In-Depth: Time for Retraining

Then there are smaller, creative firms who are well known on the market thanks to their executives. Those companies, perhaps, are the most pleasant to deal with, but as the case is with any other individual business their services are expensive. Not long ago the market witnessed the arrival of companies who have adopted Western style of operation, equipped with international know-how and expertise, market oriented and run by expatriates. Such firms fail only where they have to deal with circumstances unforeseen in international practice, namely with the much-discussed specifics of the Russian market – the traditional problems such as “fools and roads” – which may prove fatal for any project.

Banks hold a special place among the developers. Development is a resource-dependent and risky business. Of course, it is possible to acquire a good building plot expensively in a good location and raise a quality building thus minimizing risks but as risks are minimized returns, too, drop to the minimum. This is no development but commonplace construction. Another extreme is to spend considerable funds on acquisition of a plot with rather obscure prospects and then design a super project that will blast off and bring enormous returns.

Banks’ interest in real estate is understandable. Their objective is to preserve and increase funds. Banks traditionally deal with risks better than other market operators, as they have skilled staff, know-how, expertise, government support and cash to finance projects. That is why banks take active part in shaping and developing the property market, chiefly through lending, project financing and property development. As to lending and project financing, those are traditional lines of business for most banks. But few participate directly in development project.

Some of the banks involved in real estate development projects take up such projects deliberately; others have been drawn in the process by accident. For the former development is a logical step towards diversification of their business; they seek to exercise proper control over projects they finance and to minimize risks. They view development as a new line of business that has evolved from traditional lending and project financing and transformed into the bank’s wish to work independently on the lucrative market.

For the latter, this is, first and foremost, the wish to make use of accrued non-core assets seen as a source of extra income with acceptable returns. Be that as it may, to pursue their development projects both the latter and the former were forced to spin off separate companies, more or less independent from their mother companies. Today those companies are active on the market as full-fledged participants and quite often control large-scale and ambitious projects in a variety of segments. Does that mean that in the future the banking sector is likely to establish control over the property market and supplant influential building corporations?

Until recently Russian real estate did not offer favorable conditions for active growth of development as an activity aimed at deriving income chiefly from implementation of successful ideas on the basis of strategic foresight. In other words, while central Moscow still abounded in vacant plots and the demand soared, the city felt no need and offered no conditions for implementation of ambitious landmark projects on sites of little value – projects that would boost the value of land beneath them and create maximum added value in the course of construction and sale of real estate.

In those days profits were made in other business segments, involving construction and procurement, investment and brokerage, and hardly attainable without support from government connections. That is normal as those early stages prior to the point of market saturation can neither be cancelled nor stepped over. In those stages the basis for full-fledged development is being formed. The market reduces significance of administrative tools and their contribution to returns on development.

Then comes the triumph of conceptual approach: relevant town-planning solutions, the magic of master planning, the miracle of architectural ideas, in short all those things of which we still have only a very vague knowledge. But those are the key factors of the developer’s success. It is high time for developers to work out their competitive strategies. The magical moment has come and the developer must make a crucial decision. It is as if he is facing a roadside shield that reads: “If you go to the left you will lose your construction capacities; if you go to the right you will lose certain segments of the market and if you go straightforward you will lose your entire business.” But no shield says which way to go to gain something and what is there to gain. The answer to that question always depends on the company chairman’s knowledge and responsibility. The question is what knowledge market operators had when they entered that stage and how they used it in determining their competitive strategy.

For the purity of experiment let us imagine an ideal developer of the future. The easiest is to decide on his construction capacities – a useful asset, of course, but hardly decisive as building contracts may be awarded through open tenders even today. An ideal developer must be versed in know-how, timing and cost of construction, while construction capacities are not the main requirement. He must know how to organize a tender, be personally acquainted with all respectable builders; he may even hold a stake in a building company and be its board member, but he does not have to be a builder himself.

The same can be said of his financial standing. Lending services are becoming increasingly transparent and affordable these days. With a good reputation and observance of the rules of project management the developers of the future have the right to expect that raising cash for their projects will transform from a strategic into a technical task. But then, such dynamics is felt already today. What will really matter for the developer in the future is his efficiency in finding land quickly and examining quality of building plots, which are becoming increasingly scarce. Most importantly, he must be able to design quality concepts for available territories developing which is likely to grow increasingly complicated.

Thus, an ideal developer of the future is rather a coordinator, a creative worker and expert in quality, than a builder. He is the one, who creates the project and hires others to fulfill it and controls their performance, rather than builds and sells properties himself.

A special issue that requires attention is the so-called administrative resource, i.e. the importance of connections in government bodies. Developer of today will agree that over the past 12 to 18 months the role of that factor on the real estate market has changed. The formula “just money for goods” is growing obsolete. Serious issues have to be solved in accordance with legislation in effect. It is highly likely that as time goes that tendency will grow even stronger. Hence, the developer of the future will need to be independent from government bodies, competently maintain business relations with his partners and be versed in laws and regulations. Those who will seek preferences with non-market means will face problems, as they will find themselves under permanent and biased surveillance. No one denies the importance of good ties with the government but the nature of those ties will change.

An ideal developer of the future will rather discuss the prospects of territories available with government officials at a negotiations table, will offer his plans for their development, will demand that the government honor its commitments to build roads and public amenities, than haunt officials’ thresholds with suitcases filled with cash. In fact such a picture does not seem fantastic even today; as early as now many companies exercise such an approach towards business operations.

The future belongs to mobile, creative, constructively thinking companies with wide ties on the markets of real estate and finance, friendly relations with the government, best architects, engineers, market analysts, brokers and designers. They are able to organize work, ensure required quality and control performance. They can assume the leading role in the project or delegate that right to investors or local governments. They create the added value where others – i.e builders, investors or authorities – do not discern it. And that is what they are paid for.

Which companies will satisfy those requirements better than others? Who will hold the lead on the market in a decade or some 15 years from now? Will those be construction companies, bankers or consultants of today?

Just as development did not emerge out of nothing but was formed under influence of several market factors (a bit of construction, a bit of marketing, project financing and many other things), the ideal developer is being formed today, before our very eyes, adopting the best traits from market operators of today.

Will banks claim leading roles in development in these circumstances? Rephrasing a well-known English saying I will say. If a bank had development projects, the desire and ability to realize them that bank would be a developer. Most likely the banks will remain the banks and builders will be builders.

As to the fantastic prospects of the Russian real estate development market, that is undoubted. Imagine the situation in 49 years from now. Leaseholds expire, authorities take a weighted approach towards developing territories and shaping their appearance; investors have long secured returns on their investments and are ready to accept lower returns (lower houses, lower built-up density, etc); architects have mastered their skills by designing Ostozhenka, Golden Island, Plyushchikha, Zamoskvorechye, etc; builders are ready to implement the boldest ideas… What will then begin, Shanghai could not even dream about that.