Market Know-how: Chasing Klin Lands?

In this case the price set is a bargain price “and what is paid for the plot will be reflected in the contract”, says Vitaly Mozharovsky, partner with the law firm Pepeliaev, Goltsblat & Partners.

Market operators polled by Vedomosti agree that acquisition of land in the Moscow Region remains largely non-transparent, which creates obstacles for development. But some experts believe that by putting up their plots for auction sellers seek to get rid of burdensome assets. “An auction is a good idea where there is a shortage of plots, but nowadays the demand for large freeholds does not exceed the supply,” says Natalia Chukayeva, head of marketing analysis at the Masshtab management company.

Hitherto, auctions in the Moscow Region were held only under the auspices of the Moscow Region’s Property Fund, authorized by the regional government to sell government-owned lands. Beginning 2003, auctions were held four times a year. Today, the fund plans the sale of plots near the village of Novy Stan in Solnechnogorsky District. Organizers of the first private auction did not take part in the sales held by the property fund and did not seek officials’ advice.

Ranging from $100 to…

Anton Shchetnikov, general director at Greenlife management company, has unveiled the plan to hold a private land auction. A total of 700 hectares of privately-owned lands will be put up for sale in Klinsky District of the region, situated at a distance of 85 kilometers from Moscow. Plots measuring 0.5 to 100 hectares will be offered at a starting price of 2,700 rubles per a hundredth of a hectare, with a bid increment set at 150 rubles per 0.01 of a hectare.

In line with the agreement with landowners the auction will be held by the Moscow specialized government-run unitary company for sale of property (SGUP) at the company’s office at 41,1-2 Bolshaya Polyanka Street. Greenlife acts as the initiator of the event acting in the interest of landowners. Greenlife Group was established in 2003, Shchetnikov explained. A professional team of managers has formed a pool of investors, one of them being the investment company Veles Capital, with a view to acquire arable lands. Greenlife’s management company is Terra Capital, one of the group’s partners is the company Promstroiservis who carries out mapping and land survey works. Greenlife is the group’s brand since mid-2005. Today, Greenlife operates a stock of over 15,000 hectares, owned by companies and individuals, including the closed-end real estate unit fund Veles Management. Plots are situated in Klinsky, Mozhaisky and Volokolamsky districts of the Moscow Region. The group also operates over 5,000 hectares of lands beyond the region’s boundaries. Shchetnikov puts the total value of company assets at approximately $75 to 100 million.

Plots to be sold at the auction will include parcels co-owned by Veles Capital, and, possibly, plots owned by the closed-end unit fund operated by Veles Management, Alexander Goncharov, executive director at Veles Capital, has reported.

Valery Lukinov, head of countryside real estate department at Uniformstroi company and chairman of the Russian Guild of Realtors’ out-of-town real estate committee, says that plots may be acquired by any individual or legal entity who has sufficient resources necessary to acquire and develop the site. “The minimum cost of joining that business is $15 to 20 million,” he adds.

Alexei Averyanov, general director of Vesco Consulting, believes that would-be buyers are medium-sized development firms, investment funds and a small group of private individuals who purchase land for personal use or with a view to pursue investment projects. “Anyone can take part in the auction, except foreign nationals, as lands put up for sale are arable,” Alexander Goncharov adds. Anton Shchetnikov expects 7 to 8 bidders to show up. According to his estimates, the starting price may increase by 30% and over. “But we attach more importance to testing the procedure of a public auction,” he says.

In the opinion of Natalia Chukayeva a price of $100 per 0.01 of a hectare in Klinsky District is a normal price. “But lots at auctions are usually sold at prices above the market value. For that land $300 per 0.01 of a hectare is the limit. Apparently, the company hopes to push up the price to the level of Ruza Disrict where agricultural lands today are estimated to be worth $250 per 0.01 of a hectare,” she suggests.

Parcels put up for sale in Klinsky District are registered as arable lands. Bidders seeking to develop properties on those sites will have to apply for their reclassification. But Shchetnikov is upbeat on the prospects. The sites in questions are located in proximity to the area of construction of the central ring road – the future TsKAD, and the regional government will be interested in investors who will be able to develop public amenities along the road.

Shchetnikov says that Greenlife has received a letter from the regional government committee for architecture, confirming that the plots on sale do not fall into the category of state reserves and cannot be seized by the government for public use. Greenlife’s representatives do not conceal that their plan is to raise funds for their own development projects. Shchetnikov would not elaborate on those projects saying only that “those are not confined to construction of a single countryside residential compound; the plan envisages comprehensive urban development of large territories.”

Why has the company opted for an auction? Shchetnikov explains that Russian land-use legislation – the Land Code, federal and regional legal acts on sale of arable lines – calls for two schemes of sale of freeholds. Under one of those schemes the landowner notifies the government of the Moscow Region of his intent to sell his plot and after the government rejects his proposal to purchase it, he is free to sell to a third party. That is not a mere formality, Vitaly Mozharovsky says. The regional government, indeed, considers such proposals within 4 weeks and sometimes exercises its prior right of purchase at the expense of the budget. Shchetnikov says that landowners opting for that scheme face certain technical difficulties “due to poor coordination between regional and district agencies.”

An alternative is an auction. The effective law contains a provision explicitly sanctioning sale of land through auctions (Article 8 of the federal law of the Russian Federation on turnover of agricultural land No. 101-FZ, July 24, 2002). In this case, a landowner is not required to notify the regional government of his plans. The auction protocol is a document, on the basis of which the transfer of title is registered. “A public auction reveals a fair market price of land assets,” says Shchetnikov. “We advocate legal schemes of sale of land. That makes the land market legitimate, which meets the interests of the buyers – the developers. For several years our group prepared for that move. Now we are set to turn land into an operating asset.”

“The market of remote lands has existed for over three years now. It is undergoing changes now, one of the reasons for that being the plan to build the central ring road. The market has good potential, and the open sale will show that [acquisition of land] is no longer regarded as a venture. The [auction] will attract conservative investors,” Alexander Goncharov is convinced. Greenlife, on its part, will be able to focus on the group’s own development projects by selling its non-core assets.

How Land Is Sold

A private auction is a novelty, experts say. In most cases, major landowners either seek realtors’ assistance or establish their own companies to oversee land sales, Vladimir Yakhontov, deputy head of countryside property management at Miel-Nedvizhimost says. Valery Lukinov adds that sellers prefer to do without wide publicity campaigns.

One of the options is to secure a stake in a farm. The advantage is that registering a deal is relatively easy, but there are also certain disadvantages. “By securing an asset – i.e. land – the buyer also acquires liabilities, i.e. all problems the company has,” Mozharovsky explains. That is exactly the reason why owners of large plots of lands within collective farms are not able to dispose of it freely, holds Shchetnikov.

“Freeholds to over 80% of large plots of land in the Moscow Region are owned by investment companies and banks who actively bought into former collective farms in the early 2000s,” says Alexei Averyanov. “Today, in search of land parcel buyers turn to those companies or to consultancies who maintain databases of offers by market operators.” In early 2006, Vesco Consulting, too, established a department in charge of land acquisitions.

Hitherto, the region saw only a handful of auctions held under the aegis of the regional government. Being on the whole positive in their assessment of those developments, property experts, nonetheless, believe, that land auctions lack transparency and fail to attract investors with interesting offers. One of the market operators wishing to remain anonymous says that with rare exception those auctions amount to “a formal procedure of transfer of land to entities which are on friendly terms with the administration.”

“Although Miel is a potential buyer, we did not submit bids at any of the auctions held previously by government bodies, as we saw no offers that would be sought-after and appeal to developers,” says Yakhontov. The expert believes that the development of the land market is contingent on private investors, whose activity prompts government officials in the Moscow Region to adopt market-oriented methods. The sale of land in the secondary market is likely to create competition against auctions held by the regional government.

Their Time Is Yet to Come

In Yakhontov’s opinion, “if privately-owned lands are put up for sale at auctions, that may be seen as proof of the dire situation the owners are in.” “Sometimes it is difficult for landowners to figure out, how they should sell lands developing which requires tens of millions of dollars,” he adds. “Besides, perhaps, the organizers have been inspired by successful experience of an open auction held in Klinsky District by the Moscow Region’s property fund.”

Ilya Shershnev, development director at Swiss Realty Group Moscow, says that “rich landowners usually sell land in small plots so as to prevent a drop in prices, but quite often ownership in a large number of plots proves too burdensome.” Shershnev does not expect many bidders to show up. “Today there are more sellers on the market than buyers. Only the most liquid parcels change hands,” he says. Natalia Chukayeva agrees: “There are plenty of plots of land available for sale now. Most likely, a public auction is an attempt to catch attention of the buyers by introducing a new form of sale. It is hard to believe that the company has accrued so many bids that they are forced to hold a tender.”

“Major landowners will be selling non-liquid lands, with a view to boost their own development projects. Practically all of them have already set up departments in charge of reclassification of arable lands and acquisitions,” says Lukinov.

Alexei Averyanov believes that the sale of land in remote parts of the Moscow Region has very good prospects. The precedent established by organizers of open auctions will stimulate natural price formation, gradually excluding the possibility of unjustified speculations in land resources.

“A part of land reserves, acquired earlier by major landowners, may enter the market as a result of changes in legislation and, and then auctions will prove to be an appropriate scheme for the sale of plots of similar quality at a good price, for, prices may grow considerably during the auction,” Chukayeva says. In her opinion, auctions will become common “when there is a clear-cut plan of the Moscow Region’s development with a clear-cut functional zoning in place.”

Nowadays, land prices are largely influenced by the monopoly held by major landowners, who hold back their plots thus pushing up the price, Yakhontov says. Considering that only 10 to 15% of land parcels of land are available for sale in the open market, the formation of a civilized market will take at lest five years, Averyanov says. According to his estimates, the market value of freeholds prepared for sale in Klinsky District ranges from $1,000-$1,200 (detached plots, 80 to 100 km from Moscow) to $10,000 per 0.01 ha (plots situated in proximity to water sources and forests).

Alexander Goncharov says that depending on specifics of concrete plots arable land in the district may be valued at $20 to $1,000 per 0.01 ha. The price may increase 5- to 10-fold after arable land is reclassified as land for private home building. “The land market is still not as structured as in the parts of the Moscow Region closer to the capital. Operators are not always able to evaluate appeal of a certain plot. That is why developers who have experience in reclassification of plots (from arable into building land) are beginning to hunt down lucrative sites in remote parts of the Moscow Region, for this is the only opportunity left to secure a title to a relatively cheap land in the early stages of the project,” he adds.

Alexander Goncharov is certain that TsKAD will boost investment appeal of the areas along the future ring road. “If the plot is situated in immediately proximity to the road the cost of the project may drop by 20-30%, but if it is situated at a distance of 1 to 2 kilometers, the liquidity of those plots will increase considerably, by 30-40%. Today, the price of land parcels in Klinsky District varies from $1,500 to $6,000 per 0.01 ha,” Alexei Averyanov says.