show such keen interest in commercial property?

A widespread notion that office development is an endless Klondike results in higher cost of plots and arrival of a large number of operators. They secure rights to development projects without realizing what difficulties they will encounter. Assuming you have acquired some average building plot through an investment contract, or secured freehold, or bought into the enterprise with further acquisition of the right to develop the area, and taking into account the cost of construction, timing and other factors, finalize the project on time and rent it out at realistic rental rates, you will secure a rate of return of 14 to 16%, or even 17% if you are lucky.

But if you make some mistake and the project takes longer to be finalized, or design solutions are poor, or your project is located in the area where several office buildings are already under construction and developers have to cut rates to attract tenants your returns will drop considerably. Office development requires thorough analysis of all the aspects starting from the stage of selecting a plot to correct market positioning of the completed property. Only where all those requirements are met a developer can rest assured his project will succeed. It is also important to remember that a successful project provides access to cheaper and larger sources of refinancing, responsible for a considerable share of commercial success.

-You have mentioned several schemes of securing building plots. Which of those is the least advantageous, in your opinion?

Our company has tested all those schemes. Experience shows that each has both advantages and disadvantages.

-Market operators believe that developers’ interest in office development has been kindled by an acute shortage of class A office space. Are there many development companies in Moscow capable of implementing projects at such a high level?

Indeed, developers show enormous interest in top class office development. Besides, the shortage of office stock has brought new players onto that market, including companies historically involved rather in housing construction, such as DON Stroi and others. At some point in the future that will result in a large number of commercial properties being commissioned, and the situation will change. I think that in a couple of years tenants will enjoy a wider choice. And then, I think, many errors made today will surface.

For example we have seen some companies buying plots, which we had rejected over serious flaws. In some cases, the sites had poor transport accessibility and the future complex would be doomed to traffic jams at the entrance. In some cases, planning solutions were poor, with few parking facilities available. The height of ceilings was too low, as developers had sought to expand space. Quite often newly-fledged developers fail to understand construction restrictions effective in the area where their site is located.

It is vital to understand that development is a risky business. Some experts even define the essence of development as “risk management”. That is why it is sad to see certain projects carried out by people not only unable to manage risks but even simply to discern them.

-What problems do a developer face upon securing a plot for office development in Moscow?

Some problems are unique for each territory but there common problems, as well. Industrial land has to be reclassified [for office construction]. Then, there are issues of transport accessibility and parking facilities. You need to agree on the height of the building with the city government. In the city center where we work it is a difficult task to tackle. There are restrictions for plots situated in the vicinity of historic architectural monuments and greenery. Sometimes, the developer’s plans fail to coincide with the urban planning authorities’ vision of the project.

-Other developers mentioned power capacity restrictions and worn-out utility facilities… Does that pose a problem for you?

We have never abandoned plans to develop a project if we could not ensure the required capacity. It is a problem of course and tackling it is not easy but in most cases it is the matter of money.

-What are your plans for the future?

Our stock of orders for the next 3 to 5 years is quite large. One of our projects, already mentioned, is Forum Quarters office complex at 49 Leninsky Prospekt (90,000sqm, incl. underground facilities), comprising four detached buildings, 10 to 20 stories high. We will keep the titles to two of them while the other two will belong to the owner of the plot. We plan to launch construction in about 12 months.

Then, there is a small but interesting office project of approx. 8,000sqm, not far from the circus on Tsvetnoi Boulevard. The development will feature offices and a sports center.

Our housing project of 25,000sqm in the vicinity of Petrovka Street is about to enter the design stage. Only recently we have secured the right to develop a complex of building near Olimpiisky Prospekt (40,000sqm). Besides, we will continue to work on the third stage of Aurora Business Park (80,000sqm) and afterwards the construction of the 4th stage (12,000sqm) will begin.

Forum Properties is working on the project to build a complex of buildings on the site of the Mosfilm film production concern. We have developed the architectural concept and took part in the work on the concern’s plan for material and technical development. There are other projects that will be presented soon.

-Will you be able to raise financing for all of those projects?

We have considerable own resources at our disposal available. We have also managed to set up a pool of Russian and foreign investors. We attach great importance to quality of design and construction for that is what ensures stability and makes our projects appealing in long-term, when the market ceases to be a landlord’s market and becomes a tenant’s market.

Vladimir Zubrilin was born in 1963. In 1985, he graduated from the Moscow Institute of International Relations (MGIMO) where he studied international law. In 1988, he completed his postgraduate studies and upon defending a thesis Zubrilin taught law at MGIMO in 1988 to 2000. He worked as a defence attorney. In 1991 to 1992, Zubrilin worked a lawyer in New York, at the law firm White & Case. In 1992, Vladimir Zubrilin and Andrei Barinsky established the Center of Support for International Exchange and Development, a company later renamed JSC Forum Properties. Nowadays, Zubrilin is a co-owner and chairman of the board at Forum Properties Group. He is married and has three children.

Forum Properties was established in 1992. The company has developed a number of landmark projects across the city and is a recognized leader of commercial property development in Russia. Forum Properties is a group of companies involved in various sectors of the real estate market. The company focuses on property investment, construction and management of class A business projects. Tenancies at Forum Properties’ developments are held by over 100 Russian and foreign firms, BMW, BSGV, Caterpillar, Deutsche Bank, Ernst & Young, GE Money, Golden Telecom, Intel, Michelin, Novell, Saint-Gobain, Sanofi Aventis, Thomson, Mitsubishi, Regus, etc. Forum Properties runs 11 office centers rated as class A and B+, measuring a total of 100,000sqm, and 25,000sqm of prime residential space. 300,000sqm of office and residential space are currently under construction.