Money-Growing: Living Quarters for the Military

Developers in St. Petersburg have recently launched several ambitious mixed-use projects in the city center, on the sites of former military bases and other secret facilities. The most daring projects planned in the historic St. Petersburg involve what is referred to as ‘disarmament’ of real estate. This year, the federal government and the city administration are set to step up efforts aimed at bringing properties held by various defense agencies onto the market. The authorities are preparing at least 20 properties across the city for redevelopment under investment agreements or for sale through auctions.

The data on the quantity of defense facilities in St. Petersburg remains classified. Contact information on most military agencies is not available in Yellow Pages; high fences around military installations – including those built along busy highways – rarely bear any shields. There are plenty of such secret facilities in the city. Territories occupied by high-security installations cover 5 percent, or 6,900 hectares of land in St. Petersburg. The number of military schools alone stands at about 30, some of those establishments hold several sites across the city.

A Farewell to Arms

In February 2006, one of local military zones was put on the map after Lord Norman Foster won the bid to redevelop the Island New Holland formed between the Moika River and the Admiralteisky and Kryukov canals in central St. Petersburg, near the famed Mariinsky Theater. New Holland was built in 18th century, on the orders of Peter the Great to serve as Russia’s first naval base. During the Soviet era the island remained a closed zone occupied by the military. New Holland housed storage facilities of the Leningrad naval quarters, a military uniform tailoring establishment, etc.

In December 2004, the military turned the area over to municipal authorities. Governor Valentina Matviyenko was handed the symbolic key to the island by the military. Preparations for the tender then began. In October 2005, the St. Petersburg Property Fund began to invite bids from consortiums comprising investors, designers and developers. The applicants vied for the right to redevelop a 7.2-hectare site occupied by 26 buildings (68,000sqm), both federally- or municipally-owned. Only the Soviet-era buildings could be pulled down. The authors of the interim town-planning program decided that it was possible to develop as much as 220,000 square meters of the commercial properties on the island. The height of any future developments must not exceed 23.5 meters. The island currently lacks the engineering facilities necessary for the implementation of the project. There is scarcely any place for parking; therefore, a car park will have to be built underground. The island will be linked to the mainland by a number of new pedestrian bridges.

In line with the terms and conditions of the tender, the participants are required to spend at least $300 million on the project, to be fulfilled within seven years, and develop the Palace of Festivals on the island, measuring at least 10,000sqm, and worth at least $29.3 million. The right to sign the investment deal and rental costs are estimated at $41.8 million in total. After the project is completed the winner will be entitled to a freehold to the new developments and a 99-year lease to the historical buildings placed under federal protection as well as the Palace of Festivals. The city government is ready to reimburse the cost of laying the engineering lines, while the federal authorities will cover the construction costs of the palace.

The bids were submitted by consortiums established by international and Moscow-based companies. ST New Holland, set up by the Moscow-based ST Group controlled by Shalva Chigirinsky, won the bid. Chigirinsky had invited the prominent architect Sir Norman Forster and pledged to spend $320 million on the project (VAT excl.), ($90 million in own funds, the rest to be raised through borrowings). Admittedly, only a couple of months later the rumor spread that Chigirinsky was already looking for new buyers to take over that highly complicated project. The new complex is to provide a total of 180,000sqm. St. Petersburg-based architectural workshop of Yuri Mityurev has been selected to adjust Foster’s design to local specifics.

Another centrally located landmark site that for many years remained out of reach of investors is a spot on Malaya Neva Embankment, right behind the spit of Vassilyevsky Island, now occupied by the federally-owned company Prikladnaya Khimiya (or Applied Chemistry, better known by its acronym GIPKh), that produces rocket fuel. For security purposes the enterprise even has a border checkpoint on its premises. The plan to move GIPKh to another location and build a commercial and cultural center on the site has been debated ever since the mid-1990s. In December of 2003, GIPKh, the St. Petersburg directorate of the FSB domestic security service, acting on the orders from Vladimir Putin, entered into an investment agreement with a development company Peterburg Siti (Petersburg City).

Later on, the project entitled Naberezhnaya Evropy (or Embankment of Europe), became embroiled in several arbitration proceedings and criminal probes. The Petersburg City company changed hands several times. At first, a company affiliated with LSR Group secured the title to the project. Finally, in early 2006, it landed in the hands of Vneshtorgbank, whose subsidiary, VTB Capital, took over the Naberezhnaya Evropy project. The new investor has ordered a substantial revision of the plan. While the original plan envisaged the development of a 4.4-ha waterside strip, now the building site has been expanded to 10 ha. VTB is negotiating the height of future developments with the city authorities. The parameters of the mixed-use complex that will comprise the Boris Eifman Dance Palace, are yet to be confirmed. Previous owners had planned to build at least 100,000sqm of housing and commercial space on the site. The project is estimated to be worth $200 million. The cost of GIPKh’s relocation is estimated at $20 to 25 million. Architectural monuments situated on the site are likely to render the project even more complicated as those properties will have to be included in the concept of a modern commercial and community center. Polluted soil is another problem. But considering strong government backing and power VTB enjoys the state-run bank will successfully overcome those difficulties.

In March 2006 the Russian Property Fund held a tender for the right to redevelop a complex of buildings of the Military Transport University of Railway Troops (VTU), at 96 Moika Embankment and 2 Glinka Street. The bid was awarded two Glinki, 2, an affiliate of the Ruric AB company established earlier by Swedish investment companies to oversee their projects in Russia and St. Petersburg, in particular. Earlier, Ruric AB had set up NHI Group for the purpose of bidding for the right to develop the New Holland Island. The Swedes lost that bid but was granted the right to build another, no less ambitious, commercial complex in immediate proximity to the island. The plan to re-profile the territory of the VTU campus has been mulled for three years now. Previous attempts to raise investment for the project proved futile.

“This is a complicated and time-consuming project that requires huge investment at early stages of development. Besides, the tender committee feared that the winner would re-sell the plot. Our company has long-term plans in St. Petersburg and has large financial resources at its disposal. Besides, we work fast and our business centers prove that,” says Alexander Dymov, general director at Ruric AB in Russia. The VTU complex occupies an area of 3.2 hectares. Along with the terms and conditions of the tender the winner undertakes to develop a mixed-use facility measuring up to 95,000sqm, providing 5-star lodging facilities, an underground car park for 1,000 spaces, a small water park, apartments and offices. The complex will also comprise shopping arcades, recreation facilities and pedestrian areas. The investor also undertakes to clean up the Yusupovsky garden.

VTU’s properties were valued at $29.75 million. There are almost no architectural monuments on the site; the investor will decide which of them to pull down and which to redevelop as agreed with the St. Petersburg Committee for State Control, Use and Protection of Monuments – KGIOP. The complex must be finalized before 2012, with a title to 5 percent of space reserved by the federal government, which is to transfer it to the university. Investor also undertakes to develop several properties for the military in Peterhof outside St. Petersburg. Some of the VTU facilities have already been moved to Peterhof, and once the building works begin there the entire campus will move to the suburb. Ruric AB undertakes to build three residential blocks each providing 55 apartments, with a complete fit-out, as well as a university building, two barracks for cadets, etc. Construction works in Peterhof have already been launched and are to be completed by late 2007. Ruric AB plans to build 10,000sqm of housing space for the military.

The plan of redevelopment of the buildings on Moika Embankment will be prepared by late 2006. These days, the company examines the bids submitted by architects from Germany, Italy and The Netherlands. Dutch architect Erik van Egeraat, who had also taken part in the New Holland competition, is one of the contenders. “The site lies next to New Holland and Mariinsky Theater, and our complex must blend well with those developments,” Alexander Dymov explains. The total cost of the project is estimated at $300 to 400 million.

“A neighboring project – the former barracks at 5 Truda Square (an architectural monument placed under federal protection) – is the next on our list of properties to enter the market. Today, it houses the Sailors Club of the Leningrad Navy Base,” says deputy chairman of the Russian Property Committee Sergei Sysoyev. “We are planning to commission a competition, to be held by the St. Petersburg administration under the same scheme as was used to name the developer for the New Holland project.”

The Paradny Kvartal project is also on the top of the list of military facilities subject to redevelopment. The Building Corporation Vozrozhdeniye Sankt-Peterburga (Revival of St. Petersburg) is developing a 10-hectare plot in the quiet downtown area near the Tavrichesky Garden, between Kirochnaya, Radishchev, Paradnaya and Vilensky Prospekt streets. Before the 1917 revolution Preobrazhensky Regiment was stationed there; later the barracks were replaced with two military compounds, occupied by the Academy of Rear Services and Transport, the Military Communications University and other military establishments. The redevelopment, commissioned by the Defense Ministry, has been sanctioned by the Russian Property Fund.

The mixed-use complex to be finalized by late 2013 will provide a total of 166,500sqm of prime housing, offices, fitness facilities, a supermarket, a boutique and restaurants, developed on a hectare of land. “Paradny Kvartal will be a town within the city, modeled on the 16th district in Paris, or Chelsea in London,” says Ivan Romanov, chairman of the building corporation. Six 4-storied class A office buildings will be built along Paradnaya Street, each providing 4,500sqm of space. The first stage of Paradny Kvartal is slated to be commissioned by late 2008. The military leaving the area will be offered newly built properties on the city outskirts and in the suburbs. The cost of those developments considerably exceeds that of redevelopment of Paradny Kvartal, which is estimated at $300 per 1sqm. But then, apartments at Paradny are already offered for sale at 3,500 c.c.u. conventional currency units (c.c.u.) per 1sqm.

All the above-mentioned projects would not have ever been launched if the developers had failed to enlist strong support both from the federal government and the city administration.

Disarmament Market

In April 2006 the Russian Property Fund instructed St. Petersburg property officials to continue their work on military installations in the city. In June, the St. Petersburg Property Fund signed an agreement with the Defense Ministry, whereby the city officials undertook to prepare properties, currently assigned to army units and military organizations, for sale. Those are, for the most part, vacant building sites, storage facilities, rundown barracks and dormitories, many of them centrally located.

In accordance with the established procedure, each military unit or organization is to decide itself, what to do with idle properties. But to do so they are to obtain a sanction from the Leningrad Military District and the Defense Ministry. The sale or lease then has to be approved by the Russian Property Fund, whereupon companies accredited at the Defense Ministry will begin to prepare documents for the tender. As a rule, those companies are hired by a concrete investor, or they are investors themselves. In St. Petersburg, those include IVI-93, Starp, Sozvezdiye, Megapolis Corporation, etc.

The Defense Ministry and St. Petersburg governor have already agreed on the first list of properties to be put up for sale or rent on the market. The list includes 18 properties, says Andrei Stepanenko, chairman of the St. Petersburg Property Fund. Those are buildings at 4 Zanevsky Prospket, 28/2 Sinopskaya Embankment, 2 Zhdanovskaya Embankment, sites in the suburbs – in Pavlovsk, Peterhof and Kurortny District.

“We have been working on valuation of military properties for about twelve months now,” says Mikhail Zeldin, the president of Avers Group. “The facilities differ considerably, ranging from vacant plots in central St. Petersburg to rundown country-houses in the suburbs. Incidentally, we are also working on the valuation of three plots in Moscow, measuring 4 to 10 ha.”

“Working with the Defense Ministry is really hard. To begin with, 90 percent of all issues need to be settled in Moscow. At any stage the request may be rejected,” says Igor Gorsky, development director at Becar Realty. “Secondly, the military are not used to, and, as a matter of fact, are not supposed to have economic thinking that is why developers’ initiatives are often misunderstood. Coming to terms may take years, and such delays make the project too risky. That is why investors prefer properties where the procedure of conversion has already been launched. The New Holland bid has shown that even where the situation seems hopeless the solution is possible. What matters is the active position of the government. It is the government – the federal center and the city administration – that must come to terms with the military. Let the officials take care of legal issues and then offer the properties to entrepreneurs at a reasonable price.”

“The problem of interaction with the military lies in the lack of established procedures,” adds Ilya Yeremenko, general director at the Center for Project Development St. Petersburg Real Estate. “Nowadays, those procedures are being established, which means that in the future it will be easier for developers to cooperate with the defense sector.”