People in the Know: New Formats of Creativity

-Before 2005 BEL Development was a part of the company Bazovy Element (Basic Element). Today, it is affiliated with RAINCo. What is the reason for the transfer?

In the framework of our beneficiary shareholder Oleg Deripaska's plan to restructure the company’s asset management part of the assets were moved to the newly established company RAINCO (Russian-Asian Investment Company), which took over textiles, agriculture, horse breeding, aviation, Russkiye Oteli (Russian Hotels) and our company.

-Has restructuring affected your company's operations?

Before 2005, in addition to purely commercial projects we were working on a large number of private projects for our shareholder and projects for the group’s own use. In particular, we refurbished office buildings in St. Petersburg and Krasnodar for Basic Element’s local branches. . But following the restructuring a new firm was established to oversee internal projects and we are no longer involved in that work.

-Which functions have your retained?

Now we have become a multi-profile development company operation in Moscow and other parts of Russia in a number of sectors. One of those is warehouse real estate. In particular, we have built a class A warehouse complex in the town of Vidnoye. What’s more, we operate this property ourselves. We pursue office projects in Moscow and other Russian regions. Thirdly, we develop hotel properties. Our first hotel project was a boutique hotel Rodina in Sochi, later we used our experience accrued in Sochi to launch projects in Moscow. In Krasnodar, we are raising an upscale residential estate. We do not have projects in countryside real estate or mass housing construction. Altogether, we are a niche-oriented company, we do not seek to control a certain share of the market so as to vie, for example, with such firms as SU-155 in housing or Mirax or Mosenka in office real estate. We go our own way, trying to find vacant niches and tap into those before the others and to create one-of-a-kind projects, such as nobody ever did before.

-What was your financial performance in 2006?

We are not a public company and we do not publish our financial results. I can only say that our projects are worth over $250 million.

-Is it difficult to find those new niches?

We launched our first projects in the province in 2002, almost immediately after BEL Development begun, and we were among the first. Today, five years later, almost all major Moscow-based developers have operations in the regions. We were the first to arrive in Sochi where we undertook a project to refurbish the city's best sea resort Rodina. In Soviet times this resort, then known as Rossiya, was part of the 4th Main Department of RSFSR Health Ministry. Back in 2002 nobody could imagine that Sochi would compete for the right to host the Winter Olympics and the economy would grow at accelerated pace. But it turned out so that BEL Development had made a correct guess. The same happened in warehouse property sector. As early as in 2002 we realized that with retail industry booming and developers focusing on mall construction the demand for storage space would grow in near future. Also in 2002 we began working on a warehouse project in Vidnoye and launched construction in 2003.

-How do you manage to be ahead of your rivals? Does anyone in your company have a gift of foresight?

We have a shareholder (Oleg Deripaska. - Vedomosti), who has a deep strategic insight and he is the one who in charge of many crucial decisions. Then, the company has a board of directors comprising experienced and competent people, and executives. We watch the market, examine vacant niches and find areas where our services are in demand. Of course all strategic decisions are taken by RAINCO but the projects are proposed by our company management.

-You have said that the company explores vacant niches with a view to carry out development projects there. But for any development project to be implemented it is necessary to secure a building plot. How do you manage to secure plots?

There are different ways. Some plots were acquired on secondary market, as for example our site in Gorokhovsky Pereulok [side-street]. We have plots, which we are developing in cooperation with our partners - MN-Nedvizhimost, the company that owns the building of the Moskovskiye Novosti publishing house and Nikita Mikhalkov’s Studio TRITE, which owns a plot with a building on it in Maly Kozikhinsky Pereulok.Then, there are plots that we have won at tenders.

-Did you take part in tenders held by Moscow city hall?

The company Verin Vel, which is part of RAINCO, is the authorized company of the Moscow government, awarded that status as a result of an open competition. We took part in the tender held by Verin Vel and were awarded a contract to build a 3-star hotel on Magnitogorskaya Street in eastern Moscow. .

-Basic Element owns vast land resources. Have you received any plots following the company restructuring?

Our only freehold is a 6-ha plot in Vidnoye, where our warehouse complex is built. We are a fee-developer. The company provides development and property management services but we do not retain title to our developments.

-The warehouse project in Vidnoye was launched in 2002. In those days the majority of developers made profits by raising homes, offices and shops. Returns on warehouse development were difficult to predict. What rates of return have you secured?

The average rate of return on a storage project is 22 to 24%. Our results exceeded the market average. . Why? We were the first to arrive.

-How long does it take a warehouse project to pay back?

Five years, on average. We will surely get a payback in 5 years, as we have already signed tenancies with two tenants. One of those is the retail chain Kopeika, the other is the logistics operator Mont Blanc. Warehouses bring good returns. Properties are let on terms that are favorable for us. In 2005, when our complex was launched that sector was the landlord's market and we took advantage of the situation.

-With the project being that successful why haven't you undertaken other warehouse projects?

Perhaps, the land issue is acute for all developers. But that is not the key issue. As I said before our corporate strategy is to be the first in various segments. If we had stopped and focused on warehouse development we could have missed out on some other important segments. In particular, we have undertaken hotel projects. Our strong point is that we are able to move into a new segment fairly quickly. Back to warehouses, today plans have been announced to build hundreds of thousands of square meters of storage space. But some of those projects will never be completed, or their developers will fail to secure desired returns. Why is it going to happen? Because they are late. We do not want to be in their shoes, that is why we are looking for segments where we can secure a foothold and make good money. Although we do not rule out a possibility that in the future we will again undertake warehouse projects.

-Russian developers are reluctant to join hotel projects. Hotel development is time-consuming and paybacks are longer. Was your decision to launch a 3-star property on Magnitogorskaya Street in Moscow fuelled by desire to take a shot at a new niche?

But we have more than just one hotel project! We have already begun construction of several projects in that sector. Our first hotel project was Rodina in Sochi. In Moscow, in addition to the Magnitogorskaya hotel we are planning a boutique hotel on Tverskaya Street, in cooperation with MN Nedvizhimost and an apartment hotel in M.Kozikhinsky – together with Studio TRITE. Hotel development is rather complicated, perhaps, it is the most complicated segment in property development. Already in early stages the developer requires services of a consultant or an operator of the future property. The cost of hotel development is much higher than the case is with any other property. But look what is happening on the Moscow market today! New hotels are being launched, take for example Holiday. Those are 3+ star hotels but what rates they charge! $300 per day. Developers who enter this market now have an advantage. I assure you that their financial results are quite good. Consider the recent developments on financial markets. We have seen arrival of investment funds, banks that are ready to finance hotel projects. Today, you don’t have to build a hotel solely at your own expense. An experienced developer with a flawless title and an experienced operator is able to raise a bank loan as early as during construction stages.

-What do you offer as a security for loans?

Our project, i.e. our title to the plot and the uncompleted development.

-Which banks agree to finance your projects on such terms?

Sberbank, for one. Banks are even more willing to lend after building works are completed. You can complete the project and secure a long-term loan. It is no secret that today banks issue loans for up to ten years, as compared to 4-5 years of several years before. Then, there are investment funds willing to take over completed developments as well as options for completion of those projects. Of course a project raised at the builder’s own expense pays back longer. But paybacks are shorter if the developer raises bank loans, or if he agrees to sell the project to an investment fund after it is completed. Today, hotels in Russia bring higher returns than in Europe.

-Is Rodina a refurbishment project?

Yes, we have rebuilt the Soviet-era health resort into a format that was new for Russia.

-How much did it cost to refurbish Rodina?

Approximately $40 million.

-What is the expected payback?

This question should be addressed to Russkiye Oteli (Russian Hotels), the company that runs the project.

-What is the price of a room at Rodina?

9,000 to 10,000 rubles per day, depending on the time of the year. In Moscow, the 3-star hotel Holiday charges just as much. But at Rodina the quality of service is much better, rooms measure 60sqm or over. All rooms have balconies. The total area of the resort is 14 ha.

-What could you say about paybacks on BEL’s hotel projects in Moscow?

Our 3-star hotel can pay back in 8 years or longer. As to other projects I am not ready to give precise figures as yet.

-But eight years is quite a long time; most developers are reluctant to take the risk.

Why not? They take it. The rivalry for hotel building plots today is no less strong than the case is with housing.

-Several years ago Moscow government invited bids for hotel construction but companies that secured plots designated for the purpose used them for construction of properties other than hotels. For example, instead of hotels they raised offices. Has the situation changed?

The city hall has made a wise decision. On the one hand, it banned changes to functional uses of plots, on the other offered benefits to hotel developers. Those measures will have a positive impact.

-When are your hotels to be finalized?

Our hotel at 16/2 Tverskaya is to be completed in 2009, as well as the apartment hotel at 11 M.Kozikhinsky and a hotel at 2 Magnitogorskaya.

-Apartment hotels are new to Russia’s hospitality market. What are the specific features of such properties and what will your hotels be like?

An apartment hotel is a hotel providing long-term accommodation. Our hotel will be 7 stories high, measuring a total of 8,100sqm and providing an underground parking for 49 car spaces. The first two floors will house administrative services of the hotel and an office of Studio TRITE. Other floors are reserved for apartments – the total of 25 including two penthouse units.

-Could you shed light on your business center project?

The property will be built in Gorokhovsky Pereulok, near the Kurskaya metro station, on the outer side of Garden Ring. It is noteworthy that earlier developers were keen on building offices within the Boulevard Ring, later they said they wanted their projects to be within the Garden Ring, and today, due to heavy congestion in the city center sites like ours have an advantage. We offer a very convenient access to Third Ring Road, Tupolev Embankment and exit from Garden Ring. The location is quiet and prestigious, with the Embassy of Ecuador, Sergei Andriyaka art gallery and a park nearby. Remarkable in architectural style, the building will be 6 stories high and a two-level underground parking facility. The total area is 12,600sqm. The project will also provide space for a dining area and units that could be used as conference venues.

-Is the property on the tenancy market already?

It makes no sense to put the project on the market ahead of a certain time. That will not happen until the carcass is in place, approximately a year before construction is completed.

-Who owns the business center?

RAINCO owns all projects by BEL Development. Our company is a developer, in charge of all works on the site. Our plan is to finalize the property until units are ready for letting and then we will decide whether we will run the business center ourselves or a special company will be set up for the purpose.

-The general contractor for the business center is the well-known company Rebau. How much importance do you attach to your contractors’ qualifications?

If we are to create a class A property it must meet certain quality standards. This pertains primarily to engineering systems, planning solutions and quality of construction works proper. Rebau is company with a high standard management. The project will be equipped with top-end engineering systems enabling tenants to use their spaces effectively.

-But is not hiring a foreign contractor more expensive than the case is with domestic builders?

Surprisingly, at first it may seem that hiring a Russian contractor is cheaper but, as the adage goes, the greedy pay twice. Quite often it happens so that the final price we pay to a Russian contractor proves higher as most Russian firms are reluctant to work for a fixed fee. They are used to working with budget estimates adjusted to inflation, etc., as a result the final amount for works accomplished under the contract proves even higher than the case is with foreign companies.

-RAINCO is the owner of the factory Tryokhgornaya Manufaktura. The company plans an ambitious construction on the site after the production facility is relocated. Is your company involved in that project and at what stage it is now?

In the years 2002 and 2003 we worked on the plan for future development of that territory. The site is enormous, it measures over 9 ha. Our proposals and conclusions were then submitted to the shareholders and managers of the factory. On the basis of those proposals the company Tryokhgornaya Manufaktura established its own company TM Nedvizhimost, which is now implementing the concept and operates the factory properties. Tryokhgornaya Manufaktura is an operating manufacturing facility and the first step that needs to be taken before new construction is launched is the withdrawal of production units to a new location.

-Has the timing for the launch of construction on the site been set already?

That question should better be posed to the management of Tryokhgornaya Manufaktura, not to us. But then, there is a decree issued by the Moscow government, setting the timing for the withdrawal.

-Why have you chosen Krasnodar as a location for your first housing project, and not Moscow? Do you think that the market of upscale real estate in Moscow is saturated already? Or perhaps, you could not find a suitable plot, good designers or are their financing problems?

The problems we have are the same as with all other developers. It is quite difficult to find a building plot for construction of a prime residential estate [in Moscow]. Plots available in the secondary market are very expensive. And even considering that prices [for homes] grow stably such projects do not necessary bring big returns. In our opinion, our Krasnodar project will be very sought-after and bring good returns as prices in Krasnodar grow faster than in Moscow.

-Do you plan any project in Sochi?

Our company has no such plans. But our affiliates in RAINCO pursue several important projects in Sochi. For example, they are involved in construction of Sochi Airport. Basic Element is building sports venues.

-What gives you an edge over your competitors?

We do not have such advantages as the so-called “administrative resources" (strong government connections and backing) or large volumes of completed projects but what keeps us afloat is flexibility and professionalism of our team. We know that you have to offer the market something that makes your product different from those of other developers. We have succeeded in that.

-What are your plans for the future?

We are set to continue exploring new formats, new niches and trying to be the first. For example, we used to work with a famous Boston-based firm Venturi, Scott Brown and Associates Inc., which designs scientific centers. That is when the territories of research units are used for development of office projects, for example, to meet the needs of IT companies. In Russia such projects are rare. There are business parks, of course, but they are reminiscent rather of offices. Scientific centers may provide conference facilities, libraries, reception areas. Thus, the same building may serve as a venue for conferences and meetings, house research labs, i.e. specialized units. Hundreds of thousands of square meters of office space enter the market. But projects must differ from each other. They must not look similar. For example, it could be possible to create an apartment hotel on top floors of an office building, that is a good idea as it creates hotel rooms and makes the building special. Then, one could find a unique solution for combining offices and a shopping mall. That is what the development is about, aimed at creating something new, something that will be sought-after in the market.