Money-Growing: REALity Show for Investors

Foreign investors had shown sincere interest in municipally-owned land, filling the city hall with hope to see international developers on their territory. Moscow does not experience any serious problems with raising cash for its real estate projects, especially commercial properties. Russian developers are building offices and shops using own and borrowed funds.

But for the time being international investors’ interest in the Moscow property market is not very intense although the city has already seen examples of financing of projects under construction. One of those is a mixed-use facility on Novy Arbat Street, developed by the South Korean firm Lotte & Lotte.

Moscow city hall hopes that foreign developers’ participation in commercial projects will help shape competitive environment in the capital, and, as a result, the government will be able to award investment contracts at higher prices.

If Mohammed Will Not Go to the Mountain

Investors’ way to Moscow is thorny. This is especially true for international investors. The Moscow government mulls various variants of cooperation. One of those is participation in international real estate shows held abroad. Moscow’s stand has been present at international commercial property and investment exposition Expo Real since 1999. In the run-up to every forum Moscow prepares new projects and presentations, offers new fields of cooperation on mutually beneficial terms.

For example, at the latest Expo Real show held in October of this year in Munich, Germany, Moscow city hall organized a demonstration auction of an investment contract, held via a video link between Moscow and Munich and attended by Russian and international firms. That was Russia’s first auction conducted by a video conference. Prior to the event the city hall’s tender committee had thoroughly examined international practice. In particular, the results of similar auctions held in the U.S. and Great Britain had revealed that the number of bidders increased by 10 to 15%. Sales grew, too.

The organizers had hoped that the video auction would be of interest, first and foremost, to German investors. The tender committee officials explained that the number of German firms participating in Russian projects had always been high, as both Russia and Germany are satisfied with terms and conditions of their mutual cooperation. Investors from Great Britain and Austria have also shown noticeable interest, so the organizers assumed that developers from those countries could also take part in the Expo Real auction.

Interesting Offers

Two lots went up for sale at the auction, first deputy chairman of the tender committee and executive secretary of the auction steering committee, Alexei Bereznitsky, told the press.

One of the sites is situated in Southwest Administrative Okrug [district] of Moscow, at 102 Profsoyuznaya Street. Under the investment agreement to be awarded to the winner the 0.24-hectare territory is to be used for development of a mixed-use complex and parking facilities. The projected size of the 2-storied building is 3,900sqm, including 1,000sqm of shops and 1,300sqm of offices. The plot is practically free of any encumbrances; the only facility present on the territory is a metro shaft which has to be moved to a distance from the planned development. The project is to be finalized no later than in 15 months after the investment agreement is signed.

Another plot is in eastern Moscow (East Administrative Okrug), opposite 8-10 Stalevarov Street, on the inner side of the Moscow outer ring road. The 2-ha plot is allotted for development of a 4-storied shopping center featuring a multi-level parking area and measuring a total of 16,500sqm, plus a separate 10,000-square-meter parking facility. The plot is encumbered. According to preliminary calculations announced by Alexei Bereznitsky, before building works begin the developer will need to spend approximately 150 million rubles on rerouting two heating mains and a power line, now crossing through the territory. Also, the plot has approximately 200 car garages where leases have expired and the developer will have to remove them from the territory. Pursuant to the agreement the project is to be launched 12 months after the contract is signed.

Special Terms

Seeking to encourage as many bids as possible Moscow city hall adopted a simplified procedure of registration of bidders. Expo Real’s participants could file applications right at the exposition, before the auction. In Moscow, the tender committee, too, was accepting applications until the auction began. All requirements set for foreign investors were applicable also to Russian bidders.

To cut down red tape the government demanded no other papers from bidders but an application and an investment document. The size of the bid deposit, however, was quite high, set at 100,000 euros or 3.5 million rubles, with a view to exclude non-serious bidders, according to the organizers. Deposits could be made both in Germany and Moscow. In Germany money was to be deposited with a local solicitor, under an agreement with the tender committee; in Moscow deposits were to be paid directly into the account of the tender committee. Under the terms of the tender bid deposits were to be returned to failed bidders. If for some reason the winner waived the right to investment contract his deposit would be transferred to the municipal budget.

Alexei Bereznitsky said the auction was announced on the tender committee’s official website daily visited by over 2,000 guests. The complete list of tender documents was published on the same site. Any person interested could download all necessary papers without having to collect forms at the tender committee. The total of 28 packages were downloaded for the plot on Stalevarov Street and 75 for the Profsoyunznaya plot.

23 firms submitted bids for acquisition of the property on Profsoyuznaya, but only nine of the applications were registered, while others failed to meet tougher requirements introduced by the committee, the officials explained. The city hall denied registration to companies with a chartered capital of less than 2 million rubles or firms unable to provide a bank guarantee for the amount of 30% of the total cost of the project, i.e. $1 million. Alexei Bereznitsky said those measures are aimed against speculative operations on the property market, for example, where a firm with a chartered capital of 10,000 rubles files a bid, wins the title to the plot and then resells the plot.

The number of bidders for the second lot, the site on Stalevarov Street, became known only after the auction began. Three bidders had been registered in Moscow and two in Munich. Earlier, the tender committee said three bidders had been expected to register in Munich as well, but at the moment the auction started deposits had been paid only by two applicants.

Alexei Bereznitsky also reported that under the terms and conditions of the video auction the winner instead of entering into an investment agreement with the city hall (as it is customary) would receive a certificate of license to realize the project. Such a procedure was introduced in order to avoid disputes. If the winner had been offered an investment agreement German corporate lawyers would have been forced to spend a long time to study all documents thoroughly before making any decisions on them. “The certificate is in fact a security, that will be confirmed by a decree of the Moscow government and on the basis of which the successful bidder will enter into an investment agreement with the city hall,” Bereznitsky noted.

Experimenting With Spoons

At 17-00 Moscow time sharp auctioneer Andrei Likefet, chairman of the corporation Zhilishchnaya Initsiativa (Housing Initiative), opened the bidding at the tender committee. The auctioneer noted that it was the first time in Moscow’s history that properties were sold via live broadcast. Given those unusual circumstances Likefet paid the participants’ attention to the technical side of the issue.

In particular, the auctioneer warned that if any interruption of broadcasting occurs or the picture is lost during the bidding the auction will be suspended until all glitches are fixed. If that proves to be impossible the auction will continue by phone. Likefet also assured the bidders that high-end telecommunication equipment made it possible to respond promptly and without delays to cards raised at all venues.

The successful bidder is the one who is the last to raise his card and keep it raised until the auctioneer have repeated the price three times at the fall of the hammer.

Considering that the auction was held in Moscow, while the tender commission was seated in Munich, the bidders could see each other only on television screens, which carried three pictures simultaneously, one showing the auctioneer, the second with bidders in Moscow and Munich respectively, while the third picture contained a table with initial price of the lot denominated in rubles and euro and the price adjusted after each next increment in both currencies.

The auctioneer and his assistants in Munich communicated by phone independently, via a special channel hired by the tender committee.

Two certificates were prepared for the Stalevarov Street plot. One of those was brought to Munich, the other remained in Moscow. But only after the name of the winner was entered on the certificate it would become valid. The unused certificate was to be cancelled.

At the proposal of the auctioneer the bidding began with a zero lot, for the participants to test the bidding procedure. Handcrafted wooden spoons were put up for sale. The auctioneer explained that such a choice of a lot was not fortuitous. The tender committee supports a campaign to raise funds for restoration of Zachatievsky Convent, founded in 14th century; the spoons were made by the sisters of that convent. Funds raised through sales of that lot would be used for restoration of the historical monument.

The auction began with the starting price of 1,000 rubles or 30 euros and as soon as at the early stages participants both in Moscow and Munich showed high activity. The prices grew so quickly that the auctioneer barely had time to announce them and bang down the hammer.

The most active were the bidders with cards No. 12, 13 and 14 in Moscow and No. 20 in Munich. The Germans made bids so vigorously that the auctioneer even urged the Russian bidders to play up and not to allow foreigners take over the relic.

The real fight ensued, during which the Russian bidders refused to give in. Eventually, the tender commission was forced to stop the bidding at the price of 6,200 rubles and awarded victory to the most active participants in Moscow (No. 14) and Munich (No. 20).

Leonid Degtev, chairman of the tender committee, who was in Munich, suggested that the price for the lot be paid by the Russian winner, while the German would receive the spoons as a gift.

The idea caused a stir in the hall of the tender committee. Obviously, the bidders appreciated the ingenuity of the city official upon extrapolating the idea on other lots. But Alexei Bereznitsky rushed to calm down everyone noting that the committee had prepared two sets of spoons, so none of the winners would be deprived of his prize.

Price of Victory

By the moment the first lot (Profsoyuznaya Street) was sold most bidders had been caught up in the fervor. Many of them stubbornly fought for the victory in the charity auction and became quite skilled in raising cards. That is why immediately after the auctioneer named the numbers of bidders (7, 11, 5, 9, 12, 13, 3, 1 and 14), the initial price of 13 million rubles and a bid increment of 500,000 rubles, the bidding kicked off at enormous speed.

In early stages practically all bidders were highly active, but as time went the cards No. 1 and 3 were raised rarer than others. Before the price of the lot reached 100 million rubles the most active bidders were those with cards No. 7, 9, 13 and 14.

When the price reached the point of 100 million rubles a minor technical failure occurred causing confusion among the bidders and tender committee officials could not figure out who was the first to raise the card. But the picture was restored fairly quickly and the disputed increment was repeated.

Time was running out but the bidders continued to push up the price. Eventually, the secretary of the tender committee announced that once the price of the lot reached 146 million rubles the auction would be suspended to be resumed immediately after the international auction was over.

Vying for the certificate for the right to develop a mall project on Stalevarov Stret in Moscow were the bidders No. 23, 27 and 29 in Moscow and 20 and 22 in Munich. The bidding began at the price of 21.5 million rubles or 650,000 euros. The bid increment was set at 350,000 rubles or 10,000 euros. Especially active was the bidder No. 20.

The bidder No. 22 from Munich – the only woman who took part in the auction – would not give up her position either. All in all, 257 increments were made before the auctioneer announced the winner of the auction – the bidder No. 23. That bidder was in Moscow and represented a Russian firm. The screen showed the final price of 111,450,000 rubles or 3.22 million euros.

The bidding for the first lot continued in Moscow and ended with the victory of the bidder No. 14, who named the highest price of 146.5 million rubles. The auctioneer repeated the price three times, but none of the bidders ventured on pushing up the price any further.

It seemed as if other participants who had been so active in their fight for victory realized during the unplanned break how high the price was and decided to stop before it was too late. The bidder No. 14 obviously braced for a new fight and looked somewhat perplexed when he was declared the winner.

The winner of the international auction did not look jubilant over his victory either. Rather, he seemed to be taken aback as people around were congratulating him on his success. Apparently, both suddenly came to realize how much they would have to pay for the projects, and that realization sobered them up.

The Podmoskoviye company was unavailable for comment after the auction. Dmitry Maistrenko, general director at the company Flat and Co (bidder No. 14) noted that the company had already taken part in municipal auctions and had been poised to win, although initially they had no idea that the price of the deal would prove that high.

“There is no alternative that is why we are forced to accept conditions offered by the city hall,” he noted. At the same time the executive said that the company intends to build the property for own use (Flat and Co has only housing projects on its record. – Vedomosti), as it seeks to diversify its operations, while the properties acquired under the agreement will be leased out. That is why the company considers the project’s location in Southwest District as one of the key factors of success.

The outcome of the auction proved surprising for its organizers, as well. Alexei Bereznitsky said that no-one on the tender committee had expected the price of the Profsoyuznaya lot to reach 100 million rubles, and that of Stalevarov to exceed 70 million. “That once again proves that the auction scheme helps determine the market value of supply. If those plots had been sold on competitive basis where closed envelopes are used the city hall would have failed to collect huge funds,” he said.

Andrei Likefet noted that he had not expected the bidding to continue that long and the bidders to be so obstinate. The price the winners will pay is not very high but it exceeds the market average approximately by 15 to 17%, he added. “The auction is the market, it reflects the demand and high prices of the lots once again proved that investors are interested in plots of land in the capital; in the future that will force many developers to adjust their business plans,” he said. The organizers refused to name other bidders, but it became clear that taking part in the auction were German and Austrian firms.

The certificate for the right to build a project on Stalevarov Street was awarded to the company Podmoskoviye. The Flat and Co company was awarded an investment contract to develop a mixed-use complex on Profsoyuznaya Street. After the projects are finalized, the investors will secure titles to the structures and long-term leaseholds to plots of land beneath the developments, the tender committee has reported.

Alexei Bereznitsky admitted after the bidding that he would have been glad if the victory had gone to a German bidder. Then the rumor would have spread around Munich, the auction would have been covered by German television encouraging international investors to arrive in Moscow, he said.