People in the Know: Green Light to Enter Big Business

Before that the company was building hotels and offices in Kazakhstan. Market operators suggest that Capital Partners has won support at the very top – from the presidents of Russia and Kazakhstan who agreed that the contract to raise the exquisite Ritz Carlton hotel should be awarded namely to that developer.

But Capital Partners’ Moscow-based CEO and the company’s most recognizable person, refused to go into the details of the deal and would neither confirm nor refute those speculations. However, he has willingly shed light on what impeded the project Metropolis on Leningradskoye Shosse and reported on the company’s plans for the near future.

-What has prompted the company to move into the Moscow market in the early 2000s?

The market’s great potential, of course. Along with our desire to achieve a higher level of growth. Earlier Capital Partners could be described as a local company, as we pursued our operations only in Kazakhstan. Having arrived in Moscow we entered the Russian market and then moved on to Europe. We believe that we have now become a company operating on international scale.

-How did you secure the site of the Soviet-era hotel Intourist for construction of Ritz Carlton?

Is that true that you acquired the plot from the company French Superior Ventures, from whom you have also purchased a site for construction of the complex Krasnaya Ploshchad (Red Square), the project first undertaken by French Superior Ventures and the federal government years ago, as early as in the 1990s?

In 2004, Capital Partners took over that project, including the right to leasehold on the plot and the investment agreement from the previous owner who had planned to build a Hilton hotel on the site. When we took over the plot we decided to raise a hotel of higher class, a luxury hotel. The government backed our plan. International consultants rank Ritz higher than Hilton.

-Experts put the cost of the project at $1 billion. What is the approximate amount of spending required and how soon do you expect a payback on Ritz Carlton?

For the time being, we would rather not divulge the final amount; the projected payback on the project is 5 to 8 years.

-We have learned that Ritz on Tverskaya Street is the chain’s first project in Moscow. Was it your company who invited Ritz Carlton to Moscow or was it their own plan to tap into the Moscow market?

Ritz Carlton is part of Marriott Group, which, as you might know, has been present in Moscow for several years now, particularly, on Tverskaya Street. The site in immediate proximity to the Kremlin is believed to be a very good location for a top class hotel. That was what occurred to us while we were looking for a hotel operator to run our future property. They agreed.

-Is that true that Capital Partners pursues projects mainly in Moscow and the Moscow Region? Do you focus on commercial real estate these days?

Yes, so far all our projects in Russia are in the capital and near Moscow. We also have projects in Kazakhstan and Ukraine. We also consider development of an Aegean seaside resort in Turkey. Our focus is office property development. We are set to build class A offices. I believe that construction of office centers and retail complexes still brings good revenues; this market has enough potential to last for several years both in Moscow and its countryside, as well as in other Russian cities with population over 1 million. The hospitality market, too, has good prospects.

-For many years now the city hall has been trying to launch a project aimed at building small moderately-priced hotel properties, with 2 to 3 star rankings. But so far little progress has been made. Investors are reluctant to sign up. What are the reasons, in your opinion?

To begin with, such hotels require long-term investment, as compared to offices and shops. Secondly, such hotels will take longer to pay back. In Moscow not all investors have come to terms with the idea of longer payback on development projects.

-Do you plan to build other hotels in Russia and Moscow, after Ritz Carlton is completed? If yes, will those be luxury hotels as well?

We have established a very good business relationship with the luxury hotel operator Marriott Group. If we are to enhance our presence in the hospitality sector, most likely we will work together with Marriott. We cannot rule out that if we find a suitable plot we will undertake construction of one more Ritz Carlton somewhere in Moscow, or, perhaps, in St. Petersburg.

-Your project Metropolis, a complex on Leningradskoye Shosse, providing shops, offices and leisure facilities, is no less interesting. We have learned that Capital Partners has purchased the right to the plot near the metro station Voikovskaya, along with the license for construction from a Russian investor. The previous owner had also planned offices on the territory of the former industrial facility Radikon that housed Snezhnaya Koroleva winter clothing store and Champion entertainment center. But the landlords reportedly urged their tenants to co-invest in the project and for some reason the plan fell through. Have you been informed about that?

It appears that journalists are better informed than we are. As far as I know, our company took interest in the property back in the late 1990s and secured the plot in 2004. It was then that we began design works and applied for permissions for development of a complex of buildings on the site. Today we are ready to begin construction.

-Now a few words regarding the tenants who rented space in the former plant building. Reportedly, some of them refused to leave their offices. The dispute received media attention and certain outlets blew it out of all proportion.

Indeed, at first they were reluctant to move out. For example some refused because they held long-term tenancies there. But we offered them space of higher quality in the future Metropolis.

Almost all companies who rented space at Radikon accepted our proposal. Among those are M.Video who will secure 3,000sqm in the new complex, Snezhnaya Koroleva (2,100sqm) and Champion Bowling (2,000sqm). But we have no obligations towards tenants who held short-term leases.

-Have you entered into preliminary agreements with all future tenants at Metropolis?

In 2006, we signed deals with our future anchors. This year we plan to come to terms with the others.

-What is the estimated cost of Metropolis?

According to rough calculations, the projected total cost of construction is approximately $500 million. The office section is expected to pay back in 5 to 6 years.

-Rumor has it that out of the three office towers of the future Metropolis one, measuring 22,000sqm, has already been sold. Is that really so?

We are negotiating the deal right now. Space in two other buildings will most likely be let although we have already received about a dozen offers from potential buyers. Two office buildings - the first and the second stages of the project measuring a total of 40,000sqm - are to be launched in 4Q 2007. The third tower, of 40,000sqm, is slated to be commissioned in 2Q 2008, simultaneously with the shopping and leisure complex.

-At what rates will offices be let at Metropolis?

Jones Lang LaSalle puts the rent at approximately 20% below the rate charged for centrally located class A properties.

-Capital Partners has announced that the shopping and leisure complex will measure a total of 215,000sqm. At what stage is the project now? Have you already prepared the plan of the first floor and the general concept of the mall?

Together with Jones Lang LaSalle we are working on the design of the project and future lettings. Architectural design services proper are provided by the British design bureau RTKL, Russia’s ABD and Turkey’s Oncuogly.

Operators who will rent properties at Metropolis are for the most part international brands such as Stockmann (7,500sqm). But anchor tenants will include a hypermarket store of the Russian supermarket chain Perekryostok (10,000sqm).

The project will also feature a food court comprising 18 restaurants.

-What's new as regards your logistics projects Pushkino and Domodedovo?

Pushkino was launched in late 2006; the project measures 212,000sqm. As to Pushkino II, we are currently negotiating the project with the government; the plot of farmland, designated for the development, has yet to be reclassified for industrial use. At regards the plot near the town of Domodedovo, works to prepare the site for building works are currently underway.

-When you acquired the plot for construction of a warehouse terminal in Domodedovo, had you been informed that your project could be included in the Moscow Region’s government plan to create industrial districts across the countryside?

Honestly speaking, we had no idea.

When did Capital Partners launched operations?

The company was established in Kazakhstan in 1996.

-In particular, Capital Partners has built two Renaissance hotels in Kazakhstan…

Our first hotel of the chain, providing 120 rooms, was raised in the city of Aktau and launched in 2005. Our second project providing 202 rooms was built in Atyrau and launched in 2006. We continue to pursue building projects in Kazakhstan. Our brand has presence in all the regions where our projects are underway.

-What kind of partnership do you maintain with Kazkommertsbank and Moskommertsbank?

Kazkommertskban is the key source of financing for Capital Partner’s major projects. Moskommertsbank is KKB’s subsidiary, but we do not deal with that bank directly. The majority of Capital Partners' projects pursued in Moscow and Moscow Region are financed by Kazkommertsbank. But the Pushkino terminal received funding from KKB only in the beginning, whereupon we refinanced the project and it was finalized with cash provided by the German bank Eurohypo. Meanwhile, in the summer of 2006 Capital Partners signed a 160 million euro refinancing of the Ritz Carlton Hotel with Merrill Lynch Capital Markets Bank and Aаreal Bank. Kazakh-based projects are financed by Kazakh banks.

-Who are the key shareholders in CP?

Those are two individuals, nationals of Kazakhstan and Turkey. I am not authorized to divulge their identities.

-Do you use a traditional cost split - 30 to 70%?

That depends on each particular project. Sometimes we provide 20% of own funds and raise bank loans to cover the remaining 80%.

-Who are your co-investors? We have been informed that the Pushkino project was co-funded by Lone Star Ventures.

Lone Star Ventures does not participate in any of our projects today. Pushkino was the only such project. At Pushkino they also acted partially as a developer. Later we moved to buy out all shares and secure sole ownership of the terminal. Capital Partners acts as an investor, developer, owner and operator of its projects. Part of cash involved in our projects is provided by the company's owners.

-What has prompted you to refinance loans raised for construction of your terminals Pushkino and Domodedovo, which is yet to be finalized?

International banks offer real estate development loans at lower rates than the case is with Russian or CIS banks. The refinancing deal for Pushkino amounted $130 million. You attended the opening ceremony at the terminal and could see for yourself that it had been finalized quite quickly.

-Do you think the Moscow market is ready for such refinancing deals? Are international banks ready to work with local developers? What are the terms offered by Moscow banks?

Many banks tap into the Russian market and pursue refinancing. But the projects themselves must meet certain legal and financial requirements, set by international banks. As regards Moscow banks, I think they are not able to offer the same rates of refinancing as international companies. Foreign banks' sources of funding are absolutely different.

-What units have been set up by Capital Partners to work on the company’s projects?

Our Moscow office employs approximately 60 professionals. We run a development unit in charge of securing permissions and licenses for construction. Then, there is a design department and a unit in charge of contracts. We also run units for marketing and lettings, legal and finance departments.

-Do you sell or let your properties yourself and do you enlist services of real estate brokers, for example, from the Big Four group of property consultants?

We can sell our properties on our own, if needed but we prefer to work together with brokers from real estate consultancies.

-Who are your contractors?

Metropolis will be built by Enka. Pushkino was raised by the company Stroiprogress.

-How long have you worked as a Moscow-based manager?

Since 1995. I started my career in Moscow working at Enka where I was in charge of planning office projects, everything that had to do with their costs and implementation; in other words, I was the one in charge of marketing and letting. I began working at Enka in the first years of its operations in Moscow. By the time I quit the company had already built 300,000sqm of offices. That was my the first managerial post in Moscow.

-What exactly had brought you to Russia?

After I graduated from Virginia Polytechnic University I stayed in the U.S. and worked there for approximately three years. Then I came back to Istanbul, my hometown, and landed a job at a development firm that was working on a number of projects in Russia. I was offered to join the team in charge of those projects and move to Russia and I found that interesting as the market here was only being formed.

-Have you ever considered starting your own business? How do you run your projects in other parts of the country? Do you run them centrally or do you employ managers for each location?

That depends on each particular project. For example, our projects in Almaty are run by highly experienced managers, some of them used to work in the U.S.

-What are the strategic plans of the company?

We are set to enhance our presence in Moscow and other parts of Russia, in the CIS countries (former Soviet states) and Eastern Europe. But I do not rule out that if we come across an interesting housing project we may undertake it.

-Do you consider the sale of your properties in Moscow and Moscow Region?

We are flexible. As you might know a Dutch firm Rodamco has acquired a 50% stake in the future Metropolis shopping mall before the New Year. We may sell some other projects or buildings on favorable terms. But not Ritz Carlton!

Erkan Erkek earned his master of engineering degree at the Polytechnic University of Virginia and graduated from the Istanbul Technical Univesity, with master’s in civil engineering. In the mid-1990s he joined Enka in Moscow, where he worked for 11 years. Afterwards he held the post of chief executive at Brunswick Real Estate. Beginning 2004 Mr. Erkek holds the post of chief managing director at Capital Partners.

The company was established in Kazakhstan in 1996. In Moscow CP has worked as investor and developer since the early 2000s. The most ambitious projects finalized by the company in Moscow are The Ritz Carlton Hotel and Pushkino logistics park. The mixed-use complex Metropolis and Domodedovo logistics projects are currently underway. The company has operations in Kazakhstan, Ukraine and Turkey. The data on financial turnover and the names of key shareholders are kept secret.