Money Growing: The Regional Sieve

Better you to us

Moscow and St. Petersburg have ceased to be unique attractive platforms for investors in real estate. Accordingly, investors have more actively moved to other regions. The capital's companies construct in cities in Russia and abroad within the limits of the program of inter-regional cooperation, and also independently. The program begun in 2002 under an initiative of the mayor of Moscow Yuri Luzhkov, which was more a political act, but by 2007 it had turned into a huge project of developing regional areas. In 2002 17,800 sq.m were constructed under the program and in 2006, this figure had reached 800,000 sq.m. The plan for this year is to reach more than 1.1 million sq.m.

More than 30 large companies, such as SU-155, Inteko, PIK-Region, S-Holding, Peresvet-Region, Avgur Estate, etc, already work in 57 Russian cities. In the last five years they have commissioned more than 2 million sq.m of basic residential housing and also commercial real estate properties. Builders mainly work in the Central Federal District of the Russian Federation, but they have also become familiar with both the Northwest and South Federal Districts, and of the total number of federal districts work in seven of them.

"On the whole all regions in Russia are attractive for both investors and developers," Konstantin Kovalev, managing partner at Blackwood says. According to him, the indifferent attitude observed earlier and even a certain opposition in relation to the alien companies recently were replaced by hospitality: local governors are even prepared to give certain privileges to developers. "In the regions special programs for construction companies have developed, including lower interest rates on credit and certain tax privileges, says Kovalev, marking the Central Federal District as the most promising. "The most attractive cities for investment for the development of commercial real estate projects are cities with a population of 1 million or more, Vasily Fetisov, assistant to the general director of Peresvet-Region says. Among these the most promising are where the ratio between people and square meters of commercial real estate are least: Perm, Novosibirsk, Ufa, Samara, Nizhny Novgorod. Also of big interest of these cities are those where volumes of commercial real estate are practically sufficient, but where there are prospects for growth: Yekaterinburg, Rostov-on-Don, Chelyabinsk and Kazan. It is especially possible to pick out St. Petersburg where there are currently a lot of business centers, but the city is not only constantly and successfully developing, but also has the second largest population in Russia. It is one of the most interesting cities of the world, accepting thousands of tourists a year. It is ambiguous as to why Russian cities with a population of more than 1 million people are attractive to Investors - each city is different," says Michael Malikov, general director of Avgur Estate. According to him, some cities are at a stage of active growth, while others are at a stage of stagnation." In the past there has been lots of examples where new cities have arisen from on an empty place, while the greatest ones have been left behind," he points out. The investment appeal of a city develops from many parameters, the most significant of which are economic growth, the development of transport infrastructure and a certain level of the population employed in local manufacturing. In April In Moscow the "Investing in Real Estate in the Regions of Russia, 2007" forum was held. Representatives of administrations of several regions talked about which measures to take in order to attract investors. For example, in the Ulyanovsk region in 2006 the Ministry of Investments and External Communications was created, with the social investment counsel and the governor's headquarters working for the effective control of investment projects. The representative body Noncommercial Partnership Regional Investment Center attracts investment and supports investments in projects. The length of time documents for construction and the allotment of land plots are considered for is fixed.

According to an official site of the government www.ulgov.ru, since 2005 a system of support for investors has been in operation, and is based on a corresponding regional law. The regulation guarantees investors exemption from paying property tax for up to five years, exemption from paying rent on land plots used for the realization of investment projects and the lowest repayment rates in the Russian Federation for transactions for the privatization of enterprises.

For investment projects that have special value for the Ulyanovsk region, they put members of the regional government as curators of the project. Sergei Morozov, governor of the region has named it "an administrative umbrella." The Kaliningrad region also treats its investors well. Oleg Danovsky, head of the department of investment policy of the regional Ministry of Economics, has announced that they also have a law on the state support of investments: investors can get help from administration including financial, in the form of subsidizing a part of interest rates under credits for significant projects, and for investments for a period of more than three years starting from 150 million rubles tax privileges are provided.

The investment climate depends on a combination of several important factors: gross regional product, the well-being of the regional population, good transport infrastructure and the interest of local authorities in investors, including the population of the region or city, Irina Dzyuba, sales manager of MR Group says. According to her, the ideal variant for the investor is the presence of these four factors simultaneously, with the main and obligatory being interest of local authorities in investors: "For example, Bashkira satisfies developers almost on all parameters, but the local market is closed for investors from other regions. A similar example is the Tver region, where progressive governor Dmitry Zelenin has a regional program for the attraction of investors in place, but a strong minus is the low standard of living of the population even in comparison with neighboring regions."

"We welcome those investors who come to us for a long time and create an industrial base, instead of those who wish to invest two kopecks, and get a ruble back," says Valery Anglichaninov, minister of construction of the Nizhny Novgorod region. With the arrival of Valery Shantseva as governor, the region is considered by Moscow companies as a promising base for new large-scale projects.

Nizhegorodkapstroi a subsidiary of SU-155 is modernizing a factory in the Kotovsk region that manufactures reinforced concrete. Incidentally, for the last two years SU-155 has bought, reconstructed and modernized factories not only in the Nizhny Novgorod region, but also in Tula, Ivanov and Yaroslavl. In 2004 SU-155 bought a reinforced concrete product factory in Gatchina in the Leningrad region. "To build in the regions, experience and financial power are not enough," says SU-155. "You need the productive capacity. Panel housing cannot be built, if there are no concrete factories. And in the regions the factories are either collapsed, or don't work to their full potential." "In cities in the Volga region internal policy is directed at creating an exclusively favorable investment climate. These regions actively attract funds for the development of new projects," says Kovalev. He points out that the loyalty of the region to the expansion of nonresident investors and developers in many respects depends on who is governor.

Andrei Chibis, chief of the department for the support of the Housing for All national project, on the contrary, says the highest echelons of regional authority can be interested and publicly urge nonresident builders but when they come they are openly sabotaged when being allocated land plots or during the approval process of the project, etc. Chibis considers that in Russia certain affiliations exist between low and middle level administrations and builders, which frequently leads to monopolization of the local markets by local companies.

Plans without a general plan

"It is not necessary to make up stories about how authorities in some cities try to constrain the arrival of one investor and are favorable to another, Artur Markaryan, general director of Glavstroi, says. Quite simply there are not enough land plots ready, there is no town planning or understanding of how the city should develop." "A strategy of complex social and economic development in the majority of regions is absent," Fetisov agrees. As a rule, such programs and strategy at best are certain official reports for authorities, he remarks.

According to Fetisov, the quality of town-planning documentation in cities is low, moreover, in some of them new general plans have still not been approved. For example, in Volgograd where Peresvet-Region works, the general plan has been in process for more than two years, and the deadline is always being delayed.

A branch of the company in Volgograd financed the planning and surveying for a project on a territory measuring almost 100 hectares, says Fetisov. In Saratov, Peresvet-Region has attracted scientific-design Institute Enko (St. Petersburg) to work on a blueprint of a project, to build a large residential micro-district. Enko made the general plan of Perm in 2002.

"The majority of regions are 'unhappily equally': They have no projects planned, no enterprises with modern technologies, nobody knows how to use funds within the Housing for All national project," press secretary of S-Holding Oksana Basova says. According to her, earlier, when a company started the regional program, it was usual for an investor to go under the guise of the government of Moscow and solve a huge number of problems with projects, the authorities, materials and contractors. Now strategy has changed: the priority of work in the regions has become franchising.

S-Holding possesses the copyrights to several series of large-panel housing buildings and is ready to transfer the project documentation of them for 5% of the cost of the construction work. Everyone can use franchising. Basova says that when choosing a franchise the following factors are considered: the future of the market, a client having its own or rented floor space in the area of the market and the ability to pay. The algorithm of work is simple: after documentation has been developed there is a technological re-equipment or new construction, local building companies are trained to work with new buildings, receiving corresponding technologies of construction through franchising. S-Holding is also ready to help to involve local investors-builders investment resources.

What should be invested in?

"As a rule, it's common to investment in shopping centers in promising regions," says Dzyuba. According to her, in 80% of regions more than half of investments go to this segment. The exceptions are Sochi, St. Petersburg and Yekaterinburg, where investments are distributed evenly among the different sectors of the market. "In the medium term in Sochi and St. Petersburg the development of housing and hotel real estate will prevail with 70-80% directed to them from the total amount of investments," Dzyuba is convinced. These regions - are the perfect example of cities of "a federal level" where local administrative resources fade into the background, and in the forefront are the developers of the project."

Eric Van Egeraat, a world-renowned architect does not agree with her. He thinks that many regional investors and developers are very attentive to what they introduce to a city as they understand that there is no room for mistakes. "Moscow can learn something from the regions. The capital is a full rich city, here there is a lot of money, therefore funds can always be found for any project even if it will be not the most successful architecturally, whether it is an apartment building or shopping center. They will all make a profit. Regional cities are poorer, therefore they need to spend money more economically. It turns out that relative poverty of the regions is the guarantee of quality new projects," the architect is convinced.