Money Growing: Exploring Arrivals
Airports are major transport hubs that are quite likely to become growth points for the region’s economy in near future. Today it is too early to speak about that but there are all preconditions for that, says Roman Sokov, head of consulting at Becar Commercial Property. Vladimir Zhuravlyov, head of commercial real estate and investment at NAI Global, says: “The territories of Moscow airports possess two properties which make them highly attractive for commercial developers. They generate high passenger turnover and are located in the areas with good transport accessibility." Furthermore, "given their role of gigantic transport hubs airport properties attract logistics operators, hence the soaring demand for warehouses, offices, hotels and shops,” he adds. “Areas around airports are for the most part free from any extensive build-up, creating opportunities for comprehensive development on a large scale, which appeals to builders," adds Mikhail Gets, vice-president at Blackwood.
What to Build?
Property analysts believe that areas near Moscow airports offer good prospects for development of any type of property. “Sites adjacent to the airports are suitable for construction of offices, hotels, leisure facilities and storages,” Alexandra Kadchenko, deputy head of research and analysis at Praedium, says. However, when deciding on the most preferable use of the future project developers are to proceed from specialization and size of the concrete airport.
“When examining prospects of development projects near airports one should take into account the market orientation and the pace at which the given airport is growing, as it generates demand for commercial properties. Also of importance are location and transport accessibility, as well as proximity to residential and commercial activity zones already established in the area. Only after all those parameters and characteristics of specific sites are thoroughly examined it is possible to evaluate the prospects of property developments there," says Viktoria Bekasova, senior consultant at Colliers International’s valuation and consulting department. Airport-related territories are suitable for development of showrooms, hotels, business parks, shopping malls, leisure centers, homes and industrial facilities, she says.
Development of those territories hinges largely on specifics of general plan for urban development adopted by local authorities. “In France, in the course of the first eighteen years since Roissy/Charles de Gaule was launched areas around the airport witnessed more active development of production and distribution facilities rather than offices as the airport is situated at a distance from the centers of commercial activity, in a less prestigious part of the city. At the same time, another Paris airport - Orly - became a central location for offices of hi-tech firms, educational and research facilities," Viktoria Bekasova reports. It was not until the Orly area ran out of opportunities for further growth that the development s of territories around Roissy/Charles de Gaulle began. Development of commercial activity zones around Dulles Airport Washington in the U.S. was triggered by construction of new roads, she continues. In addition to improvements in the road infrastructure, the development of Washington’s office market towards Dulles and an active promotion campaign held by the airport itself also played their role.
“Airports and their development strategies largely determine the cost of land within the radius of up to 100 km. For example, the value of plots of land designated for countryside residential development along Kievskoye Shosse grew from $1,000 to $20,000-25,000 per 0.01 ha (100sqm) over the past years. The new road linking the city to Vnukovo Airport has given a major boost to the property market in the area,” says Ilya Shershnev, development director at Swiss Realty Group. Hence, uses of properties planned near airports also depend on the specifics of airports, he explains.
“As to warehouse properties, it is more reasonable to build them in near proximity to airports which focus on cargo transportation. Warehouses on airport territories are of particular interest for companies involved in export/import operations and logistics operators," holds Alexandra Kadchenko. Office projects within airport zones also pay back well. Prospective tenants of such complexes are airline companies, travel agents, logistics firms, etc. "Construction of offices near airports is quite common in developed property markets, for example, in Western European economies with well developed road infrastructure. Developers benefit from their projects’ proximity to existing transport routes. Besides, many firms are interested in offices near airports as their employees often go on business trips. Thus, they can save on taxi fares," says Irina Florova, head of research at CB Richard Ellis / Noble Gibbons. .
Areas around passenger airports are most suitable for hotel development, analysts believe. “The demand for rooms will be generated by tourists and business travelers, transit passengers and passengers whose flights are delayed," says Alexandra Kadchenko.ra Kadchenko.
Unlike storages, offices and hotels, retail properties are hardly desirable in the areas around airports, property consultants admit. “The prospects of major mall projects near airports are dubious, as passengers are quite content with a choice of shops on airport premises, such as news stands, gift shops, grocery and duty free shops,” holds Alexandra Kadchenko. Roman Sokov also puts homes on the "black list" of projects which are unlikely to succeed if built near airports. "High noise levels and poor ecology in territories around airports rule out housing and shopping projects there,” the expert believes.
Ilya Shershnev says that any construction project near airports brings good returns, which may prove much higher than those of the airport itself. “This is precisely the reason why building plots [near airports] are often acquired by companies who own or run the airport concerned. This strategy is the best type of land development whereby capitalization of territories increases owing to infrastructure available in immediate proximity. The airport, on its part, is one of the constituent components of that infrastructure, likely to boost the value of land hundred- or even thousand-fold in the course of 10 to 15 years,” he says.
Ambitious Plans
Companies that run Moscow airports have been aware of the benefits of investing in development of surrounding territories. “Moscow airports are favorable locations for commercial development. As such, properties raised in the area, being closely related to the demands of the airport proper, are not independent property units,” says Vladimir Zhuravlyov. Much depends on the specifics of the airport in question. Domodedovo places emphasis on offices and storages as the airport services a large number of cargo flights, whereas Sheremetievo and Vnukovo focus largely on passenger flights, generating demand for hotel properties.
Each airport actively promotes its plan for development of adjacent areas. The first to announce its plans was Domodedovo Airport. East Line, the company that runs the airport, plans to build a complex Airport City, featuring a 9-storied class A office complex providing 20,000sqm of prime space, a 4-star hotel with 400 rooms and a multilevel car park providing 4,000 car sports. The airport itself will feature a shopping and leisure complex Domodedovo Plaza with restaurants, shops, a multiplex cinema, recreation zones, a small hotel, children’s amusement zones, etc. East Line has secured freeholds near the airport with a view to launch more commercial projects there. “The company plans further development of territories around the airport, Including construction of an exhibition center, business parks, logistics and industrial facilities, filling stations and restaurants," Alexandra Kadchenko has reported. The company Capital Partners has already begun construction of a 600,000sqm logistics park at a 12-km distance from the airport. “Territories around Moscow’s airports have also attracted major developers. Large cargo flows have a positive impact on the development of logistics," Yevgeniya Akimova, marketing and market research manager, explains. Alexander Novikov, head of office real estate at Prime City Properties, says that many companies whose activities are connected with operation of this airport, rent offices near the Paveletskaya metro station, which is directly linked to Domodedovo by rail.
Sheremetievo Airport, too, has seen active commercial development lately. “The largest concentration of commercial properties is registered namely near this airport. Construction of the Sheremetievo III terminal is underway. The new terminal will provide shops, restaurants and cafes,” says Alexander Novikov. Class B business center Sherrizone, measuring 3,6000sqm, was finalized in 2006. The 7,200sqm Best Western Hotel Sherrizone is planned in the vicinity. But main projects are yet to be launched. East Line has expressed interest in the areas near Sheremetievo. In 2005 the company, together with Moscow River Shipping Company, acquired a 750-ha freehold for $150 million near Sheremetievo I. The partners plan 5 million square meters of housing, offices and storages on the site. The plans include construction of a business park measuring 1.8 million square meters, 800,000sqm of business-class apartments, a first class hotel of 500 rooms and 850,000 to 900,000sqm of logistics facilities. The project is estimated at $4 billion.
Another Moscow Airport, Vnukovo, is not far behind Domodedovo and Sheremetievo. “Implementation of a large-scale plan for strategic development of Vnukovo began in late 2003 after the Russian government transferred the controlling interest in the airport to Moscow city hall. Today, the Moscow government takes active steps to develop Vnukovo as an alternative to other airports," Viktoria Bekasova has reported. The government plans to spend $1.3 billion on infrastructure-related projects in Vnukovo. For example, there is a plan to extend a rail link between Kievskaya train station in Moscow and Vnukovo Airport to Moscow international commercial center Moskva City. Other developers, too, have been increasingly active in the area. Pavel Fouks’ company MCG is set to spend $250 million on the development of a logistics terminal Eco Logistics 15 km from Moscow outer ring road on Kievskoye Shosse.
MCG plans 350,000sqm of warehouses and 30,000sqm of office space on the 73-ha plot.
“Moscow has only three airports to meet its demand for flights. That is why each of those has very good prospects. In terms of location Moscow airports do not compete with each other,” says Andrei Bushin, head of commercial real estate and development at Miel Nedvizhimost.
Truth in Discussion
Market participants argue the projects of which airport are most interesting. “In my opinion, Sheremetievo International Airport is the one with the best prospects," holds Roman Sokov. Vladimir Zhukov disagrees. “Today, of all Moscow airports Domodedovo is the one with the best prospects. The airport does not only generate huge passenger flows but major cargo flows as well, creating opportunity for development of a wider range of commercial projects. Besides, it is the only airport operated by a company that holds ownership in a large number of territories around the airport,” he says.
Vnukovo, on its part, is not yet able to vie with other two airports. “Each [airport] has certain advantages and can compete with each other on par. Given the proximity to the VIP terminal used by senior government officials in Vnukovo delays of 1.5 to 2 hours are usual. But the road linking the city to that airport is the best Moscow has today," says Ilya Shershnev. .
Development activity in the areas adjacent to airports is likely to have influence on distribution of passenger flows in the future. But this is connected first and foremost to construction of new terminals. “Since the moment a modern terminal was built in Domodedovo, this airport has no worthy rivals. The development of Sheremetievo International Airport was put on hold in the wake of conflict between shareholders whereas Vnukovo did not provide necessary infrastructure and sufficient passenger capacity to compete with Domodedovo. Thus, a significant number of airline companies saw no alternative to Domodedovo. But recently the situation has changed radically,” says Viktoria Bekasova. After the owners of Sheremetievo came to terms with each other Aeroflot spun off a subsidiary tasked to build the new terminal Sheremetievo III. The new terminal will help Aeroflot to become a full-fledged member of Skyteam. Sheremetievo III will handle all flights operated by Sheremetievo and its Skyteam partners. But the future of that project is not so bright as it seems.
A Fly in the Ointment
Irrespective of ambitious plans nurtured by developers disputes over property titles to land and airports as such have marred the general picture for years. “The airports Vnukovo and Sheremetievo have long been embroiled in conflicts arising from title to those properties. In the long run, Moscow [city hall] has secured a controlling interest in Vnukovo and the airport, that earlier paid taxes to the budget of the Moscow Region, was placed under control of the capital. Sheremetievo, albeit located outside the city boundaries in the Moscow Region, continues to pay taxes to the city budget. Although, technically Sheremetievo is federally-owned,” Vladimir Zhuravlyov says. Court litigations impede commercial development of territories adjacent to Moscow airports, he says. For example, the project to build Sheremetievo III had to be put on hold several times over the past five years due to lack of clarity in its ownership structure. For a long time authorities in the Moscow Region and Moscow city hall claimed the title to airport territories. It was not until late 2006 that the presidium of the Higher Arbitration Court of Russian upheld Moscow Region's title to the airport.
The situation is more transparent as regards Domodedovo, Vladimir Zhurvalyov says. The site occupied by the airport is federally-owned while the areas around the complex are held by companies affiliated with East Line. “The company has reserved 64,000 ha of lands of various uses, having acquired 2,500ha of arable lands from the former farm Yamskoye, and registered the remaining areas as high noise impact zones or territories reserved for prospective development,” he explains. But the dispute between East Line and Rosimushchestvo, Russia’s federal property management authority, that had lasted for many years was settled only in October 2006; before that the federal government threatened to rob East Line of control over the airport.
“Of course, developers are not happy about such disputes on the government level. A change of title may cause delays in implementation of the project. Nowadays, the procedure of reclassification of functional uses of lands is time-consuming and may take up to 12 months. This situation is fraught with additional problems for developers,” Yevgeniya Akimova explains. But Ilya Shershnev believes that the government is unlikely to do the same mistakes as it did before and waste more years on dispute over rights to airports. “I am convinced that should the existing tendency be preserved the government will apply every effort to establish full control over the industry in near future. Most likely, something similar to BAA (British Airports Association) or Airports de France will be established on the basis of Moscow airports. An analogous entity could be established in Russia as early as within the next two to three years. The prospective value of lands around airports has already risen by a maximum possible increment. All that is left to do is to develop the infrastructure so as to create conditions for implementation of construction projects in the area," the expert says.
At any rate, says Vladimir Sergiyevsky, analyst at Finam, “problems of legal nature have never been a serious impediment for implementation of development projects in Russia”. “Commercial developments near airports have great prospects as the demand for office, retail and warehouse space grows. In this connection there is a certain group of tenants who attach importance to proximity to the airports. Given the general tendency towards decentralization of the Moscow office market we may forecast an increasing interest in airport-related real estate on the part of other companies, even those not directly involved in carrier services,” says Alexander Novikov.