Money growing: Risky Appetites

Investors are often accused of an excessive appetite and greed for money. Though they very simply explain where these high sales rates come from. Except for the active sales of cars on the car market, which has led to a huge number of cars on the streets of the capital, and an absence of civilized car parks, the cause of the garage problem is the high prices of garages. The majority of car owners cannot or do not want to buy a parking space for $15,000 in areas far from the center, let alone $25,000 and $40,000. In the South Administrative District of Moscow garages cost $20,000-$50,000, according to MIEL. But investors-developers cannot lower the sales rates, as is asked of them, as the cost of construction does not allow them to do so. The upshot of it is, is that there are only a few cases of successful parking places being built - successful sales can be provided in residential buildings, in multi-level garage complexes with additional commercial functions (service center, shop, club) and in areas where they will be sold quickly. Despite all the attempts of the city administration to unload the cluttered courtyards and streets from vehicles by having them placed in parking places, mass construction of car parks by private investors has not started yet.

The question is, what is the cause of the high prices for modern, and even "Soviet" garages? Is the consumer really not ready for such purchases? And, the main question, are investors setting prices too high if it costs $10,000 to build it and they are selling them at $25,000?

Whims of the market

There are cases when places in multi-level car parks were eagerly sold. But more often than not it was for garage format parking in a business class or elite apartment building. We cannot forget what happened at 29 New Arbat Street where tenants were ready to pay $200,000-$250,000 for a car parking place, because there seemed to be a deficit of parking. But if we're talking about garage complexes as self-sufficient commercial real estate projects, the majority of modern multilevel car parks (separately standing) have become unfinished projects, long-term constructions or premises with extended periods for the recovery of outlays. For example, the long-term project at 57-69 Bakuninskaya Street, by Lafer, which has been under construction for more than five years, according to its general director Valery Shakhov. Or the sluggish sale of a few garage complexes belonging to Bazistroi in the east of the city, which the head of the company Anatoly Ryabsky has confirmed. And also the long-term construction of the multi-level project at 66 Krasnodarskaya Street, and the unfinished project at 21 Polbina Street about which we were told by Isik Plus, which builds garage complexes.

The unavailability of Muscovites to buy spaces in car parks for $25,000 in the center of Moscow can be explained partly by psychological problems, one garage developer says. The problem is not only location. "There is a car park that has been under construction for two or three years in the area of Mytishchi railway station," says Elina Zanina, deputy director of management at Miel. "Though the area is very populated, hardly nobody is buying spaces in the complex." In her opinion, this format of parking is alien for the consumer. Especially multilevel car parks with open internal layout where the owner does not have anything except for several ruled square meters of concrete. There is no feeling of your own garage which Russian people have got used to for various practical needs. That’s why a price of $30,000-$40,000 for "an empty space," in the opinion of the car owner, is unjustified.

Complexes with an open layout cannot be perceived by buyers as long term. "Such a place should be on sale at a price for simply parking or for lease. For me, like the consumer, such garages are uninteresting. Also there is no assurance that a car in an open car park will be protected. For its protection a reliable management company is necessary, Zanina says.

Research by analytical center IRN.ru has revealed some reasons for the unpopularity of car parks by Muscovites and how this influences prices. Prices for garages are growing much slower than the housing sector. A car park is reasonably demanded, but people really are not ready to pay a lot of money for "a house for a car." The real price of a garage is the cost of a car. Offers in car parks in business class buildings are on average $56,000, which is equivalent to a new foreign car. The price of garages has almost reached its peak and the potential of its further growth has most likely been exhausted. In general it's much easier to pay for insurance that covers theft and all damage and sleep safely. The cost of fully comprehensive insurance is about 10 percent of the value of the car. Very high prices for parking become the category of luxury, rather than necessity. And if the growth in prices does not slow down in the next few years as was observed in 2006 then garages in Moscow will turn into absolutely non-liquid goods.

And there will only be one result: lanes, streets and side streets will be filled with cars, movement will be restricted, grassy areas will be ploughed up by wheels and other unpleasant realities of modern Moscow.

The cost of above-ground and underground multilevel car parks in Moscow is approximately as follows: car parking places at the stage of construction in the Central Administrative District cost almost $20,000-$50,000 in underground car parks, and in constructed and put into operation underground garages - $40,000-$90,000. In multilevel car parks at a zero stage of construction the price of a space is around $12,000-$30,000. Ready offers stand at $15,000-$40,000. The second most expensive place is the Southwest and West Administrative Districts. And then come the Northwest, North, Northeast, East and other districts of Moscow, according to Vesco Consulting.

Moderate demands

So why do investors who undertake garage projects - whether it be by an investment contract, imposed by authorities, or for the sake of an experiment - set such high sale prices?

It is clear, that to create an unprofitable project is senseless. Investors do not offer garage complexes in their entirety for rent in residential areas. It is profitable to allocate only one floor of a multi-level car park. The rest should be sold so that the obtained funds can be used for a new project.

Investments in separately standing car parks, according to the research of Vesco Consulting, is close to $5,000 per parking place depending on the cost of the land plot, and the building. For example, in the Southwest Administrative District investments in the construction of one multi-level car park with 500-600 parking places is $2.5-2.7 million. In the Moscow suburbs construction is cheaper - about $2,000-$2,500 per parking place. According to Tatiana Palchikova, deputy director of Trest-1991 - a company that builds garages in Moscow and the Moscow suburbs, the cost of constructing separately standing garage complexes Is In the range of $5,000-$20,000 per parking place. The price depends on the land plot of construction and charges on it, the cost of renting the land, the features of the construction project and, of course, the type of garage (from easy, cheap designs, with garages unseparated by walls, or on the contrary - boxed type; made of brick or concrete or on the basis of a metal construction; underground and outdoor.

Returns, profit, or margins of the investor are the difference between the amount invested and the final sale price of a garage. A part of this profit, in Palchikova's opinion, very strongly depends on the site under construction. For example, in Kyzhukhov Trest-1991 has an outdoor multi-level car park project in which garages are on sale from $12,000 up to $15,000 at a cost of construction of $10,000-$11,000 and with cost prices of $8,000 per place. The margin for the investor here is 5-15 percent of the cost of construction of one parking place. Noticeably profit varies, because some places in the complex are more expensive and other cheaper. In another of Trest-1991's projects, at a business park in the Kuntsevo area, parking in a underground car park is on sale for $40,000 with an investment cost price of $30,000-$35,000 and a cost price of construction of $23,000-$25,000.

On the one hand, the investor will not let any profit slip and in all possible ways will try to earn on each scrap of the project even if it is a small garage in the structure of a huge microdistrict. Padion Khegai, general director of design workshop Standard Project which specializes in the development of garage projects, has worked for some years in the Moscow institute of garage construction, and is engaged in the preparation of tender documents and predesign studies for garages under the order of building complexes in Moscow.

According to him, investors in Russia now only go for 100 percent profit on a premises and the same outlook is held by builders of car parks. "From our experience in consultation with developers, builders engaged in garage complexes construction, only direct their attention on projects with 200 per cent profitability once the project has been realized. Nevertheless this is only design information whereas in practice it is impossible to calculate so-called "administrative factors" (all charges connected with the approval of the project with state bodies), which, as a rule, reduce the parameters of profitability of the project as a whole," says general director of Vesco Consulting Alexei Averyanov.

From the other hand - the project costs consist of so many expenses that it seems no profit will be left for the Investor. According to Averyanov, in the general (investment) cost predesign works make up 2 percent of the total cost of the project, communications make up about 2 percent, preparation work of the site makes up 1 percent. Building work itself costs approximately 80 percent, and furnishing the premises 15 percent. This is without taking into consideration "administrative factor" which can reach 20 percent.

Khegai outlines the main stages of expenses: everything begins with the tender for the area, the initial-permittance documentation and the certificate of resolved use. Then the investor collides with charges on the site, which in fact can be connected with major engineering communications. Development of the project, it’s approval, and examination follow. Then you receive permission to build and then preparation of the site and construction itself follows and the finally putting the car park into operation.

The most expensive kind of car parks are underground ones. Especially if its complexes not connected with an apartment building and constructed in the form of separately standing construction. Expenses for one underground place in the capital on average come close to $20,000. They can be easily done for the investor if they are a component of a shopping or multipurpose complex. In such projects underground car parks, of course, influence the cost of construction of the whole premises. But they also pay off for themselves owing to the commercial purpose of the building. According to Averyanov, in the construction of underground car parks every level of the car park increases the cost of the project by 25-30 percent. One time the Moscow authorities tried in different areas to introduce so-called riveted garages. But to build them was very expensive, and in any case the projects consisted of less than 100 places. The sale price of one underground parking place in them reaches up to 100,000 euros. It is especially expensive to dig the ground in the center where there is a lot of communications and sometimes moving just one fiber-optic cable can cost $1 million.

Vesco Consulting happened to supervise the design project to build a large garage complex-cooperative with approximately 6,000 places, situated near the Moscow town of Vidno, in the 5th and 6th microdistricts. The number of offers of modern car parks in this city is limited, and the prices for existing places vary from $12,000-16,000. The investor plans to cover the expenses for this complex which total $68 million investor plans from sales totaling no less than $91 million. The project should be completed within two years, during which period garages measuring 32 sq.m are expected to be sold for $16,000 at a cost price of $350 per sq.m. Sales should be approximately 2,600 spaces every year. The complex is under construction as a part of a new residential microdistrict in which multi-storey and low-level buildings, a shopping center and a warehouse terminal will be built.

Mysterious coefficient

Investors and advisers do not give a single answer to the question as to whether or not sale rates in Moscow car parks are overestimated. For example, Averyanov puts the blame on the opaque "administrative factor," on which any player cannot predict expenses. Considering this factor, the developer is compelled to insure as much as possible the risks which, of course, they Invest in the cost of the project and as a result affect the sale prices. Dealing with authorities and local representatives are one of the main expenses and risks of construction. Khegai emphasizes that administrative risks cannot be calculated, as they are individual for each area and project. Moreover they have become an obligatory and expensive column in the estimate. To the cost of the project it is possible to also add disputes with local residents. In such situations as strikes to lower the expenses is unrealistic. Standard multi-level car parks under normal conditions should take no longer than 1.5 years to build, but due to the administrative factor projects are often extended, which in turn, makes them not as profitable.

For Palchikova, no investor will refuse a margin of such size that only allows to take this or that object. This is the normal psychology of market participant. Has put only in, whether there will be on garage a demand. And in this case the sales success of the garages also depends on the area. Palchikova cannot remember a case where the proprietor, for example, reduced the price for garages. There was a situation in the Obruchevo area where the owner tried to sell parking spaces at overestimated prices and as a result sales were sluggish for a long time. Then it was necessary to make a discount. In the city centre there was an example where the proprietor had to give garages for rent, instead of selling them as planned, also because of how expensive they were. For the main part, investors successfully draw up a correct business plan and appoint an adequate sale price per space. Otherwise it will not build anything.

Averyanov counts not less than five risks among those that always trap garage investors and which are considered in calculating the cost of construction. An increase in the cost of construction during the process (this especially often happens when the completion deadline is extended and is exposed to general inflation). Competitors in the neighborhood. A reduction in demand in the area. Failure to execute the sales plan and the compelled reduction of prices.

Alternatives

Here and now consumers need cheaper garages from investors. One expert approves that it is possible to lower the investment cost of premises. Others say that it is time to move to more economic garage formats. Oleg Ivanov, general director of Isik Plus, which builds car parks in the Southeast administrative district, has repeatedly suggested the idea of building multilevel aboveground structures, saving on protection construction, and using panel blocks for the construction of walls, rather than monolithic technology. For $5,000 per space it is possible to build an aboveground car park with monolithic or ferro-concrete overlappings, which on the perimeter of the building will be enclosed by a simple grid.

Parking-155 part of construction holding SU-155, has also developed a format of a cheap multi-storey car park with 5-6 levels. They propose building the skeleton of the building from domestically produced metal constructions. The levels have open plan layout. Such premises can be built 40 percent more cheaply than underground car parks, and approximately 20 percent cheaper than monolithic or brick complexes. Khegai proposes lowering the cost of garages, by not heating them and reducing the specific area of one space.

Market players agree that for consumers the city should worry about the "availability" of parking places. The same goes for the charges that may be extra in projects. Following the experience of foreign countries, some car parks could be made completely municipal. Other players in general support cardinal measures. It is time to create such financial conditions in which the car becomes a luxury, and to enter the center of the capital - a greater celebration. It will be possible to direct the obtained means on the development of public transport. And with the huge number of cars scattered in the streets it could be a struggle, to pass a law where motorists cannot park just anywhere. It would be necessary to lay down conditions in which the motorist will be compelled to buy or rent a place in a car park near to the office during the work day and in special yard parking in the evening near their home. Then, when going to buy a car, an Inhabitant of the capital will have already counted a hundred times, how much money it is necessary to spend on obligatory expenditures on the storage of an iron horse.