People in the Know: From Chukotka to Krylatskiye Hills

CMI Development is a classical developer but not a general contractor as many observers suggested when Baltschug Plaza was under construction. The company’s portfolio of projects is much bigger than announced in the media. Boris Kiperman, President CMI Development, is set to build another business park in cooperation with the same investor. But that new project will be at least 30% larger than Krylatskiye Kholmy (Krylatskiye Hills). More ambitious strategic plans of the company envisage expansion into Eastern Europe.

-Who provides financing for CMI Development’s key projects?

Our partners are Millhouse Capital, Alfa Group and Nafta Moskva.

-How do you choose investors for your projects?

We proceed from certain criteria. For example if we plan an office center the project should be worth no less than $100 million. We are interested chiefly in large developments. Our company focuses on expensive projects. And of course we make inquiries about our potential partners’ experience in real estate.

-How long have you been working in this field? Some reports say that before CMI was established you took part in major investment projects by other operators.

I have been working in this market for 15 years now. Before 2000 my partner Kirill Klimov and I worked for the company Alfa Estate, part of Alfa Group, where we created several projects, for example Alfa Arbat Center at 1-7 Arbat Street, now housing the offices of TNK-BP.

As a developer Alfa Estate oversaw the entire sequence of operations in that project, acquired the building plot and negotiated the deal with the U.S. real estate developer Alfred Taubman. It was signed before the 1998 financial crisis, but when the crisis hit he withdrew from the project. So we had to finalize the development without him. But I think the project has proved successful already because we have found a good tenant – the company TNK-BP, who later acquired the entire building.

Klimov and I also worked on several other projects by Alfa Estate. Prime residential compounds were raised at 30, 32 Bolshoi Afanasievsky Pereulok (Side-street) near Arbat. Those are exclusive properties; the project at 30 Bolshoi Afanasievsky was one of the first prime residential developments in town. Then, Alfa Estate developed the townhouse community Rozhdestveno in Mitino, the first such project in Moscow. In those days the concept seemed doubtful as Russians were not yet used to the townhouse format. Unfortunately, the project Rozhdestveno, too, coincided with the 1998 crisis. But afterwards, when the upturn began we successfully sold out the properties to individuals.

Even earlier, before I joined Alfa Estate I had worked at the co-operative company Alfa Photo. In those days nobody could even dream of working in real estate. That was a co-operative involved in the same operations as pursued by many other companies in post-perestroika years, selling computer hardware, carpets, etc. Later when the joint venture Alfa Eko was established we began to mull real estate projects. In 2000 Kirill Klimov and I quit Alfa group and launched a company of our own, CMI Development. Our first partner and investor was Millhouse Capital. Together we have already completed several projects.

-Does Millhouse Capital own a stake in CMI Development?

No. I can name all owners of CMI Development. Those are Kirill Klimov, Yakov Geiler and myself. The company was established with Russian money. The three of us own several other firms as well. We establish independent legal entities under different names for work on each of our projects. Millhouse Capital is our partner. We maintain very good, friendly relations with their executives. We usually sign an agreement on operation of each project. As a developer, our company is in charge of all operations, from acquisition of a building plot to letting space.

-What was the first project you created in cooperation with Millhouse Capital?

We began with the business park Krylatskiye Hills in 2001. Later we developed the office complex Baltschug Plaza, together with Alexander Chigirinsky’s S+T (ST Group). He was looking for investors for Baltschug Plaza and Millhouse Capital joined the project. And since they already had experience of cooperation with us they invited us to participate. Thus, CMI Development formed an alliance with S+T. A joint company was established to develop Baltschug Plaza.

-Real estate brokers sometimes act as co-exclusive leasing agents. You acted as co-developers. But was not the project Baltschug Plaza launched before Krylatskiye Hills?

The project was launched earlier by Chigirinsky himself. He had developed a concept, acquired a freehold and was looking for partners…

-The original plan was to finalize Baltschug Plaza by 2004, but by that time it was not completed. Spaces were let out only in 2006. What is the reason for the delay?

I do not know what promises S+T made when it alone owned the project. So we do not know why they made such promises.

-When Millhouse Capital joined the project, it planned to build an office property for own use, i.e. for the oil company Sibneft. Later it turned out that the project was developed for sale on the market. Why did Millhouse Capital revise its plans? Is it because Abramovich had sold Sibneft?

At first we, indeed, planned a custom-built property. Plans were revised several times. Finally, we decided to hold an open tender for tenants. As to why such decision was taken I would not say, you’d better ask the investor himself. We did our job and launched the property.

-Baltschug Plaza is believed to have proved very expensive in terms of interior, as originally it was planned as a residence for the company.

There is nothing so very special about it. Corridors and entrance areas are decorated but all other spaces are just shell & core.

-How many joint projects have you completed in Moscow together with Millhouse Capital?

We have three joint projects here – Baltschug Plaza, Krylatskiye Hills and Moscow Medical Center. Several other projects are being planned.

-Do you plan to sell Krylatskiye Kholmy and other projects?

We receive many offers from respectable European and U.S. investment funds, interested in acquisition of Krylatskiye Hills. The project has high capitalization. The fact that our tenants are major foreign firms, too, has played its role. But the landlord – Millhouse Capital – is reluctant to sell it. We do not hold title to properties financed by Millhouse Capital. But there are several projects we are working on now, which we plan to turn into attractive investment vehicles.

-It has been reported that you are developing an interesting office project, the Dubrovka Plaza complex near Sharikopodshipnikovskaya Street, on the site of a former industrial facility. The project reportedly worth $130 million is to be finalized in 2007. The EPK company is the owner and investor of the project. The rumor has it EPK is facing some problems with that project. Is that true?

You know, the investor is categorically opposed to us making any comments on those matters.

-One more project on your record is the shopping mall Dream House, launched in 2005. Could you say a few words about the concept of that unusual development?

Dream House is a small shopping center providing only 13,000sqm of retail space, and worth $25 million. The development was financed by individuals who came up with an idea to create a design center on Rublyovka [Rublyovo-Uspenskoye Shosse], where the target audience for expensive interior design solutions resides. We call that project “a design center”. It is built on a 1-ha plot in Barvikha, 8km from MKAD, at the intersection of Rublyovo-Uspenskoye and Podushkinskoye highways. Spaces are let to design studios, furniture makers, manufacturers of expensive kitchen furniture, decorations, kitchenware and crockery, bed linens and lingerie, home accessories, etc. The project was planned also as a venue for designer conferences. The plan is based on a European model.

-Is Dream House your only retail project, apart from Perekryostok stores built in Moscow in the 1990s?

No, it is not the only one. Before that we had built a large supermarket, measuring 7,000sqm, in the province of Chukotka, where we also developed a dairy and bakery plant. The regional government needed such projects. After Mr Abramovich took the governor’s post in Chukotka the government launched measures to put the territory in good order.

When I first arrived in Chukotka and watched it through the window of the plane as it descended I had a feeling that the war had ended only a day earlier, so dilapidated everything seemed. But as far as I understand Abramovich was set to turn the derelict province into a model region. He poured enormous funds into Chukotka, whose capital city Anadyr had no roads, let alone shopping centers. We received funds for construction from companies registered in Chukotka.

-Do you plan to do something else in Chukotka?

I don’t think so. Roman Abramovich’s term in office expires soon. But much has been done already. Altogether, I think that as a governor he has achieved fantastic results.

-The Krylatskiye Hills project was finalized last year. But CMI also plans construction of a medical center on the neighboring plot. Why do you plan the medical center next to the business park?

Construction of a health clinic is another joint initiative of CMI and Millhouse. The project is conceived rather as a means of enhancing our image. It is to be completed in 2008. Not long ago we found the plot for construction at the request of Millhouse Capital shareholders. Considering that the issue of returns on such investments still lacks clarity in Russia as we have seen practically no private clinics built here before, we have come up with the following plan – to build a business park comprising four office buildings and use the other part of the site (3 out of the total of 9ha) for construction of a medical center. Returns on Krylatskiye Hills were easy to calculate as the market had already seen such developments. The business park was successfully realized, as you know. We have won CREA2006 award for Krylatskiye Hills (as well as from Dream House in small shopping centers category).

-Is not the construction of a health clinic a part of some social-oriented project initiated by Moscow city hall? How did you secure the plot for that development?

The plot was first acquired from the city government at a tender as early as in the 1990s; later we purchased it unencumbered from one firm. Originally, it was designated for housing construction, but we had the plot reclassified for commercial use. We have received no tasks from the city government. Millhouse Capital’s shareholders, on their part, were keen on building a private clinic in Russia. Russians spend billions on medical treatment abroad, some $5 billion per year. Our investors believe that it is possible to build a clinic in Moscow that would meet high international standards.

In top class medical centers abroad doctors usually work under contracts. In any country it is possible to invite expatriate doctors, as long as the clinic meets international standards. For example, our manager will contact the doctor’s manager and the specialist will arrive and perform an operation. The project is estimated to be worth some $125 million. But CMI acts only as a developer for the center, which will be run by a firm controlled by Millhouse Capital.

-Who is the designer for the project?

Our designers are the U.S. company NBBJ Design and the Russian firm ABD Limited.

-Who has developed the marketing campaign for Krylatskiye Hills?

Our real estate consultant, Cushman & Wakefield / Stiles & Riabokobylko.

-All four buildings in Krylatskiye Hills business park are let. Who are your major tenants?

Tenancies are held by Microsoft, Intel, Sun Interbrew, etc. Many other companies joined the project inspired by their example.

-Is that true that the business park is occupied only by foreign brands?

Our Russian tenants are services companies, shops, dry cleaner’s and cafes. All our office tenants are foreign companies. They have established an international community of sorts.

-How much do you charge them for office space?

Much depends on the area rented, term of lease, etc. Rates are $400 to $650 per 1sqm per year. Those who were the first to arrive are charged less, some $400, for example. The last vacant office was rented at the rate over $600.

-Business parks are fashionable these days. Some developers whose projects comprise a cluster of several office buildings promote them as business parks. What is your understanding of that format?

Business parks are quite common abroad. Unlike office centers they are located on city outskirts, not in downtown where land is expensive, on large territories, providing open-air parking facilities with a parking capacity much higher than the case is with conventional offices, for example 1 car-space per 40sqm. The entire campus shares the single infrastructure; buildings are low-rise developments 4 to 6 stories high, with beautiful views, ecologically clean areas and convenient transport access. Krylatskiye Hills, in particular, has a metro station in the vicinity.

Employers are offered a shuttle service from the metro station to the office and back. Many top managers and shareholders of companies renting space there live along Rublyovskoye Shosse and get to work by car. Even if a business park is situated on the city outskirts employees should be able to get to the city center quickly. Krasnopresnensky Prospekt, currently under construction in that part of the city near Krylatskiye Hills, will link Novorizhskoye Shosse to Krasnopresnenskaya Embankment. The avenue is designed as a high-speed highway with no traffic lights leading to the center of Moscow.

Here I have characterized the international model of a business park in general. In Britain we have seen parks built near railway branches; in Europe many people take a train to get to work. Not long ago we visited Hong Kong where we visited a business park, which is very similar to the majority of European projects. But there business parks are often financed and then let at moderate rates by the state, in order to promote IT companies. Unlike technology parks business parks do not feature manufacturing facilities.

In our county the demand is high both for business parks and industrial parks. I think that in the long run the government will come to realize the importance of those projects. Although, that is also the issue of the nature of the market itself. Our economy is strongly dependent on oil & gas prices and those prices have impact on rental rates as well. But, undoubtedly, one day office supply in Moscow will exceed the demand.

-Do you believe that office projects and business parks on MKAD and in the countryside have prospects?

I think that such projects have good prospects. You see, I think that serious no-nonsense manufacturers who could launch high-end production facilities in the countryside are yet to arrive in Russia. But they will arrive if the economy is stable. And they will generate the demand for large office parks in the countryside.

-What projects do you plan to launch in the near future, in cooperation with Millhouse Capital?

We are working on a plot of land in Moscow where we plan a business park measuring 30 to 40% more than Krylatskiye Hills. The investor has asked us to find several other projects which may be worth of developing, building sites, investment contracts, etc.

-You are planning a landmark project in Rublyovo-Arkhangelskoye, the City of Millionaires, jointly with Nafta Moskva. Earlier media reports said the compound will provide 100,000sqm of office space. Is that really so?

I do not have the authority to make any public statements on the part of investor.

-Do you pursue any projects financed by CMI Development?

We are working on several small office buildings in Moscow. In Moscow Region we are developing a country-home community and a residential estate.

-Your company is involved in several business segments of real estate. But what sector do you place special emphasis on?

Our main area of specialization is office and business park development. We also plan to take up warehouse real estate development. We think that format has very good prospects. Housing construction sector already has large and good companies. We also take steps to launch operations on other markets. We are looking into Ukraine, for example. Ukraine, I think, has very good prospects; one day that country will join the EU. Kiev is short of modern buildings, offices included. We also survey Eastern European economies. Some of those offer quite good prospects for real estate development, for example, the states of former Yugoslavia. Moscow and the Moscow Region are commercially attractive regions, of course, but those markets grow fast while other parts of the country are still largely underdeveloped as provincial markets grow unevenly.

-How do you visualize your role in real estate?

Our role is development. Development falls into several categories, if we can put it this way. Some companies invest own cash and run their properties on their own. Others work on their projects in partnership with other companies and oversee design and construction works. Then, there is what is called fee development where a company signs a deal with an investor and offers its services either for a fixed fee or for a share in the project. We practice both variants, working either for a fee with major investors, or, if our company’s share in the project is comparable to that held by the investor we invest our funds in the project. As a developer we oversee works at all stages beginning with selecting a building plot to letting spaces. But we have no general contractors within our group, building works are outsourced. We prefer cooperation with Western building firms. But we also run a department that controls building works. CMI does not run completed developments. That is a separate market niche. There is the company Sawatzky which may take over the job. Sawatzky runs Krylatskiye Hills.

-What are the strengths of CMI?

Our company comprises several key units which form the core of the company. There is a unit in charge of obtaining approvals for projects. It is headed by my partner Yakov Geiler. Our marketing unit led by Garegin Avetisyan is also quite important. Then there is a group that oversees construction works, headed by Grigory Agranat.

-Where is your head office located? How many people do you employ and how much you pay them on average?

The group employs 180 people. Our head office is on Krasnopresnenskaya Embankment. Salaries are $1,000 to $3,000.

-Do you plan to hire more people, expand operations?

We do not think we will expand the company. But we have a plan to step up cooperation with foreign developers with a view to promote joint projects. I think that such an approach is useful for Russian developers. We are mulling several schemes of cooperation. If we join ranks with international developers we will tap into their resources and know-how. They, on their part, will find a partner versed in the situation on the Russian market. I think that the Russian real estate market will witness growth in the form mergers and acquisitions.

-So you are ready to sell a share in your company, aren’t you?

Yes we are negotiating that issue with several European developers right now.