People in the Know: 170-strong Universal Developer

The company took part in the development of the Krekshino logistics park; the business center RosEuroPlaza in Novosibirsk is slated to become the first class A office building in town. Over the past twelve months the company announced several ambitious projects including the plan to build a chain of shopping centers and a network of logistics complexes across Russia.

Market operators know virtually nothing of RosEuroDevelopment’s future strategies except the fact that the company is active in the province and is taking first steps to join ranks with international investors. So far it is unclear whether the company remains a “universal developer” or will focus on some particular sector of real estate market. Ivan Sitnikov, RosEuroDevelopment CEO, has agreed to shed light on the company’s plans in Russia.

-Could you please explain your information policy? Your company’s image is obscure. Many believe that RosEuroDevelopment keeps a low profile. But from time to time you make yourself heard.

We deliberately decided against self-promotion in the beginning as we believed that could be damaging to our business in early stages, generate unwanted excitement around our sites and schemes already launched. Two years ago working was much easier; we consistently acquired properties across Russia. Our interest in those assets did not push up the prices of properties we wanted to buy.

As soon as the company opens up for the public it experiences all the negative consequences of such a move. We have witnessed the negative impact of publicity on the example of the others; for example, where companies whose projects received wide media coverage never fulfilled their ambitious plans, everyone knows them.

That is why our position is as follows. Everything we say in press should be confirmed with real work. That is why our company never speaks of projects which are in the early stages of development. Certain companies promote their businesses seeking to create a kind of a recognizable brand, targeting mass consumers. Those are, for example, Moscow-based housing construction firm Don-Stroi, or Interko.

We, on our part, are a B2B company focused on the corporate market where the number of consumers is restricted to some 300 – 400 retail firms and 100 to 200 logistics operators. In this field utmost importance is attached to ability to meet deadlines and create a product of top quality and to tenancy policies you pursue. For companies like ours much more important than publicity is substance. Our work is more important than what we say. This is the fundamental principle our information policy is based on. Today we have finalized several deals and the information is reaching the market. We cannot stay absolutely silent. Information leaks give rise to speculations that do not conform to reality.

-Do you think that a developer by definition cannot be as open to the public as, say, a property consultant?

That’s not so. There are different approaches. Take, for example Donald Trump. We visited the U.S., familiarized ourselves with various companies and projects including his projects. Donald Trump has built his company by building a strong brand name. That is a vivid example of maximum use of marketing techniques. Everything depends on corporate strategies. Now, take a look at Ikea in Russia, where the company builds retail complexes. Ikea does not position itself as a developer and promotes its brand Mega as a chain of family-oriented shopping centers, which whole families may visit on weekends. In most industry magazines you will not find a report saying that Ikea is a great retail developer. On the whole, all depends on what information can do for the business.

-So what is your corporate information strategy for the near future?

We will adhere to the principle of openness and of course will report on landmark projects we are working on. Our plan is to go public and get listed on stock exchange. Thus, we just cannot afford to keep a low profile.

-How long have you been working at RosEuroDevelopment? What did you do before taking the chairman’s post?

I have been working here for over four years, nearly five years now. I worked in banking since 1994. I come from the financial sphere, so I have always considered real estate as a financial tool. Before I took the post of chairman of RosEuroDevelopment, I specialized in warehouse real estate at NLK Development. And before that I was a manager at RosEuroBank. Earlier I headed Nat Invest Securities Corp.

-It has been reported that you worked at the stock exchange in the U.S. Also, the rumor has it that RosEuroDevelopment was founded in 2004 partially with foreign support.

I never worked in the U.S., all my activity was focused mainly on Russia. True, in the past, I had relation to certain international securities markets. But I assure you that the funds initially invested in our company are of Russian origin. Key shareholders are and have always been Russian entrepreneurs.

-In early 2006, U.S. hedge fund Moore Capital Management acquired a 20% stake in RosEuroDevelopment. This last summer Morgan Stanley Real Estate’s Special Situations Fund (Morgan Stanley) purchased a stake of 10%. Who are the Russian shareholders?

Other shares are held by RosEuroGroup owners. It is no secret. Our key shareholders are Russian individuals Sergei Grishin, Andrei Suzdaltsev and Ilya Brodsky.

-Do you hold stakes both in the consortium and in RosEuroDevelopment?

No, I hold a stake only in RosEuroDevelopment.

-Incidentally, do the members of RosEuroGroup (RosEuroBank, National Logistics Company (NLK), Sem Tsvetov, Istra Holiday) enjoy financial and legal independence?

Yes, those are independent companies owned by the same shareholders. Key shareholders are the same in each of the companies. But I would rather not elaborate on RosEuroGroup. In short, the consortium is rather an investment fund, which invests in projects with good prospects.

-And still, companies that form the consortium are awash with speculations. Perhaps the reason is that for quite a long time you shunned publicity. For example, some operators who are quite respectable speak of NLK as a “dark”, “obscure” or even “criminal” organization, which should better be avoided. How would you comment on that?

I am surprised to hear that. But I think that it could be regarded as a positive sign. That means that NLK is a strong company. That is why it is not always easy to come to terms with it. Such rumors are not spread about weaker companies. We focus on building a company working in such a style as holdings on civilized Western markets, in Europe and the U.S.

-How did RosEuroDevelopment come into being?

The group was operating units involved in different lines of business in real estate. Some specialized in logistics operations, others in development of countryside compounds, still others in housing. The move to merge those units into a single powerful real estate company was absolutely logical. Formally, the development firm appeared in the wake of the merger of the companies Novoye Vremya Development, involved in construction and operation of hotels and out-of-town compounds in the Moscow Region, and NLK Development (construction of logistics parks). The decision was taken by shareholders and that moment may be considered as the moment when RosEuroDevelopment was born. In practice, our team has been active on the property market for quite a long time.

-Quite often development firms are initiated by banks planning real estate investments. As such a bank cannot assume the developer’s role itself it launches an independent legal entity for the purpose. Is not that the case with RosEuroDevelopment?

No. I may assume that you are referring to a scheme where banks invest funds in properties. Quite often such schemes are practiced by real estate investment funds. But our company is established and operates in competitive environment. We receive no preferential loans, no subsidies or cross-subsidies. RosEuroDevelopment is an independent commercial company.

-What was your very first project?

Those are logistics complexes Terminal Lesnoi, Rent-Tsenr and NLK Khimki.

-How did you manage to take a top managerial post in such a large company? Was it due to hard work on everyday basis or just a lucky coincidence, or maybe due to some special talent?

I have seen people who were building their fortunes easily. For some reason they were lucky. As for me, I have never been lucky. Nothing worked out easily for me. I always had to negotiate barriers. I will cite an example. When our RosEuroDevelopment team launched a project to build a large retail center in Krasnoyarsk, measuring 140,000sqm and worth $150 million, all consultants said the market was underdeveloped, the players had not yet arrived in town, the project would have no tenants, in other words, it would fail.

We began that project some two years ago. The managers always have a choice to make – either to undertake a project or not, put up cash or not. In my opinion, a successful manager is the one who can foresee the situation for many months or years ahead, unlike other market operators. Our team undertook that project in Krasnoyarsk, against all odds, and it transpired that we did not err. The box of the future shopping center Planeta has already been raised in Krasnoyarsk, with two tenants claiming one space there. We plan to launch the project in 1Q 2008. Property analysts have revised their views of the Krasnoyarsk market. We had an alternative. We could rank 101st company in Moscow or become one of the market leaders in Russia. We opted for the latter.

For a company chairman it is very important to combine strategic thinking skills with tactics. Otherwise, the outcome may prove deplorable. But in market conditions where competition is strong a top manager without a gift of foresight is doomed to failure. I would like to add that I am lucky to have such a partner as Vyacheslav Sosinksy. All our achievements we owe largely to him. Our result may be divided 50-50.

-When you arrived in Krasnoyarsk the city already had the project Torgovy Kvartal na Svobodnom, raised on the site of a former industrial facility by the company Torgovy Kvartal.

I have enormous respect for them as they are the pioneers of retail market in Krasnoyarsk. Namely that company launched the formation of it. Pioneers always have to struggle. It’s like a soldier who blocks the machine-gun with his body (like the Soviet war hero Alexander Matrosov) and gets killed or survives to become a hero long before he dies.

-Was the site for construction of the shopping center in Krasnoyarsk(at the intersection of 9 Maya, Alexeyev, 78 Dobrovolcheskoi Brigady and Prospekt Aviatorov streets) free of any developments or did you undertake redevelopment of an old building?

We prefer greenfield projects, as we are convinced that it is easier to pull down existing facilities and build from scratch. Redevelopment is a rather complicated process. As a rule, redevelopments are short-lived projects. As competition grows stronger such projects fail to vie with their rivals, unless they are rebuilt anew. In the long run their owners are left only with a plot of land as their only valuable asset. Although, there are, of course, fine examples of redevelopment projects, projects in historic part of the city. I would like to draw attention to the so-called low-cost redevelopment where production facilities are rebuilt into shopping areas for the purpose of quick gains.

-Is that true that your company plans to switch entirely to retail development?

We do not plan to abandon other sectors of commercial real estate, for example logistics, where we have already established our presence. We have a very strong industrial property department, where Andrei Podgorny, whose name is well-known in the sector, works. We will also work on office projects, housing construction in the regions and technology parks. Our first technopark project is underway in the scientific center Akademgorodok of Novosibirsk. But our key strategic target is mall development.

-Why do you stake on mall development?

I believe that the development market in Russia is unhealthy. But market recovery usually begins only when a crisis hits and weaker operators die. I am convinced that those times are not far off. The only question is what will trigger that crisis. The times of easy projects will be gone. Very soon it will no longer possible to bury a handful of gold coins and then reap a huge crop of gold in the form of a property. A market where properties are raised only with the help of connections and cash, without paying due attention to quality is unhealthy.

The market needs professionals. What we witness today is a large number of top quality projects in the offing and at the same time just as many projects that fail. In particular, in retail real estate, that is what we will see in many Russian cities, tenants will chose properties they want. Many retail centers are currently being built across Russia. Some of them will fail and will be taken over by banks who finance construction. The banks, on their part, will begin to get rid of those properties. That will be the stage when we will begin to acquire failed projects, install professional managers there, launch quality redevelopment and then operate those properties. All our deals are made proceeding from what will be happening on the market in some five or six years from now. And when the market recovery begins we want to be prepared.

-You must have some very powerful resources if you are ready to take over unsuccessful projects.

Of course, we do not intent to take up all failed projects. There are projects, which cannot be revived. But nowadays we are joining ranks with the world’s major real estate companies and we will have access to their resources, we will be able to train our managers abroad and invite international experts to Russia. Even if we do not have such experience our foreign colleagues have.

-To how many projects RosEuroDevelopment holds title? Do you plan to create investment tools with a view to offer them to international real estate funds in the future?

We have approximately 200,000sqm of completed developments in our ownership. Construction of 350,000sqm is underway. The company is now working on the concept of projects that will measure some 1 million square meters of space. But we do not plan to retain title to all those properties. Of course, if we see a benefit we will sell properties. I think our buildings appeal to international investors. After all, Morgan Stanley has acquired a stake in our company.

-RosEuroDevelopment is focused on Russian provinces. Do you plan to pursue projects in the capital?

We will return to Moscow, but at a later stage after our projects in the regions are completed and we become one of the strongest developers in this country.

-How do you gain data on the situation in the cities and regions of Russia? Do you enlist services of property consultants for the purpose?

Usually we do a very big job. We inspect localities and carry out an in-depth research, visit neighborhoods and examine potential sites. We collect data on our own, we do not rely on consultants alone. RosEuroDevelopment employs professional staff to do such work.

-It is difficult to coordinate construction from a distance. How do you manage it?

We run offices in all regions where we pursue construction projects.

-How do you begin your projects? Do you explore cities on your own and then contact authorities or do you enlist support of local officials? Have you ever experienced difficulties in securing building sites in the province?

As a rule we begin with gathering data with the help of our sources and only after that we establish contacts with local governments. As to whether it is hard to secure a building plot or not I’ve already told you that for me nothing is easy. But you can congratulate us because recently we have secured a 49-year lease to a site for construction of a Planeta store in Tyumen.

-Do you secure plots at tenders or by acquiring them from local mayors?

As the case is with all developers, that depends. For example, a contract to develop a technology park in Novibirksk was won at a tender.

-RosEuroDevelopment has a retail center, an office building and a technology park in Novosibirsk. What is so special about that city?

If you take a closer look at Novosibirsk you will see that major banks and international firms have already opened or plan to launch their offices in the city. Novosibirsk is one of the most prosperous Russian cities with population over 1 million; it has good prospects. We are building a technology park in a unique location, a scientific center. Such places are rare in Russia. Our plan is to build a campus of offices and research labs measuring a total of at least 100,000sqm, featuring a business incubator, a family-oriented shopping and leisure center and a hotel. The complex will also provide housing space for employees. We are also developing a 120,000sqm Planeta mall, worth $100,000. The 27,000sqm office center RosEuroPlaza, worth $35mln is to be finalized in late 2006. I must admit we began with exploring the strongest markets where we see good potential.

-In other words, the markets where the demand for shops and offices is guaranteed.

Absolutely.

-Market operators say that Novosibirsk is a complicated site. Many plots are heavily encumbered, because of high density of engineering lines in place. Have you encountered such problems?

Any city is filled with all sorts of communication lines. I will not conceal the fact that our site for construction of the shopping center was encumbered, too. Other developers – our predecessors – had rejected the plot. The problem was that there was a large collector on the site. The site is situated on the right bank of the River Ob, near Dimitrovsky Bridge and at the intersection of Dimitrov Prospekt and Vladimirovskaya streets. We have managed to find a solution to the problem. To remove the installation from the sight we simply covered it with a bridge and installed our mall above it.

-Did not you have any misgivings about the idea? Will the mall operate normally?

Why not? We have the know-how.

-Your business center RosEuroPlaza is harshly criticized by certain operators who claim that the complex fails to meet class A standards.

No matter what they say there are international standards in effect and I can assure you that RosEuroPlaza meets class A standards by a sufficient number of parameters. The real estate services firm Cushman & Wakefield / Stiles & Riabokobylko has official confirmed that.

-Could you say a few words about the concept of the Planeta mall chain? In which cities the company has already secured plots for construction of Planeta stores?

We are working on concepts of two chains. Planeta will comprise super-regional complexes, measuring over 100,000sqm and targeting medium income buyers. The first complexes of the chain to be completed soon are in Novosibirsk and Krasnoyarsk. In the years 2007 to 2009 we plan to launch stores in Samara, Omsk and Tyumen. Another project is the chain of upmarket Fashion Center stores. The development of the first store of that chain is to begin soon in Rostov-on-Don.

-Who will operate your stores? Many developers who launch their retail chains prefer to manage their properties on their own.

We are also set to establish a unit in charge of operation of future malls – RosEuroManagement. We have enough resources to take up various types of management, such as facility management, property management and asset management, as well as marketing campaign to promote those projects. The management company, too, will become a network brand.

-Are there any anchor tenants in your malls? Who are they? Have you already signed preliminary tenancy agreements with them?

Sportmaster and M.Video rent spaces in Planeta in Krasnoyarsk. We hope to develop cooperation with them in other locations as well.

-It has been reported that you are raising a shopping center in Rostov-on-Don, on a site owned by Dinamo Stadium, and that you undertake to build a sports facility on the site as agreed with the administration of the stadium.

We considered several locations for development of a large shopping center in the city. As to what site we have eventually opted for remains a secret for the time being.

-We have heard that RED is one of the developers who intend to build a network of logistics distribution centers across the country. Your company is said to have acquired building plots for the purpose in Novosibirsk, Rostov-on-Don, Nizhny Novgorod, and other cities. Could you please elaborate on those plans?

As I have said before we’d rather not divulge data on projects which are in their early stages. Therefore, today it is still too early to report anything.

-Property consultants report that warehouses bring high returns. Or, are returns from mall developments higher?

Consultants may err, you know. I sometimes feel surprised to hear them talk of annual rate of returns of 20%. You should better ask the developer, the one who is directly involved in construction, and he will tell you that nowadays return rates do not exceed 12 to 13%.

-Do you take interest in cities smaller than Novosibirsk, for example? Cities with population of 500,000 are becoming increasingly popular with developers. Do you plan any operations there?

It all depends on the market situation in each given city. A case-by-case approach is needed here. For example, for the time being Orenburg is of little interest for us, whereas Lipetsk, Arkhangelsk, Novokuznetsk and Magnitogorsk are quite attractive.

-Is it convenient to work this way being involved in all sectors of the market?

Of course, I admit this is the most difficult path, also in terms of governance. That is why we have decided to place emphasis on some specific sector, i.e. on mall development.

-How are RED’s projects financed?

Like the case is with most others, the company assumes 30% of costs and raises bank loans to cover the rest. It would be strange if an active developer fully financed his projects with own funds. That is possible perhaps only if he is a retiree and seeks to prosper in old age.

-Do you practice refinancing deals, similar to what Capital Partners have done with the terminal Pushkino? Do you plan to raise loans from international banks?

I believe that refinancing is necessary. Foreign and Russian banks issue loans at lower rates and for longer terms. As properties are already raised and developers receive stable income the banks who finance such projects face fewer risks.

-Do you have some special business-dream?

All businessmen, I think, have a dream. But I am no dreamer, I am a realist. I would like to see RED turn into the real estate fund involved also in property management. We will focus on commercial real estate, on retail properties in particular. Our goal is to enter the list of Russia’s top three mall developers.

-How many people do you employ?

Our head office and regional branches employ a total of 170 experts.

RosEuroDevelopment is part of the RosEuroGroup, a conglomerate of businesses with operations in Russia. The company was established in 2004. RosEuroDevelopment is an established property development company with a significant and fast-growing presence in Moscow and the Russian regions. The company controls a large land bank of over 1.8 million sqm and plans to develop over 2 million sqm of real estate over the next five years. RED has projects in ten regional capital cities with populations over 1 million each. RosEuroDevelopment specializes in innovative, large-scale projects in four property sectors: shopping- entertainment centers, business centers, logistics parks, and residential complexes.

Ivan Sitnikov, born on Nov. 7, 1971 in Moscow, graduated from the Moscow Institute of Radio Engineering, Electronics and Automatics in 1995. Two years later he completed his post-graduate studies at the Plekhanov Economics Academy and the Russian Academy of Science. His professional career began in 1995 at Rossiisky Kredit bank where he worked as acting operating officer. In 1998 Sitnikov joined S.A.&P. as executive officer in charge of real estate investment and publishing. In 1999 Sitnikov was appointed chairman of Nat Invest Securities Corp. Ltd. In 2002 he was invited to join RosEuroBank’s team as head of corporate finance and project finance. In 2003 he became chairman of NLK Development. After NLK Development merged with Novoye Vremya Development, Sitnikov was appointed chairman of RED.