Money-Growing: Doing Business on St. Petersburg’s Derelict Properties

Thus, for the first time in the city’s history, Smolny (the city government) got St. Petersburgers involved in solving property-related problems. The number of those willing to participate proved surprisingly high. By the moment this issue was sent to print, the results of the campaign were yet to be finalized but the city officials had already received reports on approximately 750 sites.

Smolny is keen on reviving derelict developments. Nearly 90 dilapidated buildings have already been sold through auctions. This past summer Smolny approved a new list of over 40 sites designated for sale. Clearly, after the city examines the results of the Popular Inventory campaign it will be considerably augmented.

One Call Can Change Our City

One of the slogans of the campaign, which is to be completed in late September, reads: “Your call can change our city!” The property fund has already received over 1,500 calls, numerous e-mail messages and photos. A caller, who introduced himself as Sergei P., reported about 65 derelict developments.

The results of the campaign will be announced during a solemn ceremony. City officials have promised to award all participants with special certificates of gratitude for their cooperation and gifts. The most active researchers will be named by a jury, with journalists among the judges. The city residents will be invited to an exhibition of photos of all derelict factories, burned shops, unfinished school buildings, etc., detected by vigilant St. Petersburgers.

The project is accompanied by a large-scale advertising campaign. Over the past 6 weeks the local television ran 270 commercials, 130 advertising carriers – billboards, over-road posters and stands – were installed across the city. The advertising costs were assumed by the property fund, the agency authorized by Smolny to oversee the sale of municipally-owned properties. The city government’s committee for press and the center for advertising placement provided advertising spots on preferential terms.

“The objective of the inventory is not only to put up as many properties as possible for sale, although, of course, we are interested in that, too. The key goal is to detect all idle, dilapidated or unfinished properties and take necessary managerial decisions on each of them, for example, to have them put up for sale through auctions, terminate deals with state-owned companies, previously entitled to manage those properties and have them transferred to more efficient users, somehow to influence negligent owners,” says Vladimir Zhukovsky, deputy chairman of the St. Petersburg property fund in charge of economy and finance. Naturally, among the reports collected by the city government there are many that are based on hearsay. Some of the buildings are slated for sale, others have already been transferred to investors who are yet to launch reconstruction works or pull down those properties.

Sadly, the city center holds the largest share of dilapidated properties. Most are to be found in Admiralteisky District. Although, there are plenty of such sites on the outskirts as well. The largest number of ruins has been detected in Nevsky, Krasnoselsky, Primorsky, Moskovsky and Kirovsky districts. The figures are yet to be verified. Employees of the St. Petersburg property fund inspect all sites, take photos and track them down in city property archives so as to establish whether the given properties have been privatized or not, and then forward the data to KUGI, the St. Petersburg state property management committee. “Every week we process reports on approximately 100 buildings and forward them to the committee,” Vladimir Zhukovsky explains. KUGI’s task is to establish the legal status of those ruins and decide their fate.

“I think the Popular Inventory initiative is really cool. Of course, the advertising campaign has demanded huge spending but the enormous number of calls received shows that St. Petersburgers are really interested in removing those breeding-grounds for drug addiction and crimes from our streets,” says Igor Gorsky, development director at Becar Realty. “Smolny has succeeded in appealing to consciousness of our citizens and make them feel involved in the fate of the city. That is a successful political move on the part of the incumbent city administration. Today it is extremely difficult to assess the financial outcome of the campaign. However, even approximate figures are quite impressive. Auctions alone are likely to bring hundreds of millions of dollars to the city budget. Part of those funds could be used to finance the development of the city infrastructure. Then, there are taxes to be collected from investors who will undertake reconstruction of dilapidated sites, new contracts for construction firms, etc.”

It would not be true, though, to say that Smolny has decided to make conscientious citizens solely responsible for detection of ramshackle properties. The city real property inventory and valuation directorate, GUION, was working on the same task over the summer months at the request of KUGI. GUION’s experts examined central St. Petersburg and detected nearly 900 dilapidated buildings and derelict construction sites. GUION pursued the same goal – to detect mismanaged properties and unfinished developments with a view to put them up for long-term rent or sale through auctions along with plots of land beneath them.

“Information stored in district inventory bureaus is insufficient. Planned inventories are carried out only once in five years,” says Denis Timofeyev, head of coordination of operations of GUION’s branches. GUION’s officers armed with cameras explored the entire city center, entering each and every courtyard. Information submitted by district administrations proved helpful. The lists compiled by GUION included sites of frozen developments, ramshackle buildings, houses with deep cracks in the facades, with windows boarded up, etc. The largest number of such sites – as many as 310 – was discovered in Admiralteisky District. Vasileostrovsky District (Vasilievsky Island) with only 135 sites proved to be the least affected.

On the list of dilapidated properties are houses at 7/6a (A) 11th Krasnoarmeiskaya Street, 37 (B) Serpukhovskaya Street, 14 (B) Liza Chaikina Street, 24 (G) Morskoi Prospekt; 9 (A) Polozov Street, 34 (A) Monetnaya Street, 6 (B) Bolshaya Raznochinnaya Str., 56 (A) Chernyakhovsky Street; 11 (B) Shpalernaya Str., 112 (G) Ligovsky, and 127 (E,A) Ligovsky. Data collected by inspectors has already been processed. Inquiries sent to the registrar offices, KUGI and the property fund have helped to detect title-holders of most addresses. The owners include the federal government, city administration and private owners. It remains unclear whether the latter will face any sanctions.

This fall the city government plans a similar inventory of all the other districts, whereas KUGI will have to process both lists – the one to be submitted by officials and the other, compiled on the basis of reports provided by the residents.

Old Stuff Wanted

Derelict properties in St. Petersburg are put up for sale or lease under a decree by the city government No. 33-RP, issued as early as 2003. Lately, the city has seen an increase in acquisition deals. Over the past year 37 sites were sold at auctions. By this fall 91 buildings measuring a total of 60,000sqm were sold. The budget revenues have reached 702 million rubles.

Under the terms and conditions of the auctions the buyer secures a title both to the dilapidated facility and the plot of land beneath it. The winner undertakes to carry out reconstruction works on the site or to pull down the development and replace it with a new building within 3 ? years. If the investor fails to honor commitments the city government is entitled to sever the contract and take the property back.

If the property is located in a historic zone of the city placed under government protection or itself is of historical or cultural value, all the works have to be sanctioned by a local branch of the committee for the protection of monuments (KGIOP).

As a rule, at least once or twice a year Smolny augments the list of properties slated for sale at auctions. The latest revision of the list of derelict developments was adopted this summer (decree of the St. Petersburg city government No. 100-RP). 44 sites located in 12 districts were added to the list. Some of those sites are quite attractive. For example, a 4-storied residential house at 73 Sadovaya is likely to catch attention of buyers. Investors have long showed interest in the property but reconstruction works were only possible after a lengthy and nerve-racking procedure of providing residents of a neighboring building with new apartments. These days, only the vacant building is put up for sale.

Two other interesting properties are situated near Nikolsky Market. Those are a non-residential building measuring over 6,000sqm (4-6 Shchepyanoi Side-street (Pereulok)) and a 4-storied house at 8 Kustarny. The former Gromov’s country-house on Akademika Pavlova Street – a wooden house in early eclectics style – is also on the list.

Many buildings are heavily dilapidated. For example, a house at 17 Staro-Petergofsky Prospekt occupying a site of approximately 2,800sqm has only the first out of four floor preserved. Almost all of the centrally located properties enjoy government protection and will have to be repaired under close supervision of KGIOP. Even a small unprepossessing house at 9 Krestovsky Prospekt is a monument of constructivism style. The only site where a developer will enjoy a freedom of choice is 62 Yuzhnoye Shosse in Frunzensky District where construction of apartment houses of more than 9 stories is allowed.

More than half of all sites are in the countryside, in Kolpino, Sestroretsk, Zelenogorsk, Lomonosov, Peterhof (Petrodvorets), Pavlovsk, Pushkin, Ust-Izhora, Komarovo, Pesochny, Repino, Lisy Nos and Pargolovo. Those are former one-family homes, summer dachas, etc.

Expensive Ruins

Practically none of the dilapidated properties that appear on the property fund’s listing get stuck there. The demand is quite high. The most attractive sites collect as many as 10 applications and over. In 2006, the average price of 1sqm of properties sold at auctions stood at $910. Since the value of houses sold is quite doubtful it would be more appropriate to talk of the value of land that goes along with the square meter - $165, on average.

At times, investors secure plots that are quite spacious. For example, a former vocational school building at 18 Rybatsky Prospekt in Nevsky District (measuring 1,418sqm) was put up for sale along with a plot of land measuring over 2.1 hectares. Peterburgsky Vzglyad company paid 20.4 million rubles for the non-residential property in the summer of 2006.

Most buildings available for sale in the city are no larger than 1,000sqm in size. But some properties are quite large. In the autumn of 2004, the Remtek Invest company acquired two vacant apartment blocks measuring a total of 6,049sqm, at 2v Rasstannaya Street, situated next to Yuzhnaya Hotel. Both buildings are currently undergoing redevelopment for office use. In 2005, the Brig company purchased a complex of buildings at 41 Rizhsky Prospekt (10,700sqm, 1.65 hectares) at 90.6 million rubles.

Some of the investors are already quite clear about their plans. AVA management company is set to redevelop a 3-4-storied building at 2 (A) Drovyany Pereulok into a 3-star 50-room hotel. The developer acquired the building two years ago for $484,751 (the size of the plot is 1,065sqm). The TAM Gavrilov V.A. company is currently involved in preliminary examination of the redevelopment project. The redeveloped building will measure 3,500sqm and will be 5 to 6 stories high. AVA plans to finalize the project in 3Q of 2007. Meanwhile, the project has been put on hold as residents of neighboring houses protest the development fearing it would worsen solar insolation of their apartments and block access for fire engines to inner courtyards.

A firm linked to the Transneft company secured a freehold to a building at 28 B. Podyacheskaya Street. The company acquired the 3-storied development measuring 1,293sqm on a 831-square-meter plot, for 21.1 million rubles.

The sale of an edifice at 40 (A) Galernaya Street, measuring 3,370sqm and situated in the historic center of St. Petersburg is seen as one of the highest-profile deals of late. Nine buyers vied for the property. The 6-storied house, only recently declared as part of the cultural heritage of the city, had stood vacant for years. In 2001, Smolny suggested that the Charter Court of St. Petersburg move there but the court rejected the present as the building failed to meet the court’s requirements. The Arbitration Court, too, rejected the proposal.

For several years the building was forgotten until in the fall of 2005 it was put up for sale at an auction. RGS Nedvizhimost, the company that won the tender, paid 72 million rubles for the property. The winner refuses to elaborate on its plans concerning the project, but to all appearance the company is set to redevelop the site into a first-class (4-star) hotel.

Residents Are No Obstacle

Until recently, the only properties available for sale at auctions held under the auspices of KUGI were vacant buildings, where all former occupants had been moved to new locations. Thus, a considerable share of properties where the plan to resettle residents had been launched as early as in the Soviet times but was never completed remained beyond the scope of the city government’s activity. In the summer of 2006 the property fund, as an experiment, took charge of several houses that were still inhabited by households. Those were buildings where only a handful of occupants still resided.

“We undertake to resettle them at our own expense,” says Andrei Stepanenko, head of the property fund. “The fund will find and acquire apartments for those residents, in cooperation with the housing committee and district administrations. Those apartments will be municipally-owned. Then we will announce the auction. Of course, the economy of the project will be calculated on a case-by-case basis. The fund is no charitable organization and we will not be able to afford a large-scale resettlement. However, there are, of course, lucrative sites where one or two households still live. We understand what the problem of the last tenant is about. But it is easier to come to terms with tenants (of municipally-owned apartments) than with the homeowners. Besides, the city government allows us to file an action in court if necessary.”

Resettlement expenses incurred by the fund will have to be reimbursed by the winners of future auctions. Several properties have already been sold under that scheme. Last August a 1,351-square-meter property at 15 Admiralteisky Canal Embankment was sold at an auction that drew a full house. The building adjacent to a house at 40 Galernaya Street was acquired by RGS Nedvizhimost. The real estate company was clearly interested in securing the rights to the dilapidated facility, but nine other firms filed applications, too. As a result, the starting price grew 4-fold and RGS Nedvizhimost was forced to pay 142.6 million rubles for the building, which the winner is allowed to pull down.

“Dilapidated houses put up for auctions by the city government rarely appeal to major professional developers, given their size. But then, they suit companies who seek a freestanding property to house their headquarters or representations, open a shop or a car repairs shop,” holds Ilya Yeremenko, general director of Peterburgskaya Nedvishimost (St. Petersburg Real Estate) Center for Project Development. “Unfortunately, quite often municipally-owned properties have serious encumbrances and investors will have to apply much effort to collect all papers and permissions to begin construction works.”

“Today, the local market suffers an acute shortage of smaller properties, measuring 1,000 to 1,500sqm. Those properties are not available for sale on the open market, while the city government is able to make up for the deficiency at least partially. Against the backdrop of skyrocketing home prices, commercial property investments become increasingly appealing. In my opinion, today it is much more reasonable to spend $1 to 1.5 million on a prestigious office, which you can mortgage at the bank, than to buy an apartment in great haste for the same amount of money. As to the procedure of auction sales, it still needs to be adjusted. But this is a only a matter of time.”

“We calculated the economy of several projects, which could be implemented upon acquisition of dilapidated facilities through auctions. However, we dissuaded our clients from participation as the starting prices set by the city rendered an acceptable payback impossible. That is why such properties are often purchased for own use. Or, the buyers are the firms that are part of large holdings, whose idea of profitability is different. I think the city should not get overexcited about soaring auction prices. The officials should think of what happens to the building tomorrow, whether it will be resold to a third party,” Sergei Igonin, managing partner at IB Group, warns. For the time being, according to the property fund’s officials, such cases are rare. All such deals need to be approved by the fund. “Speculators are warded off by rigid deadlines set for implementation of investment projects,” says Vladimir Zhukovsky.

Meanwhile, the fate of ramshackle developments that are fully inhabited remains deplorable, as the city budget grows too slowly for the city to be able to afford resettlement at own expense. Private investors show little interest in those projects.