Money Growing: Properties of Powers That Be

The federal government still has not abandoned its plan to put up the parliamentary properties for sale. But the sale is not expected to take place before this year's vote, chief of the presidential property management department Vladimir Kozhin said in early 2007. The press-service of the department confirms Kozhin's statements, as does the official website of the Federal Council. It is also true that both the upper and lower houses of Russian parliament are to move to a new Parliamentary Center building, which is one of the reasons for the sale of old offices. The plot allocated for construction of a 200,000sqm Parliamentary Center is to be found near Belyi Dom, the seat of the federal government, on the site of the sports stadium Krasnaya Presnya, across the street from the book-shaped building of the Moscow mayor's office. The project is estimated to be worth $300 to 400 million. The government plans to offset the costs by selling the buildings of State Duma and Federation Council.

Admittedly, residents of Krasnaya Presnya district were very unhappy to hear about the plans and held numerous protest actions urging the authorities to preserve the stadium, one of the oldest sports facilities in Moscow. State Duma deputies, too, suggested that a different site be chosen for construction. There were plans to build the parliamentary center on the territory of [the Moscow international business center] Moskva City. But the project will be raised next to Belyi Dom, Viktor Khrekov, spokesperson and adviser at the presidential property management department, has confirmed. The idea to find a new building was put forward by parliamentarians themselves, Khrekov said. The reasons for the move are quite understandable: it is high time for the two houses to be seated together, not on different streets; besides, the buildings they occupy now are obsolete while the new center will bring them closer to Belyi Dom. As to local residents, "the issue has been settled by the government of the capital", he said. The property management department, on its part, has been instructed to develop the concept of the future Parliamentary Center. The sale of old buildings will be prepared by the Ministry for Economic Development and Trade, as Kozhin had many times reported before, Khrekov said. The developer and general contractor are yet to be selected. To all appearance, the role of the developer will be assigned to a company controlled by the property management department, while a general contractor will be selected at a tender. After nearly two years building works on the site still have not begun. Khrekov does not rule out that the reason for the delay is the vote planned this year – the government is too busy with preparations to think about real estate.

How Much is the State Duma?

The offers to buy the State Duma or the Federation Council are rarely made by the government. But market participants' opinions on the appeal of those facilities vary. Some believe those properties are a tasty morsel, given their central location. Others point out that few investors can afford to purchase and put those properties in order. Still others say that a serious disadvantage of both properties is Soviet-era floor plans and obsolete engineering systems; therefore, restoration projects may fail to pay back.

“As to acquisition of government-owned properties on a competitive basis, most likely, each of those facilities will be sold in one piece, and not by separate units,” say Alexei Belousov, commercial director at Capital Group. Sergei Tyurin, deputy general director at MosCityGroup, a development company, is convinced that the properties will be sought by major investors. But both buildings will require refurbishment. Most likely the government will hold an open tender and invite bids from prospective investors on certain conditions; the owner, in the person of an authorized government body or organization, will propose a development concept, discussed with and approved by all bodies concerned. As a condition, the buyer will be required to reimburse the costs the agency in charge of preparing the bid will incur. Investors, on their part, will most likely be more interested in the plots land beneath those buildings rather than buildings themselves. Therefore, in the future the idea of their “delicate demolition” will be raised inevitably.

Andrei Zakrevsky, senior vice-president at the real estate consultancy Knight Frank, says that the offer may prove attractive for major financial and industrial groups. Both buildings are prestigiously located. Many firms dream about offices near the Kremlin. Provided the buildings of the State Duma and Federation Council undergo major refurbishment they may as well be transformed into prime class A offices. Today, 1 square meter of office space in the State Duma building is valued at $5,000. Following the refurbishment (at the cost of $2,000 to $3,000 per 1sqm) the rate may reach $10,000 per 1sqm. But it is also possible to continue using both buildings in their “as is” state. In addition to offices, the State Duma building could also house a cultural center, conference facilities, etc., Zakrevsky says.

But Larisa Afanasieva, head of valuation and consulting at Colliers International, is quite cautious in her estimates of the prospects of both buildings. "We can only make guesses about what condition they are in. They are excellently located. But it is difficult to say now at what starting price the State Duma and Federation Council building may be put up for sale . Before purchasing a building any investor commissions a marketing survey,” she says. Prospective investors will need to examine the offer thoroughly and carry out technical and architectural expert examinations of properties. . It is clear that floor plans and engineering systems in place fall short of class A criteria. The advantages are their location and spaciousness. Such large buildings could be suitable for a mixed-use complex featuring hotel rooms and offices. Their market price can be estimated as early as now on the basis of calculations of refurbishment costs and future returns. If investment is minimal the properties will remain viable for a certain but rather short period of time, as their concept is obsolete. But the future owner may opt for operating the buildings for some time and then use proceeds for capital repairs. Another option is to pledge the property as collateral to secure a loan for its rebuilding. A mixed-use facility in that area is likely to pay back as soon as in three years. But few companies will be able to afford acquisition and refurbishment of parliamentary buildings, Afanasieva says. It cannot be ruled out that redesigning those government buildings as class A offices will prove unviable.

“The State Duma building can be used as a mixed-use complex, considering that it provides an enormous canteen and conference facilities. Incidentally, conference halls could as well be used as show rooms," says Sergei Tyurin. “Investors may deem it more appropriate to pull down the entire property and raise a new mixed-use from scratch, maybe even a hotel and exhibition complex. But the cost of refurbishment will be high.”

Sergei Polonsky, chairman of Mirax Group corporation, believes that sale should be fair and open for all investors. It is quite another question whether every prospective bidder has sufficient technical resources for implementing new projects on those sites. Mirax’ Polonsky is inclined to believe that both buildings should be pulled down to vacate space for new developments, rather than refurbished. In Russia there are not more than 7 or 8 companies which are technologically equipped for the job. Those include Hochtief, Enka, Capital Group, Don Stroi and Inteko. In order to find out who has enough cash to afford the project, suffice it to have a look at Forbes lists.

As such, the government’s readiness to sell those properties is a correct move, Polonsky says. Government bodies are not supposed to own and run a large number of real properties, nor take active part in market operations. It is not customary in developed markets. In France, for example. proceeds from real estate operations account only for 4% of budget revenues. In Russia, this figure, perhaps, exceeds 50%. “This idea – of selling the parliamentary buildings – was first proposed to the government by myself two years ago. Apparently, administrations do heed market participants’ opinions after all,” Polonsky says. He believes that the sites concerned could be used for development of quality hotel facilities, residential estates or malls. Much will depend on the size of returns on various commercial uses in 3 to 4 years.

The Ministry for Economic Development and Trade refused to specify what agency would be in charge of organizing the sale. Numerous departments of the ministry failed to answer our questions. Apparently, the ministry’s specialists have not yet received orders from the presidential administration. And even the ministerial press-service could not say when the parliamentary buildings are to be put up for sale.

Parliament on the Move

The upper house of Russian parliament was not always seated at 26 Bolshaya Dmitrovka. Earlier that building housed the House of Press (Dom Pressy), which later was hastily moved to a different location, as the government bodies apparently ruled that the property was too good for journalists. But there is something parliamentarians do not like about the building. As early as in 2007 Federation Council chairman Sergei Mironov said that the house leadership was looking around for new offices. Units measuring 13sqm per one senator and his or her two aides are too small, he explained. It was then that the house asked the presidential property management department to find a new office building for the Federation Council. Admittedly, in those days Mironov said that new construction was not necessary. But apparently the authorities failed to find a building that would meet the civil servants’ requirements.

Nowadays, not all departments of the upper house are situated on Bolshaya Dmitrovka. Some units of the Federation Council occupy spaces at 19 Novy Arbat, others have offices on Tsvetnoi Boulevard.

Incidentally, the site on Tsvetnoi Boulevard has recently been acquired by Capital Group. Alexei Belousov, Capital Group’s commercial director, has confirmed that the company is raising a mixed use complex Legenda Tsvetnogo (Tsvetnoi Legend) on the site. The project will provide offices, homes and the library of the parliament, run by the presidential property management department. In the Soviet time that spot was occupied by a building of the Moscow Communist Party Committee’s social and political center. The building was confiscated by the Supreme Council of Russia in August 1991 and transferred to the Parliamentary Center of Russia; three years later the Federation Council took over the property.

Perhaps, it was the Tsvetnoi Legend project that sowed confusion in the public and many came to believe that both houses of parliament were to move to Tsvetnoi Boulevard, and not to Krasnaya Presnya. After someone had learned of various uses of the Legend rumors emerged that the new Parliamentary Center would feature fitness facilities, bowling alleys, shopping malls, etc. But the future Legend on Tsvetnoi and the Parliamentary Center planned on Krasnaya Presnya are two different projects. “Capital Group’s plans have nothing to do with our plans for construction on the site of Krasnaya Presnya stadium," Viktor Khrekov emphasized.

“We would gladly take part in construction of the new Parliamentary Center if we were invited to,” Sergei Polonsky admits. He believes that private real estate companies should also take over the tasks of elaborating the concept, overseeing development and running the future facility. "Neither the [president’s] property management department, nor any other government bodies are professional participants of this market. Elections are at hand and they no longer have time to spare for the projects. It is not surprising as this is not their job in accordance with the law of developed states," he says. Polonsky puts the cost of the 200-square-meter project at $500 million. Mirax Group will take part in all tenders held in connection with the project, he added.

Encyclopedia for Government Officials

One of the recent cases involving state-owned properties in Moscow worthy of mentioning is that of the hotel Rossiya (Russia Hotel). Discussion of the planned relocation of Moscow city hall to a new office complex in Moskva City also continues. Addressing the MIPIM property show this year Vladimir Resin, chairman of the Moscow city construction industry department, said that the new building would be raised in 2.5 years. Moscow city government has revised its plans for this project several times. As a result, the cost of the project climbed to $2 billion; to raise the amount the authorities needed a solid private investor. In 2002, the city hall said that the projected area of the complex would be 217,000sqm, and put its value at $260 million. A construction industry department official close to the project has reported that the planned investment had initially grown to $1 billion, and later reached $2 billion; such an increase was brought about not only by the government's decision to move a large number of government bodies, whose offices are scattered across the city, to the complex, but also by the “growing appetites" of government agencies who need larger spaces to seat their rapidly growing staff; besides, high-end offices are expensive.

Originally the government planned to obtain loans from banks and companies, against a pledge of old ministerial buildings of the Moscow government. Later those buildings were to be let or even sold to lenders. But the city hall gave up the idea. They are able to afford to implement the ambitious project if a very strong private investor or a group of investors provide financing; in exchange, those investors will be offered a chance to buy several units in the new complex.

Our interlocutor suggested that the federal parliament, too, is likely to face similar problems. For the time being the new mayor's office project is still on the drawing board and the government plans to hold a tender for investors. The book-shaped building on Novy Arbat, too, is to be vacated. Most likely, the property will be put up for sale at an auction. As to 13 Tverskaya, although the government plans to move its staff from there officials will not let private owners take over the landmark. They want to retain municipal ownership of the edifice and use it as a venue for official ceremonies.

Civil servants quite often come up with ideas that send jitters through community. For example, in the early 2000s Nikolai Maslov, deputy head of the federal construction committee (Gosstroi) suggested that all government bodies be seated in a single central district. In particular, he proposed to move the Federation Council to the building of the Hotel Moskva (Moscow Hotel) and build a tunnel to join it with the State Duma building. The historic Pashkov House (Dom Pashkova) could seat the Culture Ministry, while the building of the Moscow State University's journalism department would house the Education Ministry, according to Maslov’s plans. Fortunately, his ideas did not win any support in the government. The rumor has it though that the journalism department will be moved, after all, but those reports have not seen any official confirmation yet.

The city where a large number of government-owned properties went on sale is St. Petersburg. In the summer of 2006 the local city authority sold the building of the department store Passazh to ST Group. Consultants estimate the price at $150 to 200 million. In 2005 a company associated with Viking Bank obtained a controlling interest in Oktyabrskaya Hotel, for $50 million. The International Banking Institute on Nevsky Prospect sues the new owner of the institute building, the company Lyuka Invest. The company acquired the building at an auction for $17.5 last year, although the institute's tenancy agreement expires only in 2041.