Market Know-how: Cumbersome Construction

“In central locations problems arise from complicated geological situation, difficult landscape, proximity to historic buildings, archeological monuments, etc.,” says Vyacheslav Timerbulatov, vice-president at Konti. “All across the city proximity to engineering networks is a problem.” Developers are not always able to entirely fulfill their plans, nurtured when they took part in tenders or acquired a building plot under a different scheme. In the long run, some abandon those plans and sell their plots and projects. The buyers show up immediately, only to make the same mistakes.

Experience is the Key

Novices are rare among Moscow developers. Most of them have experience of many years’ work in the capital, they are versed in laws and usages governing the procedure of obtaining building plots and know how to secure a foothold there. “We examine every offer we receive as long as it meets our requirements,” says Sergei Lyadov, chief spokesman for the City – XXI Vek investment and development company. “If the plot is offered together with a project designed, our experts examine the site and the project with a view to determine the degree of its appeal. The next step is the decision on joining or rejecting the project.”

Alexei Belousov, commercial director at Capital Group, says that the company’s decisions are made on the basis of comprehensive analysis of the site and the company’s experience of many years. Such an approach guarantees against buying a pig in a poke, he explains. Vladimir Zubrilin, board chairman at Forum Properties, agrees that extensive experience in development helps companies to make right decisions. Developers shun projects where no comprehensive geological survey has been carried out, even more so as sellers quite often conceal the defects, he says. “We have rejected quite a few projects lately where development was fraught with problems arising from environmental situation and built-up density,” Zubrilin says.

Flaws that go unnoticed at first result in substantial changes to the project. The cost of additional works may have considerable effect on the cost of the project, undermine its profitability or send it into the red altogether. “Depending on the scale of changes and their effect on the project investors decide whether to go ahead with the project or sell it to someone else. Or close it down altogether and write off losses already incurred,” says Dmitry Popov, head of analysis at Novaya Ploshchad. Vyacheslav Timerbulatov, however, insists that a detailed analysis of the site by company experts helps detect “unexpected” problems, of which the developer had no idea before.

Oksana Basova, spokeswoman for SKholding, disagrees. Pitfalls abound especially on the sites secured through tenders held by the city government, she says. “We perform analysis to determine what can be built on the given site, how much that would cost us, examine the market situation, as well as the terms and conditions of the investment agreement,” Oksana Basova explains. “But quite often auction documents fail to provide complete and accurate data on the plot. That is why it is impossible to foresee all risks.”

Risk Without Reward

The price of building plots in Moscow depends largely on the volume of spending required for their development. The more complicated is the situation on the site the lower is its price. A comparatively low price is a great temptation both for novices and experienced developers. Vyacheslav Timerbulatov agrees that given the acute shortage of building plots in Moscow many companies take up plots “more or less suitable for construction” but as soon as first problems arise they seek to sell the plot. Moscow has seen quite a few problem-ridden projects resold many times until they were taken over by developers with substantial financial resources and government backing necessary to tackle the problems.

The development company KV Engineering has purchased a ready-made project and a site near Poklonnaya Gora where the development of a business center had been planned, Vladimir Kollar, general director of the company reported. The low price coupled with the company’s desire to secure a site seen as having good prospects served as a stimulus for the deal. At the moment the accord was signed the buyer saw no obvious defects. Moreover, construction works had already been launched, which, it seemed, made the task easier for the new owner. But a more profound analysis of the site performed afterwards revealed serious problems. It transpired that the site was not plugged into power lines and had heat supply. Electricity cables had to be pulled all the way from Khoroshevo Mnevniki beneath the Moscow River bed and Kutuzovsky Prospekt. Ensuring heat supply was possible only by installing a gas plant on the site.

The valuation of the project made by Cushman & Wakefield / Stiles & Riabokobylko revealed that the building designed in the mid-1990s no longer met the modern-day requirements for business centers. Another problem revealed was that the planned development would block sunlight from reaching neighboring residential blocks. The company had nothing left to do but to commission a new design. “The project designed by Pavel Andreyev’s bureau of Mosproyekt II has fewer floors but more space due to a larger perimeter of the building,” Kollar explains. “The public town-planning council backed our project but the city hall halted the development.” The city government said that the increased size of the building would further aggravate traffic congestion in the area. Under those circumstances the only solution for the company was to sell the project. “The company that acquired our project was aware of all the problems but it had long-term money available and was ready to take up a protracted development,” Vladimir Kollar adds.

Ilya Shkabara, deputy general director at KV Engineering, agrees that buying a project on a problem site is possible if in the course of bargaining the buyer has an opportunity to save 30 to 50 percent on costs. “But, when buying such a site you need to make sure that you have resources and know-how for solving those problems,” he says.

Looking for Hidden Faults

Problems arising during development of building plots may be either insignificant or quite serious. The earlier they are revealed to the developer the likelier he is to avoid mistakes. Denis Kolokolnikov, general director at RRG (Russian Research Group), says that any interested party may apply for information on the site in question to the town-planning cadastre agency of Moscow and obtain a copy of a cadastre certificate, providing data on all the aspects of possible use of the site and several maps of the site, with reference to town-planning regulations, functional zoning, zoning for construction and landscape zoning. Those papers determine the future use of the plot and adjacent territory, including buildings subject for dismantling and under construction, the allowed height and built-up density, and contain data on communication lines laid on the site (power and telephone lines, sewage, etc.).

The engineering geology map provides more details on physical restrictions applicable, the quality of the soil, underground water level, etc. Those data are part of the package of primary project documentation. Experienced developers know how they should be used and where to procure them. But defects are not always obvious. Quite often the developer trusts the seller and fails to verify data provided. As a result, the new owner remains unaware of problems until construction begins. Or, being aware of some problem the developer remains ignorant as to the true scale thereof. Anatoly Morozov, general director at the MIAN real estate agency, has reported that MIAN had secured a plot for construction of a business center on Pravda Street, with a foundation pit already been dug out and foundation laid. But the pit had been filled with water for nearly 2 decades. To fortify the foundation the builders had to ram piles into the ground, 28 meter deep.

Gennady Zhigaryov, general director at Rybstroiinvest (RSI), told Vedomosti that when developing the Profico business center on a slope of Krylatskiye Kholmy, the developer had “to build a breast wall 26 meters deep, fortified by over 500 anchors. Thus, by developing the business center we had to go 20 meters below Krylatskiye Kholmy Street, clear the site and then start raising our high-rise, with 5 underground levels and 26 stories above the ground, literally from scratch.” Sergei Lyadov believes that the relief as such is not a defect, as builders have necessary skills and know-how to work under various conditions. Ilya Shkabara adds that the problem of varying heights is solved through construction of underground facilities. “The relief also provides additional view characteristics,” he says. Sergei Ivanov, head of investment analysis at RIGroup, is convinced that a masterfully designed project “transforms defects into advantages”. For example, wetlands may be transformed into water features, varying heights may be used for development of leisure facilities.

Field Riddles

Building plots available to developers quite often are limited in size or awkward in shape. A plot measuring 0.2 to 0.3 hectares is not suitable for office or housing development, as the cost of design and construction is too high, Ilya Shkabara says. The optimum size of the site for office construction is 0.5 ha and over. “Such a territory is enough for building a business center measuring a total of 10,000 to 15,000sqm, with a parking facility providing up to 200 car spaces. Developers in that case qualify for a bank loan in medium-size banks,” he notes. Shkabara warns against office development on narrow plots as the minimum width of an office building is 12 meters. “Construction of properties measuring less than 10,000sqm is not feasible,” he says.

Denis Kolokolnikov believes that plots that are not suitable for office development may well be used for other purposes. “Narrow plots are practically ideal for construction of a retail center where importance is attached to a long fa?ade,” he says. Natalia Zharenova, head of commercial real estate at Russky Dom Nedvizhimosti (Russian Realty House), notes that plots that are awkward in shape do not pose problems for the developer – suffice it to devise an original design solution. Although, of course, complexities tell on the cost of the project, that is why low-cost projects are scarcely viable in such circumstances. Complicated for development are plots in proximity to metro stations where restrictions are imposed on the height of buildings as well as the depth of underground space. For example, on the stretch between the Universitet and Vernadsky Prospekt metro stations the maximum allowed height of developments equals four stories.

“Nobody is building any offices there, as such sites are suitable only for retail development,” says Ilya Shkabara. “Plots in that area are much cheaper than similar sites where no such restrictions apply.” Anatoly Morozov has admitted that the company had to spend extra on vibration protection during the development of a business center that houses MIAN’s head office on Krasnaya Presnya, built on the site right above a metro line.

Development of underground space where main lines are laid is fraught with problems. Experts recall cases where builders, having dug out a foundation pit, came across such a quagmire of pipes and cables (never mentioned in any of maps available) that developers had to spend months on finding their owners and re-routing main line pipes. One of the examples is a housing project on the site of a foundation pit dug out about two decades ago on a site where a construction of a hotel for the Soviet Defense Ministry had been planned, near Krutitsky Val street. Construction works on the site had to be suspended for six months required to unravel the problem. “We were looking into a plot of land for development of a small retail center,” Dmitry Popov recalls. “But it turned out that beneath the site there were sewage and water supply network, telephone lines, which could not be rerouted without substantial spending. Although we had applied certain efforts to examine the site, spent time and money on that project, we were forced to abandon our plans.”

Popov noted that the district administration had been aware of those restrictions but failed to notify the developer accordingly. Anatoly Morozov cited another example: “Before our company launched development of the Raduzhny residential micro-district in Solntsevo (outside Moscow), we had to remove engineering lines from the site.” But the problem of moving main networks fades into insignificance compared to their unavailability on the site. “With communication lines overloaded, commissioning of new power generating capacities takes place first and foremost on the outskirts and in the areas of comprehensive housing development,” Ilya Shkabara adds.

Denis Kolokolnikov confirms that power lines are distributed across the city unevenly. At times, developers ignore that fact hoping that problems will be solved as they arise, he notes. But to plug a major consumer into power lines, say, in Khamovniki, will require pulling the cable all the way from Khodynskoye Field – the only area in the city where excess capacities are available. The official price of 1 kilowatt in Moscow is 1,000 euros. For comparison: in St. Petersburg availability of power lines is the prime criterion for assessing problems that may arise in the course of developing a certain plot, says Maxim Shubarev, head of the Peterburgskaya Nedvishimost (St. Petersburg Real Estate) corporation. Solving that issue may require the amount of spending ranging from “high to impossibly high,” he says. For example, in order to provide electricity supply to a panel house in Krasnogvardeisky District of St. Petersburg, the developer had to pay $1,700 per 1 kilowatt. The entire amount ran into nearly $765,000, Shubarev complains.

Developments on the sites in densely built-up areas often may block sunlight from reaching neighboring houses. “At one of our sites near Kutuzovsky Prospekt the original design solution caused problems with insolation for a neighboring house,” says Vladimir Zubrilin. “We had to change the proportions of our development and decrease the number of stories where it would have blocked sunlight from entering apartments of neighboring blocks, and increase the number of floors on the other side.”

But that is not always possible. Developers often have to come to terms with tenants of nearby houses and pay compensation to them, or buy affected apartments. “Practically every project in the city center is fraught with complications,” Zubrilin says. “Problems arise from organizing building works on limited plots, costly technical specifications for plugging into communication lines, the need to fortify neighboring developments, changing worn-out infrastructure, greenery, etc. As a rule we accept all those terms where location is unique and returns are likely to offset high construction costs.”

Look Before You Leap

One of the key instruments employed by developers when deciding on acquiring a plot or joining a project is a comprehensive analysis of its prospects. Where the plot has serious encumbrances or defects while the prime cost of construction and the cost of the plot taken together equal the sale price of real property in the area, taking up the project makes no sense, Natalia Zharenova says. Experts polled by Vedomosti say that many problems arise where plots are offered for development along with ready-made projects and concepts already approved, prepared by inexperienced developers and designers. Sometimes, architects give in to unsophisticated landowners who insist on designing a building of the largest possible size.

Such projects often have dark rooms, poor entrance and zoning solutions, which undermines their commercial appeal. The problem is especially hard to address when the timing is limited. “In such cases, commissioning a new design spells loss of precious times and the need to go through another round of time-consuming and complicated procedure of securing approvals from government bodies,” Forum Properties’ experts say. In the opinion of Denis Kolokolnikov, it is necessary to take into consideration rival projects carried out in the vicinity. RRG’s analysts tend to divide the city not into administrative districts, but proceeding from natural or artificial borders, such as a river or a motorway.

“Upon receiving a request for analysis of a certain plot we start with defining what we refer to as clusters and set about examining them,” Kolokolnikov says. “In particular, we look into projects that are to enter the market in the future. If, for example, a shopping center developed in the vicinity is to be finalized earlier it is likely to create real competition. The more data we receive on the plot and its surroundings the higher are the chances to succeed.”

Alexei Belousov admitted that at times while working on the concept of the future building on a given site the developer comes to realize that it is possible to create a more interesting project than originally planned, provided the size of the allotted plot is adjusted. That requires filing a request to the city government bodies or to the owner of the adjacent plot. “That is a common practice and there is a clear-cut procedure outlining steps that need to be taken,” he says.

Property consultants may help developers grasp the price situation on the market. “Such assessments help determine the range of fluctuation between rental rates or sale prices of 1 square meter of space in the future building, future demand and competition, which hinges, among other things, on existing and projected supply of analogous properties that are to enter the market comparatively soon,” Zubrilin says. Ilya Shkabara believes that erroneous positioning of the property costs more than consulting fees. A 10,000-square-meter office building finalized only four week later than planned costs the developer $500,000. Besides, “no bank will grant you a loan if the package of documents accompanying your application contains no independent valuation report by influential consulting companies,” Vladimir Kollar adds.

Some Lose, Others Find

At times developers confronted with distressing results of marketing surveys have a difficult decision to make on what is to undertake on a complicated plot. “In the long run,” says Oksana Basova, “The developer either comes to terms with or pays government bodies or companies capable of solving problems, or sells the plot to inexperienced buyers.” But sale is seen as a last resort. Most developers are ready to incur spending. The developer is likely to lose as much as it costs to solve the problem, says Natalia Zharenova. Sergei Lyadov says that certain defects may increase the cost of development by 5 percent, in rare cases by 7 to 8 percent. Or 3 to 10 percent of the projected investment, Anatoly Morozov says. Stanislav Kapinos, general director at Russkiye Oteli (Russian Hotel), has reported that the cost of re-routing engineering lines and fortification of neighboring developments in the city center goes as high as 30 to 40 percent of the total cost of the project.

According to the analysts at Russky Dom Nedvizhimosti (Russian Realty House), if it turns out that engineering facilities beneath the building plot cannot be removed, while the developer plans a class A business center featuring an underground car park on the site, it is quite possible that he will have no alternative but to allocate one of the upper floors for the purpose. “For a building five stories high, rough calculations suggest that the developer will lose up to 20 percent of projected profit,” Natalia Zharenova explains. In Moscow, many restrictions may be lifted in the course of talks with authorities, says Vladimir Zubrilin. The size of the plot may be adjusted, borders defined more clearly, government town-planning programs amended and territories reclassified for money and with government backing.

As a result some companies develop a feeling of omnipotence and permissiveness and they undertake projects where their predecessors failed. But then, Natalia Zharenova believes, in Moscow there are no non-reclaimable plots and no insoluble situations, it’s only the question of money and ability of operators concerned.