People in the Know: Ruza Land Trustee

The company Vash Finansovy Popechitel is no newcomer to the real estate market but so far its track record comprises only a handful of large completed developments. But then, the company has ambitious plans. For the purpose of implementing one of those – an upscale countryside compound Ruzian Switzerland – the company has acquired a freehold title to considerable share of lands in Ruza District, suitable for development. Vassily Boiko, board chairman at Vash Finansovy Popechitel, believes if the company’s plans materialize Russia will see emergence of a world class health resort. The first step has already been made. In early October the company hosted a pompous presentation of the project in Ruza. First projects in the area are expected to be launched in two to three years. Building works on the site are yet to begin.

-Your company was originally conceived as a financial services institution but at a later stage you took up development projects. What prompted the company to do that?

When I first thought of launching a business I already mulled taking up property development. I realized that such services would enjoy high demand in Moscow. But it happened so that in 1992 we focused on securities market, our company was among the pioneers, those who shaped that market. These days we continue to pursue activities on securities market, specializing chiefly in mergers and acquisitions. We work under a classic scheme, acquiring large stakes in enterprises, chiefly at auctions held by specialized government-owned companies. We launched development activities four years after the company was established, in 1996, by launching a project to build a business center measuring a total of 90,000sqm on Bolshaya Dekabrskaya Street. In the late 1990s our project was the largest in Moscow, comparable perhaps only to Krasnyye Kholmy. By 1998 we had the project approved by all government instances in charge. The plan was to build the project in two phases, each measuring 45,000sqm. But our plans were disrupted in August 1998 after the country was hit by the financial crisis, which paralyzed the entire financial system of the country.

-Did you experience problems with financing?

The project was put on hold not because of the lack of financing but as a result of the financial collapse, which rendered all financial payments impossible. We had funds, but just like was the case with many other companies, those funds were deposited in banks who suspended operations. For example, the box of what was to become the office and retail building Novinsky Passazh on Novinsky Boulevard was raised in 1998, whereupon the structure had to wait another five years before it was completed. But we persevered. Also in those days, we were working on a smaller project, a business center on Spartakovskaya Square, measuring 15,000sqm. I admit that project had cost much effort; we borrowed everywhere we could, in banks that survived the crisis, from companies involved in export and import operations. Our revenues from our activity on securities market where we had managed to hold our ground were poured into that business center, too. Nowadays, the project pays back generously. In addition to offices, the center features an excellent Italian cuisine restaurant Venetsia (Venice), a state-of-the-art sports center for affluent customers, with covered tennis courts on the roof. Incidentally, inflated coatings have been used worldwide for years, but we were the first to install them on the roof of a building in the world. Rental rates there are higher than in more recently built office developments namely because of the high quality of the project. Properties are let at the average rate of 600 euros per 1sqm, excluding operating costs.

-Who are your tenants?

They are Credit Swiss First Boston, Hewlett Parkard, MMK Trans, radio stations Radio Na Semi Kholmakh, Nashe Radio, Best FM and others.

-You have never launched realization of you first project, have you?

For the time being we are busy with other projects. For nearly four years now a retail center Elektronika Na Presne, comprising several office properties, has been operating on that site. The project is successful and I think the complex will continue operations for several more years. There are several other sites we are working on. But we do not abandon our plan to build an office complex on Zvenigorodskoye Shosse in the future, in five years, or so.

-The business center project was designed long ago. Do you plan to make any alterations?

Today no changes are necessary. We had forestalled the tendencies of development of office construction in Moscow. The architectural design is ideal, no changes are necessary. The project will comprise two buildings, 27 and 12 stories tall. The building will provide underground parking facilities of 2 to 3 levels, a sports club, a restaurant and retail space.

-The company’s track record includes a number of completed office buildings and retail complexes. Do you have any personal preferences when choosing between those formats?

Personally, I enjoy office development more, as that business is more stable. Perhaps, returns from business centers are lower but the office property market is more stable and predictable. Today much is said of risks faced by mall developers, of retail projects – already designed, under construction or completed – which may end in failure, as, although being raised close to human and car flows those projects offer no convenient access for buyers. Or, maybe, there is such an access, and yet people still refuse to go there. When building retail properties it is necessary to combine numerous external components. For example, the project requires a large territory providing convenient entry driveways, parking facilities, which is not always possible to achieve on the given plot. Requirements for centrally located office buildings are less rigid. Besides, we have adopted a new interesting concept, which we will use in our new projects.

-What is it about?

I will demonstrate with an example. Today, we are about to launch construction of a mixed-use center Izumrudny Gorod (Emerald City) near Gogol Theater on Kazakov Street and the Garden Ring. Our initial plan was to build a sports and leisure center on the site that measures 1 hectare. The project was designed as early as 2000 and already in those days we realized that it would not bring good revenues. Moscow residents and tourists are not likely to spend huge sums of money on sports and amusement alone, therefore it is necessary to combine those facilities with truly paying spaces. The site we had secured was not suitable for development of a shopping and amusement complex, such as Atrium on Kurskaya, so we had to revise the project entirely. Today, the plan is to create a unique complex providing offices, a 4-star hotel with approximately 200 rooms and nearly just as many apartments. The project features sports and leisure facilities, bowling alleys, a roller-skating rink, and, of course, an underground parking area. In terms of conceptual solution, there is only one project in Moscow that is comparable to our Emerald City. That is the International Trade Center, raised before the Olympic Games, but it features no sports facilities.

-Who are the target audience of the project?

We think that properties there will be of interest to foreign and regional firms seeking to provide their employees with accommodation next to their offices.

-Is the timeline for the project set?

We have obtained permission for construction but, as I’ve already said, now we are revising the plan and I think we will be through with those revisions in about six months. In summer of 2007 we will begin construction. Although, it cannot be ruled out that we will begin to dig the foundation pit already in winter and the building will be completed in 18 months or so. An analogous project, providing offices, apartments, shops, a restaurant, underground parking, but without leisure facilities, is planned in the East Administrative Okrug, at the junction of Third Ring Road and Sokolnichesky Val. The working title of the project is Business Center Rizhsky. That site also measures approximately a hectare, but the size of the property will be larger than on Kazakov Street. While Emerald City measures 45,000sqm, Rizhsky will provide 85,000sqm, underground facilities included.

-Do you plan to retain title to those mixed-use complexes or sell them?

We will keep the title.

-Who will operate the properties?

We will run them on our own. The company has gained successful experience in managing our projects, Na Spartakovskoi business center, Elektronika Na Presne retail complex, Semyonovsky technology park that features production facilities, storages and office properties.

-Semyonovsky is not the only technology park on your record, but those other projects are no longer on the list of your assets. Have you sold them?

Yes. Usually, we work on such projects until they become an attractive investment target and then sell them as a leasing business. In 1999, we were working on the technology park Tsvet, at the intersection of Shchyolkovskoye Shosse and MKAD. We sold it six months later. Last year we sold our technopark Sinichka, measuring 7,500sqm, in the vicinity of Avtozavodskaya metro station. Now we are working on a property of the same size on Dubininskaya Street and also consider selling it as a ready-made business that brings considerable income.

-What are the returns on a technology park project?

A relative rate of return on such projects in quite high, nearly 50%. For the most part we deal with refurbishment projects, rather than new construction. But those are relatively small projects. Securing 50% returns on an investment of $100 million is one thing, but achieving the same targets by spending $1 million is quite another matter. This may sound nice but on the whole for our company the appeal of such projects is quite low.

-Your company plans new office complexes, yet today much is said of the imminent saturation of the office property market, which will bring about a slump in profits. How would you comment on that?

Throughout all the years that I have been working on that market, which is more than a decade now, I have been hearing forecasts that the market would soon reach the point of saturation and everything will change.

But the situation did change once, and that change by no means was brought about by the glut on the property market and many new offices emerged, but by the financial collapse of 1998 that left the nation struggling for a couple of years afterwards. That was what caused a slump in demand for offices; prices plunged by 35-40%. Today, office prices are practically the same as they were before the 1998 crisis. Although, in recent years the office stock has grown 5 times, or, perhaps even 10 times higher than before. And I suggest that those who speculate on when the market will reach the point of saturation take a walk through downtown Moscow and have a look at buildings there. The majority of administrative buildings within the Garden Ring have seen no repairs over the past three to four decades. They were raised either before World War II or immediately afterwards and are now in a deplorable state. As regards returns on office projects I think in these terms we will not differ at all from Paris, New-York or London. On the whole, prices will fluctuate, but those fluctuations will not go beyond the range of 10 to 20%. I think that the demand for prime quality business centers offering comfortable working conditions, with web connection, digital phones, all sorts of public amenities, dining areas, sports facilities, will always be high. Although, I would like to reiterate that prices and rents will fluctuate, however, those fluctuations will result rather from oil price fluctuations than from overproduction of quality office space.

-What will happen to office prices once properties currently under construction in the commercial zone of the International Business Center Moskva City?

Some of those properties have already entered the market. But has anything changed? I would like to note that prices for which offices are sold in Moskva City these days make me sincerely happy, for that means that quite soon prices in all other locations will reach the same level. I think that the property market within the City will live its own life. Prices and rents may grow there and then drop. That project, indeed, is likely to alleviate the tension on the market of prime offices, which we see today; tenants will move there, but, once again, I would like to emphasize that quality office buildings in Moscow are few and Moskva City will not alter the situation on the market in general.

-What are the prices in Moskva City?

Office space there is sold at the rate of $10,000 per 1sqm; apartments cost $20,000 per 1sqm, provided the buyer is well-connected, you know, and over.

-Your company is known on real estate market as an owner of large freeholds in Ruza District of the Moscow Region, and you achieved wide publicity by launching the project Ruzian Switzerland, which you plan in the district. What came first, the project or land?

Of course, the project came first. If we had planned to secure the freehold first, in order to add it to our assets, than we would not have confined ourselves solely to Ruza, but would have acquired lands in a less remote countryside, closer to Moscow, for example, in Odintsovo, Krasnogorsk or Istra. And, perhaps, commercially that would have been more correct. With the funds we had spent on Ruza, we could have purchased lands much closer to the capital. I can say, by way of an example, that when back in 2003 we were purchasing land property units or stakes in farms, we paid $7,000 per unit on average. In some cases a unit price stood at $10,000; where there was no competition $3,000. In those days farmers in the districts of Istra and Krasnogorsk received just as much for their properties, whereas the market value of land in those two areas is much higher than in Ruza.

It is quite another matter that competition in Krasnogorsk was tougher but even while the lands of a single farmland had to be divided between contenders, each of the parties nevertheless benefited from the deal.

-Why did you opt for Ruza?

We chose Ruza in 2001 as a location for an out-of-town health resort, namely out of town, not just in the countryside. To that end we had analyzed and inspected nearly all districts of the Moscow Region. Our requirements included availability of large water sources, well-preserved nature, lack of any built-up, that is, there had to be industrial facilities around, no chaotic dacha settlements, and of course the area had to have transport accessibility. Plots with access to large water reservoirs and pristine nature are unavailable near the Moscow ring road. We examined the banks of countryside water reservoirs Istrinskoye, Ruzskoye, Ozerninskoye, Klyazminskoye and Pestovskoye as well as lands near Ivankovskoye reservoir (Tver Region) and other water sources, including the banks of the Moscow River.

Istra, for example, had two disadvantages. Those lands are closer to Moscow, indeed, but the banks of the reservoir were densely built up; besides, to get to the water you had to spend about an hour in car traffic on weekends, before reaching Novorizhskoye or Leningradskoye Shosse. Ivankovskoye was rejected because of heavily congested Leningradskoye Shosse. Klyazminskoye and Uchinskoye lakes on Dmitrovskoye Shosse and lakes near Yaroslavskoye Shosse did not suit us because of their proximity to the industrial north of Moscow.

Those are navigable waterways, with numerous facilities being raised along the shoreline, hence, we can hardly speak of cleanness there. On the basis of results of our survey, we focused on lands in the areas of Ozerninskoye and Ruzskoye lakes.

-What was so special about Ruza lands?

The shoreline of Ruza has remained virtually unbuilt-up over the decades. Although the distance is quite long – some 80 to 90 kilometers from the Moscow outer ring road you can get there within an hour or so. The highway leading in that direction is quite free and driveways leading to the Ruza water reservoir are well-developed. There are three roads linking Novorizhskoye Shosse to Ruza shoreline and only one road to Istra.

Another advantage is that in the future the section of that road from MKAD to the Garden Ring will be redesigned for transport to move without traffic lights, as a result it will be possible to get to our resorts in less than an hour. After we secured the freehold we applied all efforts to preserve the nature in the area, leave it untouched. We restricted car access to the banks of the reservoir. But people are free to vacation there. We sell firewood to them and clean the territory. Over the past years we have not parted with any of our plots.

-But only by restricting access to the waterfront the problem will not be solved. Do you have other plans?

Being aware that preserving nature in such a state is possible only by preserving the functional use of the entire district, we have pledged support to traditional agriculture, in particular, dairy farming, and plan to develop a network of health resorts which have existed there since the Soviet times. The district has a workforce, which is also important.

-You have said that you were looking for a territory with large water sources. But the development of lands on the banks of reservoirs in Moscow countryside has triggered heated debates and court disputes, of late. Is not there a risk that the project Ruzian Switzerland could also trigger a scandal?

No, there is no such threat as we strictly observe all water protection regulations. All design works are being coordinated with the Russian Rosprirodnadzor (the Surveillance Agency of Management of Natural Resources). We support the campaign launched by [deputy chairman of Rosprirodnadzor Oleg] Mitvol, as we ourselves have had to deal with arbitrariness, on the part of the chairman of Tuchkovsky farm, who was leasing plots of our land at meager rates, without any official registration. With no permissions for construction issued people were building up the 100-meter zone of the Moscow River without raising any water treatment facilities. We have put an end to that process. And then, it is necessary to understand that we are different from developers of countryside compounds. Once they are through with the project they do not care what happens to the area afterwards. We, on the contrary, are highly interested in preserving environment, for if we commit some violations we will not only be punished for that, we will see the results with our own eyes and will no longer be able to build another compound normally. We are set to work in Ruza for years to come.

That is why we give preference to creation of sparsely built-up areas, spacious countryside estates, with one house per 2 hectares. Farther off from the lakes and rivers the built-up will be more dense but even the most densely developed areas will have one house per at least 25 one-hundredths of a hectare.

-Recent media reports allege that Vash Finansovy Popechitel owns 80 percent of lands in Ruza. Is that true?

This is not so. This is an exaggeration. We own a freehold to some 23,000 hectares of land and hold a title to operate another 13,500 ha, whereas the entire area of Ruza District measures 165,000 ha. Our share makes up approximately 15%. The tale about 80 percent emerged because out of the ten former collective farms operating in the district we have acquired eight farms. But former collective farms own only a small share of lands, besides not all lands in the district are arable. Some lands – approximately 10% - fall under jurisdiction of water-use authorities, they do not belong to us, they are government-owned. Then, there are forests, registered with the forestry authorities; urban areas take up some 15%. It is quite another matter that our share in the volume of lands suitable for development upon their transfer from arable into urban category is quite large.

-In spring of this year it was reported that you planned to buy another 6,000 ha. Has that deal already taken place?

Yes. The situation is as follows. Our rival – the company Nerl – secured stakes in two farming enterprises as early as in 2003. This year we bought their stake. But the area in question is smaller than 6,000 ha. In one of those two farms we have taken over 1,700 ha of land, and an 800-ha plot in the other. Also, we have secured a right of free use of another 1,000 ha.

-You have acquired those lands for a market price. Has the price of land increased considerably since 2003?

Yes. But the price was not an obstacle as we attached fundamental importance to purchasing the share from the company that was not ready to invest in the Ruzian Switzerland project. Both parties to the contract were satisfied with the deal.

-What share of arable lands owned by your company has been reclassified as urban land?

One of the plots, measuring 46 hectares, had been reclassified for urban use before we acquired it. Besides, as part of the Ruzian Switzerland project we plan to reclassify several more plots as lands for development of residential and leisure facilities.

-You company has consolidated enormous freeholds. Do you plan to use them solely for development of Ruzian Switzerland or to keep some of the plots in reserve, with a view to use them for some other purposes later on?

All those plots were acquired to develop Ruzian Switzerland, which comprises two projects. Firstly, we are set to create an agricultural holding for dairy produce, including a milk plant, a feed mill and eight farms. Then, we plan to create a health resort zone. We do not plan construction works on all of the plots. On the contrary, thus we seek to preserve the nature of that region and prevent chaotic built-up as the case is in other areas.

-What do you plan to build there?

The first stage will feature a state-of-the-art alpine ski complex, which is to become the largest artificial skiing facility in the world. There are three large hills near the Ruza-Zvenigorod motorway, 90 meters high, where we plan to raise another 60 meters and install 12 high-speed 6-seat chair lifts. The complex will provide a total of 26 runs, up to 150 meters high and 500 meters to 1.2km long, including a giant slalom run which will make it possible to use the site as a venue for European grand slalom cups and a training ground for our national team. We also plan a holiday complex Bukhta Bunino in the area.

The project will comprise 56 prime holiday mansions, on the plots measuring 2 ha each, and two first-class countryside compounds. The first stage will also feature two country-hotels on Ozerninskoye and Ruzskoye water reservoirs. The country-hotel on Ozerninskoye will provide two full-fledged golf courses measuring 70 hectares with 18 holes, one of them rated as champion class.

A similar hotel, although providing only one golf course, is planned on the bank of Ruzskoye reservoir. The country hotel will provide an equestrian sports park with two covered riding halls and stables for 80 horses, a show jumping site, a dressage course and a polo facility.

The hotel building two to three stories high will be raised at the heart of the complex. The hotel will provide a large covered sports center with two tennis courts, a 50-meter indoor swimming pool and a spa facility. The complex will also offer an outdoor football pitch, a volleyball court and tennis courts.

Around the central building we plan smaller houses – cottages to let. The project also features a yacht club and a church for guests, as well as an attraction dairy farm with nanny-goats, geese, etc.

We also plan to build real full-fledged farms. Each farm of the future farm holding will have livestock of 2,000 cows. None of the existing farms has been closed and we are set to boost the output of dairy produce in the future.

-When do you plan to finalize the first stage of the project?

The ski complex will be launched in two or three years, while the first stage is to be completed already prior to the next skiing season. The countryside hotels will be built in two phases. The first phase is to be completed in two to three years. As to the second stage, some of the properties there will be developed simultaneously with the first stage. As part of the second stage we plan a classic safari park Ivoilovo on the territory of derelict quarries. Besides, we intend a water park on the site. In winter the ski run will be open. The complex will also feather a race circuit and a go-carting facility. There will also be stables with horses for hire.

-What is the cost of the project?

The first stage is estimated to be worth $200 to $300 million.

-Do you plan to finance the development on your own?

We will finance all works ourselves and with funds borrowed from Russian banks.

-Do foreign banks show any interest?

We held talks with the European Bank for Reconstruction and Development, which had shown interest in financing of the country-hotel.

-Do you plan to invite co-investors?

We are looking into the issue of inviting portfolio investors but their participation in the program is of no vital importance. Co-investors could speed up implementation of the project.

-Such an ambitious project is hardly possible without support from the Moscow Region’s government. What kind of relationship do you have with the authorities?

We have established successful relationship with the governments of all levels and have enlisted support of many officials. There is hardly anything surprising about that as we have designed a unique product that will be useful for the district, the region and the state on the whole.

The plan to develop a unique resort zone in the Moscow Region was aimed at creating conditions where exacting clients would be able to enjoy their stay no less than on Cote d’Azure in France, Spain or Switzerland.

The project will create extra 3,000 jobs. Today, Ruza District has only 15,000 jobs. Tax revenues in Ruza District, the Moscow Region and to the federal budget will grow. But most importantly, with top class resort zones available at home Russian holiday-makers will spend billions of dollars in this country, not only abroad.

-Given the scale of the project, there must have been certain problems. What difficulties do you have to deal with?

Of course, there were and there are certain problems. The competition was rather tense at the stage of acquisition of land. Later we had to deal with real blackmailers – the so-called greenmailers who unleashed a dirty information war against us, seeking to be paid a certain amount of money. As we do not respond to such attacks and reject such means of dispute settlement slanderous reports about our project still appear on the Web from time to time. It is no secret that some of those people are government officials.

For the most part we manage to solve those problems. But the most challenging and most important task for us was to persuade Ruza residents that we had come to stay.

When we first arrived in the district in early 2002 we did not only established relations with local farms. We would organize meetings of workers and shareholders and tell them about our program, including our plans concerning agricultural development.

Most farmers would say: “Those are all words, but what will be in practice?” You will buy our lands, they said, re-sell them and be off.” Over the past 3.5 years we have managed to persuade the majority of local residents that we honor our commitments and do what we say.

-What do you mean?

When we say we take up farming, that is true. Over the past year milk yield grew has grown by 30%, which means our farms yield by 30% more milk than they did before we came in 2002. Corn crops grew 5-fold.

We have not sold a single hectare in the district, with the only exception where we allocated a plot within the Kosmodemianskoye farm for organization of a gardening cooperative for war veterans and retired military at the request of the government of the Moscow Region.

In late August we held public hearings dedicated to the project and although some remarks were made concerning chiefly the current state of certain localities, on the whole local residents voice their support for the project.

No serious complaints were made even though someone had intentionally spread rumors that we were planning to pull down houses to vacate the building site for Ruzian Switzerland. Everyone can rest assured: no home will be pulled down in the course of implementation of the project.