People in the Know: Following in Wal-Mart’s Footsteps

We work together with major banks. Nearly 70% of financing is provided under project financing schemes. In St. Petersburg our partner is Gazprombank. Other partners are Sberbank, VTB, Euroypo and Raiffeisen. In Krasnoyarsk and Ufa we are examining several proposals. The results will be announced in a month. As regards other projects we will not apply for financing to the banks before building works begin.

Thus, Zelimkhan Mutsoyev’s sons Alik and Amiran have been entrusted with the task to oversee Regiony’s ambitious plan to build a chain of shopping and leisure centers Iyun ("June") across the country, estimated to be worth $800 million. They are, perhaps, the youngest top executives in Russian commercial real estate. The younger brother and co-owner of the company Amiran is in charge of strategic issues. He says that on his initiative the company has adopted a rather aggressive stance in the market. His vision of Regiony is near future is that of a self-efficient and strong development firm operating under the brand recognizable in every city, whose name is by no means associated with “rich heirs" - an image imposed on the brothers by the media, nor with political activities of their relatives. But “give us five years and we will hold the lead on shopping center market," Amiran Mutsoyev insists.

-Construction of malls in the province is becoming quite fashionable. Many developers, including RosEuroDevelopment, A.N.D. Corporation, Torgovy Kvartal, Mall Management, Tashir, DVI group and many others are set to pursue such projects. Aren't you afraid of competition?

Many companies say they want to build retail centers. But honestly speaking the approach assumed by some of them is surprising. Sometimes there is a feeling that they merely fling themselves into something that is commonly believed to bring good returns. When looking into the market situation in several large cities we saw that in some locations there were three major mall projects pursued by different developers on the same street. It is unclear how three complexes measuring 40,000sqm each, situated within just several hundreds meters from one another, will get on. We have seen such plans in Novosibirsk. Incidentally, some companies only announce their plans but still have not built anything.

I think that the niche of retail centers of various formats will grow rapidly for another five years or so. For the time being, that segment is short of professional developers. As to the professionals you have mentioned it is always possible to sit down together at a negotiations table with them and work out a compromise. Inept developers are no rivals.

-Can you say what share of the regional retail property market your company controls?

It is hard to say right away. One has to make detailed calculations, commission a survey…

-Why have you focused on the province? Do you plan any mall projects in Moscow?

As far as I am concerned I believe in real estate projects in Russia, even more than in some other sectors of the economy. The market potential is very large in Moscow Region and other parts of the country. Russia has approximately 19sqm of retail space per 1,000 residents, whereas in developed European nations that figure stands at 300 to 600sqm. The same is true for other sectors of real estate. For the time being it is still possible to acquire building plots in good locations in provincial towns. Large Russian cities are growing fast. And while in the province, the period between the acquisition of the plot and the launch of the mall takes 2.5 years, in Moscow those projects are more time-consuming.

-Do you know how the media portray you and your brother? They call you "heirs to the throne", "rich sons", whose fathers have built a company for them. Numerous headlines said, "Sistema's Kids Breaking Into Regions”, especially after Regiony was founded as part of AFK Sistema and you were assigned a top management job alongside Vladimir Yevtushenkov's son Felix.

Fine, you have noticed that those things are said by the journalists, not by people we work with.

-You have graduated from the Academy of Finance in Moscow and a business school abroad. Where exactly?

I studied financial management at the Academy of Finance under the government of the Russian Federation. My degree thesis focused on investment opportunities in metallurgy. Before that I attended Box Hill School in London.

-How did you find yourself in real estate?

Not forthwith. While I was still in my fourth year at the Academy of Finance, my brother and I started a company offering procurement services to ferrous and non-ferrous metals enterprises. My objective was to widen the range of goods supplied. My brother oversaw financial and administrative tasks. Then we started to look around for an office for our company and somehow came across an old mansion in Milyutinsky Pereulok [side-street]. That was four years ago when a sale price for such a building was very low. We took interest in that property and decided to have it refurbished and rented out. My brother and I commissioned a marketing survey into the prospects of this acquisition and of the real estate market as a whole for two years ahead. We drew up a business plan, with a projected payback of five years. Then, we obtained a loan from a bank and our parents. But the market grew rapidly and rental rates soared having increased by nearly 100%! As a result our projct paid back as soon as 3.5 years later, whereupon we repaid all our loans. Today, the price of that mansion is very high. Some three years ago, a sale price of 1sqm in a similar development stood at $2,500; today it is valued at $10,000 to 12,000. That was when I thought, that business is interesting, why not try it? I took a training course at a Moscow school of real estate and enjoyed it.

It transpires that it was owing to a concurrence of circumstances that I ended up in that business. But our decision to join Regiony’s project aimed at building a chain of retail and leisure centers in Russian cities was not spontaneous at all. If you only knew what enormous work had been accomplished before the company was actually established! We carried out a marketing analysis of 32 Russian cities, examined each location to the minutest detail, including birth rate dynamics in each part of each given city. Having analyzed all those figures we realized that Regiony’s plan was quite feasible.

-But was not the idea to part ways with AFK Sistema and Sistema Hals merely a publicity stunt, aimed at attracting public attention to your company?

No, that was not a deliberate PR-move. We had worked together for about a year. Having joined Sistema in 2004 as development director, almost immediately after Regiony was founded, I remember that time. Approximately a year later Sistema withdrew from the project. I believe the reason why we split is that Sistema moved to enhance its presence in the segments where it had been working for a long time, in order not to spread itself too thin, as they say. Sistema’s development company focuses, as you might know, on various segments of commercial real estate. Regiony is set to concentrate exclusively on the chain of shopping and leisure malls.

-Honestly speaking, for a long time nothing has been heard of Regiony...

In our early years we focused on acquisition of building plots. We believed it was too early to announce our deals and plans. Market participants who needed to know knew about us. All prospective tenants and banks were kept duly informed. Today, as we are beginning to develop our sites we provide more information about ourselves. We seek publicity and are keen to enhance our brand awareness.

-Is that true that the group was established by Sistema owners and the businessmen who are now on the board of directors of Regiony?

It is possible to put it this way. On a par, so to speak.

-Have Sistema's shareholders fully sold their stake to you or have they retained a share in equity?

-They have sold their 50% stake to us. Today, neither AFK Sistema, nor its development arm Sistema Hals have any links to Regiony.

Therefore, the only thing you have now in common is the Detsky Mir brand that belongs to them. That retail operator holds anchor tenancies at many malls that you own. Who are the shareholders of Regiony? Does the company belong chiefly to your family, your brother, father, uncle and yourself?

-Our company’s shareholders are several individuals. In the future, before launching an IPO the company will become more open and their names will be known to the public.

-Many companies mull IPOs these days? How soon do you plan to go public?

IPO is an advantage for many firms. It helps them to raise cash and to grow more aggressively. But preparation for the move is time-consuming and may take up to five years. We are yet to decide on the exact timing of our IPO.

-It is known that the company's strategic plans are elaborated for years ahead. Does that mean that you are trying to figure out what, where and how you will be building in five years, and in a decade from now?

The company Regiony develops its development strategy for 10 years ahead. Each year we seek to determine how our company is to grow and what decisions need to be taken, and when. Such an approach is adopted by many international companies. A year ago, for example, we set the goal to reach our maximum output of 1.1 million square meters by the year 2012. But that does not mean that this figure is our limit, there may be even more properties by that time. Considering the potential of all the building plots, which we have already acquired and all projects already launched it transpires that we are likely to attain this goal as soon as by 2010. Our company is growing quite aggressively. We pursue projects in 12 regions. The first retail center June has already been launched in St. Petersburg.

Here I would like to cite an example of a great strategist. The example of Wal-Mart is quite indicative. In the days when Sam Walton's chain was being established he wrote down in his long-term strategy that the company would acquire plots in the parts of tows which would be developing in accordance with the general plans for urban development during 30 yeas to follow. He acquired plots at knockdown prices in the areas that were to become central locations later on. Ten years later those plots were worth their weight in gold.

Let me cite our own example now. Take Mytishchi where we have acquired a 10-ha plot at the intersection of Volkovskoye Shosse and Ulitsa Mira [street] as this is precisely the part of the town which has seen the most active growth lately. Next to our plot PIK Group is raising a total of 1.5 million square meters of homes. Before acquiring that site we had studied the general plan thoroughly, held three marketing survey and came to a conclusion that construction of a shopping and leisure mall on that spot would prove viable.

-Regiony Group comprises two major firms Regiony-Development and Regiony-Management. Are those companies independent from one another?

Directors of those to companies are independent from each other. From the legal standpoint those are two companies are independent entities. But they are united by a common cause. Regiony-Development is involved in acquisition and development of projects, while Regiony-Management carries our marketing analysis for those projects, invite bids from prospective tenants and take part in elaboration of the architectural concept. After a project is finalized Regiony-Development secures ownership of the complex whereas Regiony-Management runs the property. Other services are outsourced. We believe that each professional must do his business. For example, in order to build a complex we enter into a contract with a general contractor in each region, hold competitions among organizations that oversee construction works, marketing specialists, brokers, etc. We work together with DTZ, Jones Lang LaSalle and other consultants.

-What general contractors do you prefer to work with? After all, few companies provide services of top quality today.

In St. Petersburg we held a very wide competition and selected Renaissance Construction, a local builder with a financial turnover of approximately $1 billion. They have built all Mega malls in Russia. In Krasnoyarsk the contract was awarded to a comparatively large local operator Sibiryak. Today, every region already has a pool of strong general contractors. Hiring a nationwide building company is hardly expedient as construction costs in this case is higher; besides, not all contractors have branches in all regions.

-Do you plan to retain title to all your properties or will the most successful projects be put up for sale?

For the time being we do not plan to sell our stores. Building a company is a huge and time-consuming job, which will take much longer than five or ten years. Who knows, perhaps, one day we will tap the foreign real estate market as well.

-Do you own all of your building plots?

No. In St. Petersburg we have been awarded a plot under an investment agreement with the city authority. The same is true for Krasnoyarsk and Ufa, where the plots were allocated to us for three years, pending design and building works. The Mytischi plot was acquired by the company. If possible we always aim to secure either a freehold title or a 49-year lease to our plots. The situation differs from town to town, as terms and conditions for entering the market vary. In the province securing freeholds is easier than in Moscow.

Is that true that Regiony plans to build its malls -- each measuring 50,000sqm and over -- in 32 Russian cities, and that you plan to spend $800 million on the chain in the next five years?

On the whole, yes, such are our plans. In terms on the format, today we see four main formats on the market. Those are district stores, projects of municipal or regional significance and super-regional malls. We pursue almost all of those formats. Our malls are complexes measuring 30,000 to 120,000sqm. For example, our project in St. Petersburg is 46,000sqm large, in Krasnoyarsk 70,000sqm.

Our shopping and leisure complex Rzhevka, a district in St. Petersburg with a population of 400,000, caters to local residents. In Krasnoyarsk our coverage is the entire city center and one more part of the city. That site boasts a unique location at the intersection of major roads linking the historic center to Sovetsky District – the city’s nascent commercial zone - and the left-bank part of the city to the largest district on the right bank, Leninsky, as well as two other districts. The retail center is Ufa measuring 38,000sqm is a project of district significance. The Omsk retail center measures 132,000sqm, that is a project of regional significance. The 110,000sqm mall in Mytishchi caters to the whole town. The project in Cherepovtsy, with 38,000sqm, is designed as a district retail center but as we will be the first to build such a modern facility there, the complex is expected to attract customers from all over the town. If other developers arrive and win over part of our audience, the mall's status will be downgraded to that of district significance. Our project in Volgograd, measuring 45,000sqm, is a mall targeting the entire city, given its central location. The mall in Saratov, with 120,000sqm, is a super-regional centrally located complex. We do not even view Mega as a rival, although this chain also plans construction in Saratov and Omsk, because certain customers who are unlikely to be won over by Mega. Mega’s audience are people who do their shopping en route to their country-homes or to IKEA. All other things that people need they will find in our malls. There will be hypermarkets, household goods stores, amusement zones featuring roller-skating and ice rinks, and even a rock climbing facility. June malls in Saratov and Omsk will also have 167 shops operating on their premises. In three years from now we will have nine retail centers operating across the country. In four years their number is to grow to 12.

We are set to establish our presence in the cities where there are large city-forming enterprises. Consider Cherepovets, for example. Another important criterion for assessment of our future locations is individual incomes. In Cherepovets, the average monthly pay is 18,000 rubles. Of all developers, so far Regiony is the only company to have announced plans to build a shopping center there. Although, I believe that the climate is favorable for external investors and the local authority pursues a correct approach towards all the companies that invest in local real estate. After all, in addition to building a 36,000sqm mall we will create nearly 3,500 jobs. I do not know how other investors do that but as far as Regiony’s concerned, in each town or city where we work our malls are owned by our affiliates who pay property taxes, land-use taxes and a part of profit tax to local budgets.

-In what other towns of the Moscow Region do you plan to pursue your projects?

We have plans for several parts of the region. For example, there are plans to develop retail parks and several shopping and leisure complexes along Novorizhskoye motorway, the Rostov-Don motorway, Kiyevskoye Shosse.

-How do you raise cash for your projects?

-What is the difference between retail parks, which you plan in Moscow countryside, and shopping complexes?

Retail parks will have fewer tenants, and the number of amenities will be less by 20%. They will house, first and foremost, large hypermarkets, household goods, Detsky Mir stores and sports goods shops, as well as small food courts and a number of shops of various profile. People will visit our retail parks with a specific purpose, for example, to buy something at a household goods store, or a hypermarket, or Detsky Mir. A buyer enters a sports goods store, buys what he needs and leaves. As to a shopping mall, people often go there for a whole day. After all, is not it fun to take a stroll through various shops, watch an interesting movie, climb rocks with your kid and dine at a restaurant?