People in the Know: DVI: Breaking Into Province

-Is that true that you entered the real estate business as a student selling apartments through auctions?

In those days I studied at the energy department of the Irkutsk Polytechnic Institute. My friends and I were second-year students when we our first property auctions in the city.

-How did you manage to do that?

Being a highly energetic young man, I combined my university studies with managerial training. The word ‘manager’ had only entered our vocabulary in those days and the phenomenon itself was becoming increasingly popular. Those courses had a profound effect on us, students, on our way of thinking. We felt ourselves nearly as full-fledged managers and my comrade, several years my senior, Mikhail Grudinin, decided we had to start something serious. (He also lives in Moscow now, and has even penned a law governing property market).

He had read somewhere that oil and real estate were two most profitable fields of business, drug trafficking aside. (Unfortunately, in those days few were versed in oil business). But where to begin? We decided to start with apartments. As we studied media reports and watched the developments unfolding in Moscow we realized that sale of properties through auctions was the best option for us. Our first auction was held two months after the idea had first occurred to us. That was in 1991. Russia still had no real estate market, no laws to govern it. First legal acts on privatization had only been issued.

To begin with, we needed to find some property available for sale, so we were making rounds in residential areas, knocked on every door and inquired: “Anybody selling a flat here?” We were posting notices. In the evenings we would meet in a lobby of a local hotel to discuss our dealings. We were a group of several young men. We contacted various enterprises offering assistance in selling real property. Finally, we found several buildings and about five flats available for sale.

It transpired, though, that some of those properties could not be put up for sale, as there were no laws governing those cases. For example, we “sold” a building of a local cultural center at an auction but registering a title to that property was impossible. With apartments we were luckier for we found flats in housing cooperatives, eligible for sale. Our first earnings equaled a price of one apartment. Bid prices grew three-fold from initial bids. Thus, being a second year student I already could afford a fridge. Then we held another two or three auctions, whereupon we launched a real estate agency of our own.

-What did your company specialize in?

It was a real estate services agency. But it was more than just a business -- it was an ideology. And we were there to spread that ideology. In other words, we were setting the rules for real estate operations. We wanted to build our business in accordance with market practices where all processes are interconnected. People were watching us with interest but few understood our objectives in those days. A couple of years later our team split up and each went about building a business of their own. My new agency, San Tai, focused on communal flats (with several families living in large apartments sharing the kitchens and bathrooms), providing their residents with new living quarters. We borrowed loans from banks at annual rate of interest on a loan as high as 250% but in those days those rates did not seem abnormal and provided residents of communal flats with new housing quarters and vacate their previous dwellings. If we failed to repay our loans annual rates grew up to 500 percent.

-Did you plan to get some training in real estate operations?

Our agency was one of the first to join the Russian Guild of Realtors and each year we attended all the seminars and conferences held under their aegis. In the late 1990s I took the property management course (CPM) also held by the Russian Guild of Realtors. Later I took more interest in commercial property management. At the age of 24, I joined an Irkutsk-based production company that held title to a high-rise in the city center and suggested redeveloping the building into a business center. The director agreed. I was appointed his deputy in charge of finance and development. Production units were withdrawn from the city center. The first three stories of the building were redesigned for retail use, two upper floors for office use. Once loss-making, the company came out of the red.

-Could you tell us how you first met Mark Afraimovich, head of Ross Group, well known as managing partner at the retail company Torgovy Kvartal?

We met by chance. Our common acquaintance introduced us. In those days Mark was working on a retail project in Krasnoyarsk. That happened in 2000. He offered me to join him. Besides, I saw no problems in moving to Krasnoyarsk. His plan was to redevelop a workshop of a local television set production plant, already bankrupt by that time, into a shopping center, later named Torgovy Kvartal na Svobodnom (Retail Quarter of Svobodny Prospekt). That niche was virtually vacant in the city.

The project we pursued seemed enormous to us, the first stage alone measuring 10,000 square meters! Today we see developments of up to 40,000sqm and over. But in those days, after three anchor operators moved into Torgovy Kvartal, there was virtually no space left for others. We launched construction of the second stage, acquired a neighboring building. Today, there are several buildings in the site forming a single complex, similar to a retail and entertainment center.

-And what about the concept, property consultants’ recommendations that developments designated for retail use should better be built from scratch? Some say that redevelopment projects often fail to achieve an effective layout. There are quite a few examples of failed retail projects, and Moscow is no exception.

But there are success stories, as well. Take Gorizont in Rostov-on-Don, the shopping center operating on the premises of a former production facility. As far as I know, buyer attendance there soars, as well as takings. Of course, a retail center must be convenient and comfortable. But it is also quite possible to develop such a mall on the premises of a workshop. With our Torgovy Kvartal in Krasnoyarsk everything worked out well. Shopper flows are organized in circles, there are no dead-ends. In 2001, nobody attached much importance to the concept. But Andrei Tolmachyov, head of MIG (Interbank Investment Group) and owner of the Torgovy Kvartal project, had a clear vision of what had to be done so as to create a modern shopping mall. For example, to bring in anchors. The first anchor to arrive in Krasnoyarsk from Moscow was the retail operator Starik Khottabych, followed by L’Etoile. In those days Ramstore launched its first outlets in Moscow, extremely popular in the capital. Retailers were ready to accept tenancies on virtually any terms as long as a Ramstore supermarket was among the tenants. Then, we secured the title to the second part of the workshop and went all out to persuade Ramstore to open a store in Krasnoyarsk. That was the first Ramstore supermarket launched in the region.

-Instead of letting space to anchor tenants at Torgovy Kvartal, you sold it. Why? Tenancies are more common at shopping centers.

Sale is profitable for developers as it boosts returns, though that depends on goals they pursue. Some practice the following approach: they sell properties at a shopping center at early stages of development to raise financing for construction. Besides, by selling a future property, developers make profit based on the difference between the sale price of 1sqm and prime cost of construction. Those profits may be invested in the project. Later stages are financed through a bank loan. That is how we built our first shopping and leisure complex in Perm. In those days, in the years 2003 to 2004, DVI Group had already been established. But on the other hand, such schemes have considerable disadvantages. What you get in the long run is a highly effective project, but upon selling 40 to 50 percent of properties in the complex you find yourself in a situation where you cannot sell the entire project.

-The project of Torgovy Kvartal belonged to MIG Group. What kind of a company it was?

The group was set up by former military officers. It owned a variety of plants and enterprises across Russia where they had acquired stakes. MIG was a Moscow-based company run by Andrei Tolmachyov.

-So it transpires that during the development of Torgovy Kvartal you were a MIG employee?

I worked at MIG’s unit “Torgovy Kvartal na Svobodny” as general director. I was on payroll. Besides, I held a share in the company. Together with Tolmachyov we acquired one of the buildings of what was later to become Torgovy Kvartal. That was a dilapidated facility with no one willing to put up money in the project, as there was no certainty of success. Of course, the amount seems trifling today, the building had cost us $60,000 to $70,000. The first stage proved a success. But in 2002 I sold my share and withdrew from the project.

-Why? What happened next?

I realized that I would not stay at MIG any longer; I parted ways with my partners, as is often the case in business. I moved to Moscow. I began with picking up a real estate and development directory of companies with operations in the regions, published by the Russian Guild of Realtors, and started calling them.

-What did you offer them?

I said an investment company was planning a shopping center, inquired if there were any building plots available, if they could help. Most were interested. All the money I had at the moment was what I had earned at MIG plus what I got from selling my share in Torgovy Kvartal. I started from scratch again, running an office in my Moscow apartment. That was when DVI Group began. I held talks and my wife took care of the entire paperwork. The first city that showed interest in our offers was Perm.

-Could you please tell the story of Perm’s retail center Stolitsa, DVI’s first project, in more detail?

The situation was unique. I think by 50 percent we were lucky. We had many problems there but we learned a lot, too. The experience was very useful. In 2003 I arrived in Perm where I first met Vadim Chebykin, director of a sports complex under construction. He helped us a lot. The unfinished development of the complex, once owned by Lukoil, was taken over by the city government later on. The government established a joint-stock company tasked to finalize the project. The territory was enormous. By the time we arrived construction of an Olympic size swimming pool had already begun on the site. Part of the area remained vacant and Chebykin suggested that we purchase it.

Chebykin himself had long nurtured plans -- rejected by many as unfeasible -- to build a shopping center on the site, which, his opponents believed, was no convenient location for such a project. Although he had held talks with a Turkish contractor Yenigun. Thus, we were the only company who ventured on the project. We took the risk against all odds. Besides, we had won support of the city government. Admittedly, the price of the plot was exorbitant for Perm, about $1 million for 2.5 hectares of land, with a foundation already laid and piles that we had to dig out at own expense, and papers left behind by the previous owner. But we succeeded in developing a gigantic center with a swimming pool and a health fitness complex nearby, already completed by Chebykin. We even plan to build a passage linking the pool to our mall.

At early stages, three investors joined the project. I signed deals with anchors Starik Khottabych, Sportmaster and L’Etoile. Thus, we had about 50 percent of financing provided by DVI, and another 50 percent by operators. We could not apply for a loan in those days, as we still had not obtained permission for construction. Besides, banks were not ready to issue investment loans. But then, nine months after the building works began, thanks to professional approach and flexibility of Sberbank’s West Urals Bank we came to terms with them. Today, Sberbank is our strategic partner.

What matters in our business is not just interesting schemes but also the people who believe in what they are doing. For example, in Krasnoyarsk I found a friend and partner Dmitry Gudkov. We used to work together at MIG. After he quit MIG, I called him and offered him to take charge of the Perm development. He took a day to think it over and agreed. He had trust in that project and what’s more, he moved from Krasnoyarsk to Perm, lived there for two years, built a team, acted as a general contractor and oversaw the project. Today, he heads our new retail project in Volgograd. Other people who moved to Moscow from Krasnoyarsk and now hold top posts in the company are Konstantin Chubarev, Sergei Norvaisha and Alexander Tisetsky. Those people are the backbone of the DVI team. It is through their efforts that the Stolitsa project in Project has been fulfilled.

-How much did Stolitsa cost?

About $15 million.

-What are the rates tenants are charged there?

$500 to $800 per 1sqm per year, on average.

-Are there any figures available on the Perm project?

There are such figures. Our original goal was to secure a daily attendance of 10,000 to 12,000 visitors. These days, that rate stands at 18,000 to 20,000. We had not expected such results. The demand for properties at Stolitsa is high, too. We have realized that our complex, measuring a total of 32,000sqm, is too small.

-Do you think Perm is a prosperous city?

Yes, it is more developed than Volgograd. For many years Perm’s potential remained underestimated.

-A situation where a manager arrives in Perm to take charge of a construction project seems to be rather an exception to the rule. How do Moscow-based developers control their construction projects in the regions?

They either have their reliable representatives in the region or delegate the authority to a local company and arrive from time to time to inspect the development. We are adopting such an approach now. It is especially convenient if you are involved in a number of projects simultaneously.

-Does that mean there are professional firms in the region, after all, capable of taking control of development projects?

Of course. For example, Novostroi Group in Yekaterinburg. I think we are lucky to have them join our project.

-How high is the annual income made from a shopping center operating in a developed region, and how to use that income wisely?

A shopping center such as Stolitsa may bring about $4 million annually. But expenses are high. We repay our bank loans, which takes up 50 to 60 percent of our earnings. Another 30 per cent are used to pay taxes and cover maintenance costs. The rest is used to finance new projects. Our goal is growth and we are focused solely on growth. We aim high. I always say that in order to make $100 million you should aim at least at $500 million. For, in practice, only 30 percent of plans are fulfilled. Sometimes people set their aims too low and that is why it seems to them they have not achieved anything. With us, it is vice versa: we achieve more than originally planned. For example, nowadays, we are pursue more projects than we had expected; we have also launched construction of larger retail centers, measuring up to 80,000sqm, than we did before.

-DVI is developing four shopping malls – in Volgograd, Yekaterinbrug, Izhevsk and Krasnodar. How many more malls would you like to build in Russia?

As many as it possible.

-Do you take interest in cities with a population below 1 million?

Certainly. For example, in Astrakhan we have already secured a building plot from the city hall and signed a deal to the effect. We take keen interest in Penza and Lipetsk, too.

-What project did DVI undertake after Stolitsa had been finalized?

Even before Stolitsa was finalized we had secured a 5-hectare freehold in Yekaterinburg. We managed to make that acquisition by selling part of the properties at the Perm center to anchors.

-Which projects are you involved nowadays? Who are the participants, retailers and investors?

Investors in the 67,700-square-meter project in Yekaterinburg are M.Video and Karusel (Pyaterochka). The project in Izhevsk is financed by Sberbank. Our strategic partners Karusel, M.Video and home goods chain Castorama take part in our project in Volgograd.

-How high is the take-up under preliminary tenancy deals?

70% in Izhevsk, 30% in Volgograd and 40% in Yekaterinburg.

-How difficult it is to secure a building plot in the province? What are your impressions of investment climate there?

Each case is different. Volgograd has amazed us. The new mayor of the city, Yevgeny Ishchenko, has set up a special department in charge of raising investment. Krasnodar, on the contrary, was difficult for us. For three years now we have been unable to secure necessary papers and begin construction works. Working in Yekaterinburg is easy because there we have bought a freehold and also because we have found a reliable partner to oversee the project.

-Do regional governments practice investment contracts? If yes, what are their specifics?

Some regions have brought their legislation in line with the laws of the property market, others have not. That is the key difference between them. While some cities are investment-oriented, such as Yekaterinburg and Volgograd, others are closed and unwilling to communicate with ‘aliens’, as Chelyabinsk or Saratov. There are many reasons for such an attitude, for example, ongoing election campaign or local authorities being more focused on local market operators. The procedure is more or less the same everywhere: either the developer pays the city’s share in cash, or undertakes the development of engineering infrastructure, or somehow contributes to urban development. Thus, 5 to 8 percent of the total cost of the project goes to the city.

-How do you build relationships with regional officials? Do you have to resort to intermediaries’ assistance often?

That depends. For example, in Astrakhan we came to terms with the city government fairly quickly, without any mediation. But in some cases things are done faster with the help of a third party. The city administration does not always allocated plots itself, sometimes officials inform us who the owners are. There are many variants.

-The provincial market is often described as ‘troubled’, non-transparent and crime-ridden, not as civilized as the Moscow market. The rumor has it that developers are forced to make extra payments, apart from those made to the governments under investment contracts?

Some operators, reportedly, pay downright enormous amounts. But we don’t. In principle as long as you are versed in the local market and the rules of the game you can do without any extra payments. If you look lost, not knowing where to run, you may encounter fraud. But, I assure you, the situation where we would take a suitcase packed with cash to the city administration in exchange for a plot with all the necessary papers – that’s pure fiction. The need to bribe city officials is a myth rather than reality. If you bring them a case full of money they won’t take it. It is not the city government that poses obstacles. There are many other agencies whose approval is required.

-Is it hard for provincial retailers to work in modern shopping centers?

That is a serious problem. Many local retailers still have not realized that to rent space at a shopping mall is only half the work. The task of the shopping mall is to attract as many shoppers as possible, and the task of each retailer is to attract shoppers to their shops and that is what catchy signs, showcases and lighting solutions are for. Salespeople are there to sell their goods. And in Russia there are still shops where you can find shop assistants dozing. That is why sales are low.

-Why are international brands so few in Russia?

They have always been wary of the province. They prefer franchising deals. They move on slowly, with extra caution, assuming a wait-and-see attitude. If things go well in Moscow they move on to St. Petersburg, and only afterwards to other cities. Russian operators have already learned to work. Is there anyone able to catch up with Sportmaster? The chain already runs some 100 or 150 stores. Its foreign rivals, such as Intersport for example, will find it hard to achieve such a target. The same is true for L’Etoile, which has already launched about 300 shops. Who can compare to it? Foreign firms are unlikely to catch up with them. In my opinion, they are late. Nowadays, it is easier for them to buy chains already formed. Perhaps, some will manage to open stores in the region, like Auchan. But it won’t take long before they will be unable to find a place for their business in Russia.

Vyacheslav Kaminsky was born on May 29, 1973. He graduated from the Irkutsk Polytechnic Institute, completed real estate training courses and earned professional certificates at the Russian Guild of Realtors, the State Construction and Housing Committee of the Russian Federation and CCIM Institute. Before launching DVI Group Kaminsky held property auctions in his native Irkutsk and ran a real estate company. He worked as a top manager at MIG, where he took part in the Torgovy Kvartal project in Krasnoyarsk. In 2002, Kaminsky established the DVI Investment Group. He is married and has a son.

DVI, an investment group comprising 10 legal entities, focusing on investment in real estate, development and management of shopping & leisure centers across Russia and the CIS. The group is involved in investment, development, sale of shopping areas, consulting, trust management, retail, film distribution (DVI Cinema) and finance (DVI Finance). The company’s track record of completed developments includes shopping center Stolitsa (32,000sqm) in Perm. DVI is currently working on a number of retail projects in Volgograd (87,000sqm), Yekaterinburg (67,000sqm), Izhevsk (31,300sqm) and Krasnodar (72,000sqm). The group’s partners are Starik Khottabych, L’Etoile, Karusel, M.Video, Planeta Bowling and others. In 2005, the company’s turnover stood at $25 million.