Money-Growing: To Stay Afloat

Casus Belli

In late September, the mayor’s office undertook what was its fourth attempt to evict tenants from barges and landing stages on the Moscow River. The first to call for eradication of the established practice was the head of the city government Yuri Luzhkov. Riverside properties fail to meet architectural requirements in effect in downtown Moscow, he said. In particular, “those properties distort the appearance of the city.” “We will fulfill the task to remove those terrible elements from the Moscow River. It must be clean,” the mayor told a government session.

Faulty design aside, what also vexes the city hall is the volume of water and energy consumption by riverside property tenants. As a result, the authorities decided to launch a crackdown on those properties. On September 27, 2006 the city water supplier Mosvodokanal cut off water supplies to all offices operating on landing stages along Frunzenskaya Embankment, the most prestigious waterside area in the city. Official reports named several reasons for the move. Owners of riverside properties had exceeded the limit of water consumption and failed to meet environmental requirements for sewage disposal facilities, the city hall alleged. Originally, it was assumed that water supplies had been suspended to prepare properties for the winter season but those reports saw no confirmation. The tenants, on their part, resolutely denied all charges as false.

But the city hall did not confine itself to water blockade alone and went further. Pyotr Aksyonov, who held the post of the acting mayor in September, ordered the energy supplier Mosenergosbyt to look into electricity supply agreements with the owners of riverside properties. “The landing stages situated on the Moscow River within the city boundaries consume five times more electricity than conventional shops,” the official was quoted by Interfax as saying. Furthermore, Aksyonov told a session of the municipal economy department, several landing stages had plugged into power lines unlawfully. In particular, he referred to the barge docked near the movie theater Sputnik.

Rosprirodnadzor’s deputy chairman Oleg Mitvol has pledged support to the city hall. In comments carried by several news agencies, the deputy chairman of the federal environmental watchdog said that his agency is ready to raid Frunzenskaya Embankment at any moment.

In the past the mayor’s office already took steps to evict tenants from the waterfront, but those attempts – made in November 2002 and February 2003 – did not evolve into such a large-scale conflict as we witness today and led to nothing.

“We have launched a real offensive against those installations,” Yuri Luzhkov told a recent session of the city hall. A month passed and the government seemed to have forgotten its plans but on October 30 Luzhkov issued an official statement urging Prime Minister Mikhail Fradkov and the federal government to annul licenses for installation of landing stages within the city. On his part, head of the department for nature management and environmental protection Leonid Bochin pledged to “introduce order” in the prefecture of CAO (Central Administrative District).

Four weeks after the conflict flared up, in early November all landing stages on Frunzenskaya Embankment were still there while the federal government continued to ignore the city hall’s request. In response to the blockade riverside tenants moved to file a joint lawsuit against the authorities but those efforts have stalled. Several tenants decided to move out; for example the agency New Media Stars rented an office on the premises of the production facility Salyut.

Dig Deeper

Market experts believe that the conflict between the Moscow government and owners of waterfront facilities is a dispute between economic entities. “On the whole the situation is reminiscent of disputes between the municipality and the federal government. The city hall’s desire to improve the appearance of embankments is understandable, considering significant funds spent on creating the new look of the city and the poor appearance of some of the barges against the background. The only way to pressure disagreeable property owners for the Moscow authorities is to cut off utility services, which is what we witness today,” Vladimir Zhuravlyov, head of commercial real estate and investment at NAI Global, says.

In line with the Water Code of the Russian Federation, the Moscow River basin is under the jurisdiction of the federal government; therefore, the Moscow mayor’s office does not receive any revenues from rented waterside shops, restaurants and offices. Furthermore, payments for the use of water resources are incomparably smaller than rental charges for expensive land in the city, especially on Frunzenskaya Embankment. “Rental payments in Moscow River basin are trifling. The problem is that the Moscow River is the property of the federal government, and all such payments are made to the federal budget. The size of those payments is insignificant and cannot compare to rent paid for municipally-owned non-residential properties,” says Andrei Bushin, head of commercial real estate and development at the Miel Nedvizhimost realty.

Low rent aside, property owners are not exempt from the obligation to secure plenty of approvals from various government bodies for installation of their landing stages. “To open a riverside restaurant, a caf?, a casino, etc, it is necessary to secure numerous approvals. All government bodies involved in that process may be divided into two groups – “water agencies”, which are in charge of water resources – the federal bodies, and “coastal”, i.e. municipal bodies,” Andrei Bushin explains.

Installation and maintenance of riverside properties comes within the jurisdiction of the Russian river registrar office, the state river shipping inspectorate and other federal agencies that oversee water management. Upon obtaining approval from the federal bodies the applicant must sign an agreement with the Moscow city hall’s public utilities department for water and power supply and access to other utilities. The city hall also has the right to set requirements for outward appearance of the property, its location and use. Finally, river tenants are required to sign deals directly with Mosvodokanal and Mosenergosbyt.

Thus, considering the total cost of all preliminary measures, installation and fit-out of riverside properties, the rental rate may run into several hundreds of dollars, VAT and operating costs excluded, but still remains far below the average market rent charged for class B offices, which currently stands at $550 to $700 per 1sqm, excluding operating costs, according to Colliers International.

“On average, the cost of renting a modern riverside property on a landing stage is 30 to 40% lower than in similar properties elsewhere, which results from certain inconveniences tenants of waterside properties have to put up with,” Zhuravlyov says. “Such properties are quite difficult to classify, nevertheless they create competition for upper class C and lower class B offices. Technologically, properties on barges and landing stages are inferior to conventional buildings, whereas in terms of location and image component some offers may prove unique.”

According to Zhuravlyov, space on a landing stage in Krylatskoye is available at $250 to $300 per 1sqm per year, VAT and operating costs incl.; a similar office on Krasnopresnenskaya Embankment costs $300 to 400 per 1sqm, while on Krymskaya and Taras Shevcehnko embankments the rent may reach $450, on Yakimanka and Frunze embankments up to $500. While final rates are quite high the lease of a water spot beneath the landing stage costs virtually nothing. Tenants are often affiliated with property owners; for example New Media Stars rents an office from one of its investors.

River Basin Inhabitants

Today there are approximately 250 landing stages, barges and motor ships moored at Moscow River embankments, Andrei Bushin reports. “Most properties are rented by restaurants and shops. Office tenants are the most various companies but most of them opt for riverside properties because they seek a unique location,” says Olga Kisarina, head of research and analysis at Praedium.

“For the most part waterside offices are sought by media companies, publishing houses and editorial offices, Internet service providers, casinos, leisure operators and restaurants. They seek a special location in downtown Moscow and are ready to put up with certain inconveniences,” Zhuravlyov adds.

Those companies rarely employ a workforce over 80-100, while larger firms would feel rather cramped in a floating office, which measures 700 to 800sqm on average. In terms of tenant mix Moscow riverside offices do not differ greatly from similar properties in Europe. But in Europe such offices often house art workshops and studios, which is not the case in Russia. Properties on landing stages in Moscow are rented by some well-known companies who prefer waterside offices. Shops and restaurants are available in the vicinity.

“The most famous tenants on Frunzenskaya Embankment are the restaurant Skazka Vostoka, the television company VID, restaurant Mama Zoya, Konstantin Rykov’s agency New Media Stars and Japanese cuisine restaurant Aiko,” says Andrei Zhamkin, senior commercial real estate consultant at Blackwood. Other tenants on Frunzenskaya are Ivea & Verge, Mik-Invest and restaurant-bar Prichal Torpednykh Katerov (Motor torpedo-boat berth). Earlier, one of the local landing stages was occupied by a furniture store; currently it undergoes reconstruction.

“With certain reservations it is also possible to include in this category the property in central Moscow, at 12A Chistoprudny Boulevard that houses the restaurant Shatyor owned by famous restaurateur Roman Rozhnyakovsky,” Bushin says. “There are examples of boats used for similar purposes, i.e. as bars, cafes, restaurants, clubs and shops – Silver, Alexander Blok docked near Moskva City.”

In terms of communication equipment boats are easier to maintain as they are originally designed to work autonomously unlike landing stages, which are dependent on utilities – water and power supply, sewage disposal, etc, he says. But, regardless of the mentioned examples, riverside offices are rare in Moscow, as they are not very convenient in terms of organization of workspace; besides the water registrar office imposes numerous restrictions on their operations. In particular, proceeding from public safety considerations the government bans multistoried construction on landing stages, restricting their height to two stories.

“Of course, it is possible to use the decks, but one of those will have to be reserved for auxiliary facilities. Thus, there are only three floors of useable space left. Besides, it has to be remembered that a landing stage usually measures 25 to 60 meters in length and only 10 to 12 meters in width. Thus for a large company there is not enough space on a landing stage,” Andrei Bushin adds.

While waterside offices in Moscow are seen by market experts rather as an exception, riverside homes are non-existent. “The precedent has already been established in Russia – a residential project in St. Petersburg, docked at Krestovsky Island. It may be viewed as the first sign, as the demand for such homes exists. Quite a few people would like to have a riverside home,” Olga Kisarina claims. However, it is hard to talk of mass construction of such projects as their installation and registration is fraught with difficulties of technological and bureaucratic nature, she says. For example, a house built on a landing stage will never be registered as a residential property and will always be classified as a small-size vessel.

“A home-barge rarely meets the requirements set for residential space. But the main reason why riverside homes are unpopular is Russian mentality. People are concerned chiefly about their personal safety. And, besides, the cost of redesigning a landing stage for residential use may run into $1 to 2 million, turning a barge into a home is slightly cheaper. That is why it is more profitable to buy an apartment or a premium class home in the countryside,” Andrei Bushin says.

No Prospects for Riverside Properties

Most analysts are convinced that waterside real estate has no prospects in Moscow. One of the reasons is the weather. “Our climate is the main reason why such properties are unpopular. Living on a barge, even if it is equipped to meet the highest standards, is hardly cozy. Secondly, the environmental situation on the river is far from favorable, with an exception of a short stretch in northwestern Moscow. Nevertheless, even properties offered in that part of the city fail to attract tenants given their remoteness from the city center,” Zhuravlyov says. Andrei Zhamkin agrees. There are several reasons why riverside homes are not popular in Russia, he says. The navigation season is brief – from April to October. Ice on the water may destroy the floating property fast. Finally, Russian laws impose strict requirements on waterside construction.

“Riverside restaurants operating on the water are viewed as temporary installations. Homes cannot be placed into that category as the Russian law does recognize seasonal homes. By law, waterside homes are banned. In this connection, such properties may emerge only where climatic conditions are appropriate and no legal restrictions are in force,” he holds. Vladimir Zhuravlyov says: “The geography of the conflict is for the time being confined to the central part of the city but in view of rapid development of plots adjacent to the river the number of disputes will grow. This is only a matter of time.” “Owing to reasons of economic nature Moscow is not interested in those facilities, as revenues from their operations go to the federal government, not to the city hall. In other words, what we see here is the conflict of economic interests,” Andrei Bushin agrees.

International Experience

The idea to use the river basin for placement of commercial and residential came to Russia from the West. “Properties in river basins of the cities are a common across the globe. Waterside properties are quite numerous in Paris, Amsterdam; such homes may be found in Great Britain, the U.S. and Canada,” Olga Kisarina says.

Riverside real estate falls into two categories – fixed properties docked at landing stages and berths and the so-called houseboats, such as yachts and ships.

“Landing stages are autonomous, mobile, easy to build, offer great views. But most importantly, historically renting a water spot in Paris, Stockholm or Amsterdam is much cheaper than a spot of land of the same size in downtown. European businessmen take advantage of that, and today in Europe people do not only live on the water; numerous retail and business centers, restaurants and leisure complexes have long become common,” Andrei Zhamkin explains.

Olga Kisarina says that the largest number of modern waterside properties are to be found in The Netherlands; Paris, too, has many such projects. Waterside properties house hotels, leisure facilities, homes and offices. “In most cases landing stages and barges are used as homes, hotels and leisure facilities, while offices on the water are rare,” says Zhuravlyov. Offices on barges are common in Africa and Asia but those examples fall short of civilized standards, he says. In the state of Kerala, India, practically all types of water properties are represented – restaurants, offices, homes, shops and even hairdresser’s.

This is the result of low living standards, analysts assume. As to The Netherlands, the popularity of barges in that country is put down to political and economic disasters. According to local statistics, 10,000 households live on the water; one of the landing stages even houses a museum of riverside homes.