Market Know-how: A Tree for a Tenant

In the Russian real estate market wooden residential buildings have always been popular: the cost price of their construction is lower than a stone or brick construction, and they are much more ecological. However in the commercial real estate market wooden premises until now were a big rarity and more likely to be perceived as attributes of country living in far out places. In the opinion of some experts, this point of view is not always true.

Modern technologies do not limit the imagination of developers, who are interested in wooden projects, however tenants and potential clients are unlikely to ever move to wooden offices and warehouses. “In the Moscow market, or more precisely within the city’s boundaries, commercial premises made from wood, usually are not built. There are only special premises in forest park zones or exhibition centers, for example cafes and shops. But these are isolated instances, which can hardly be united under such a big title as "commercial real estate premises made from timber,” says Svetlana Snitkovskaya, director of the commercial real estate department at MIAN-Development. However, according to her, in the Moscow suburbs such premises are as widespread as wooden housing construction.

“If the concept of a cottage settlement is wooden, then the infrastructure of the settlement is also made from wood. This can be sports constructions and other premises, for example shops, clubs etc,” explains the expert.

“Owing to the development of manufacturing and scientific work, the architectural possibilities in constructing wooden buildings has become practically unlimited, and their form and number of storeys are dictated exclusively by the wishes of the customer and the tendencies of the market. This allows a company to build administrative and office buildings, restaurants and large hotels,” says Alexandr Lvovsky, head of the Moscow representative office of Honka.

Skepticism prevails

According to experts, every year interest in wooden designs grows in Russia. "Premises built from wood are mainly residential cottage real estate, whereas wooden commercial real estate is less widespread in the market,” Sergey Leontev, general director of Vesco Realty notes. According to Maxim Ardeyev, head of the sales department of the Gagarinland cottage and entertainment complex, “wooden housing construction in Russia is traditional, but at the same is poorly developed.”

“There is not enough production or staff, wood costs more than in Finland, and there is a prejudiced consumer attitude of still preferring stone houses to wooden ones. Step by step wooden housing construction is growing. And it is clear, in fact, that wooden buildings are more ecological and more comfortable. Wooden houses, I am sure, can become a comfortable and accessible example of habitation within the limits of the national project,” considers Аrdeyev. According to his data, at the moment wooden houses are under construction in the regions adjoining to Finland therefore in this segment the Leningrad region leads.

The expert names one of the reasons for the slow distribution of wooden housing constructions is the prejudiced attitude towards it from market participants. Many experts approach this question rather skeptically. “It is more worthwhile to build such commercial real estate premises as banyas or saunas in the context of retreats, rest homes or country hotels from timber and also separately, at the same time, bases of rest can be built under a uniform concept, for example the use of wood as the main building material, whereas other commercial real estate premises made from wood, will be less perspective,” says Leontev. According to Antonina Lairova, an analyst at Prime City Properties, “commercial real estate from wooden timber has small prospects.”

Because of the skepticism of Russian players, according to Maxim Ardeyev, interest in this market is shown by leaders of wooden housing construction from other countries. They open representative offices in Russia or look for space under factories, and build relations with Russian developers, and try to work with the consumer directly. “World experience, especially in Finland and other Scandinavian countries, outlines the development of our market. Technologies of wooden housing construction recently took a great step forward. A technologically thought over product together with a complex approach to integration and construction may soon take a leading position in the market,” the expert notes.

Resistance of material

According to market participants, restrictions on the use of wooden constructions in building commercial real estate premises are imposed by the material. According to Michael Gets, vice-president for strategic development at Blackwood, the wide use of timber for the construction of commercial real estate premises is hindered by its fire danger first of all.

“Timber is a fire-dangerous building material. For this reason construction, for example, of shopping centers from wood is simply impossible. In the market modern materials, satisfying fire safety regulations are popular, for example, the use of metal constructions with sandwich panels. The features of timber do not allow it to be used it in the construction of office, industrial or warehouse premises. Potentially, the partial use of timber is permitted in the construction of elite shopping centers, however in practice, there are no such examples. In the long term it is possible to predict the wide use of timber mainly in the construction of residential cottages,” the expert notes.

In the opinion of Andrei Bushin, general director of MIEL - Commercial Real Estate, in addition to the fire danger factor in the impossibility of building multi-storey premises, is the lowered durability of bearing constructions in comparison with ferro-concrete, and consequently, the technical impossibility of building large area premises.

“Premises made from timber, have higher requirements concerning technical equipment and engineering communications. Special attention should be paid to observing all the necessary regulations, and guaranteeing fire safety in wooden projects,” Leontev notes.

In addition, in his opinion, the service life of such premises is insignificant at about 20-30 years. "Whilst on a fishing trip, I observed the following picture: the manager of the base with a stop watch in hands, stood on the central platform where the flag for fishing festivals is usually hoisted up, and shouted in a loud voice: “House number 5 is on fire," and then noted the time. Within several seconds all the personnel of the base ran together with fire extinguishers to house number 5. Such training was conducted very often both in the afternoon, and at night,” Maxim Sukharkov, general director of Ostogenka Real Estate, ironically recollects.

Vladimir Sergievsky, an analyst at Finam investment company disagrees with some of the listed restrictions. “Of course, to carry out a low construction with up to three floors is technically easier, but the area of the premises and other parameters can widely vary. However everything depends a lot on the building material,” he notes. According to the expert, the use of beams demands the creation of a powerful base. In addition builders should consider possible shrinkage of the buildings. “Actually the shrinkage period is a primary factor for increasing the period of construction. In terms of durability wooden houses are practically not inferior to constructions made from other materials. On the contrary, for example, wooden structures are considered more seismically stable. Although, for example, this factor is not of great importance for the Moscow region,” the expert adds.

A question of money

Although the prevalence of wooden housing construction in Russia is restrained by the above factors although some are challenged by some experts, this segment of the market has one conclusive advantage, which is the low cost price of construction. According to Gets, "the cost of construction of a building from planed timber averages 5,000-6,000 rubles per sq.m, and from profiled timber from 6,500 rubles and more.

“Construction per sq.m of a wooden building will cost an owner $300-$500 using Finnish wood or $150-300 using Russian materials. In buying prepared felling the price can decrease even up to $50 per sq.m, but such technologies are used mainly in individual housing construction or when building small infrastructural premises for example, banyas or saunas,” notes Sergievsky.

In his opinion, the cost price of such a construction is also defined by the duration of the work. “The main disadvantage is long periods of construction. As a rule, the construction of one building takes no less than 12 months, and often increases to 24 months as construction goes into two seasons. Periods can be reduced in some cases to 4-8 months, but in this case its prime cost will decrease no more than 30 per cent as a reduction in the period will demand the purchase of expensive modern equipment,” the expert adds.

In addition, according to him, for a reduction in expenses it is necessary to invest in the localization of the production of materials, or in other words, use local wood for the construction. “There is a raw-material base in Russia, and the reduction of logistics and other costs will promote a further decrease in the cost price whereas this parameter in other segments will most likely continue to grow,” Sergievsky considers.

According to Snitkovskaya, the cost price per square meter of wooden buildings is lower than brick constructions. However the construction technologies of a wooden building are more complex, and consequently, the expenses on specialists’ salaries are considerably higher than with the construction of normal buildings. Everything changes if there is a stream of construction. “As a rule, factories that use timber, produce a machine that can be quickly made on site,” Sukharkov says.

Rare examples

All market participants converge in the opinion that there are not many commercial real estate premises made from wood in Russia today. According to Lvovsky, in Europe there is much more of such real estate, but for Russia, wooden offices or hotel complexes are still unusual. Therefore among the existing wooden commercial real estate premises experts name, first of all, restaurants.

“Among the few commercial real estate premises made from wood it is possible to name a number of restaurants in Moscow, one of which is located in the Khoroshevo-Mnevniki district. In addition to the restaurant being made of wood, its territory is bordered by a wooden fence, and the land plot is divided into several functional zones,” Leontev tells.

According to the expert, there are some country hotel projects, which assume the use of wooden constructions. “As an example it is possible to name the Solyaris country club located 800 meters from the MKAD between Altufevskoye and Ostashkovskoye shosses in the Nagornoye settlement. Here some of the infrastructural premises and also small hotel buildings are built from wood," he adds. In turn, Sukharkov names Dacha in Zhukovka and the medical center in the Nikolskaya Sloboda settlement as an example of wooden premises.”

According to Snitkovska, at the moment, there are a lot of companies in the market that are prepared to construct premises from wood. This is explained by the small number of prepared premises. “There are companies working in the economy segment, for example Zodchy, and companies that offer high-level houses, for example Honka,” the expert says.

But the majority of such companies concentrate on building constructions which have a great demand. “As a whole the development of the segment first of all is connected with residential real estate, and also with various hotel/recreational projects. Wooden construction has all the chances of active development by virtue of a lower cost price and a growing trend to be ecologically friendly,” Sergievsky considers. However there are some commercial real estate premises made from wood in Russia.

“Although one of Honka’s main branches of activity is the construction of houses and cottage settlements, the perfecting of construction technologies also creates interesting commercial premises such as rest houses and hotels,” Lvovsky says. Among the large scale commercial real estate premises constructed by Honka, are the Le Meridien Moscow Country Club and the biggest wooden restaurant in Europe, the Pristan cottage complex in the Yaroslavl region whose total area is 1554.5 sq.m.

“At the Pristan restaurant we managed to create a unique microclimate system for each zone of the restaurant: the kitchens, the cigar room, etc. As a result it turned out to be not only a significant construction in terms of its sizes, but also an exclusive architectural premises well suited to its environment.

It is symbolical that the restaurant is located on a bend of the Volga in the surroundings of a pine forest,” he says.

If we widen the geographic activity of Honka, it is possible to name as an example, the construction of a hotel in the Vitim settlement on the River Lena this year. This project is being carried out under the order of Surgutneftegaz, which develops several oil deposits in the vicinities of the settlement. The hotel complex built from glued timber will include a 3,000-sq.m-hotel building and a health center.

In the opinion of experts, there is no other company like Honka in the market today, but even within Honka’s structure there is no separate division for the construction exclusively of commercial real estate premises. “We are engaged in commercial real estate, but it is only a small share of our work. There is no separate line that builds restaurants or hotels. Honka simply possess technologies which allows it to build premises from wood of any complexity and volume,” Lvovsky explains.

According to him, Honka will participate in the construction of infrastructural and Olympic premises in Sochi as the company has international experience in building sports infrastructure, hotels, mini-hotels and cottages. Several years ago the company already realized in Sochi a large project together with Gazprom that included the construction of a cottage settlement and a hotel. In addition a representative office in Perm opened this year and it should become a center for Ural distribution in such cities as Yekaterinburg, Chelyabinsk, Magnitogorsk, and the nearby regions of Bashkiria and Udmurtiya.

However Honka’s production can hardly be called cheap. Although the company prefers not to speak about prices, experts specify the high cost of materials it uses. Honka uses high quality pine to produce houses. "The harsh natural environment of Finland has lead to a slowed down growth of trees and lower humidity of wood. A reduction in the thickness of annual rings makes a tree stronger, more durable and less inclined to deform. In comparison with pines that have grown in a less severe climate, Finnish pine also possesses the best thermo-insulating properties. All wood used by Honka in the construction of houses comes from central Finland,” says Lvovsky.

At the moment the company owns four factories in Finland that produce components for houses. As a result, not including the cost of work, clients of the company should cover and recapture the transport costs.

Future prospects

Experts assess the future of wooden commercial real estate premises differently. “Demand for them is low. Complex development of territories, for example the realization of retreats and rest houses may develop. At the same time the risks of realizing commercial real estate premises from wood are much higher,” considers Leontev.

On the other hand, according to Sergievsky, "wooden construction has all the chances of active development by virtue of the lower cost price and growing trend to be ecologically friendly.” If the fashion for ecological material remains and the quantity of such settlements will grow, then wooden infrastructure will develop. But this only concerns country real estate, not city," says Snitkovskaya.

According to Sukharkov, the future of wooden commercial real estate is cottage and recreational complexes. “For example, the Zavidovo complex where it is possible to rent a wooden house and to feel at harmony with nature, and use all the blessings of its extensive infrastructure, hunting and fishing bases,” he says. In addition market participants do not exclude that such projects will appear in Sochi as frequently through building materials the developer of the project tries to show the national coloring of a building, demand for prior to the future Olympic Games is rather high.