People in the Know: A Gold Digger with a Challenge

ST. PETERSBURG - The commercial real estate market of Moscow is a country within a country, it is too specific and cannot be an example for the Russian regions. St. Petersburg is another matter, it is a European city where subjective laws don’t play such a great role, and where there are more effective economic rules, Yuri Borisov, president of St. Petersburg’s IB Group, and vice-president of the Guild of Managing Directors and Developers of St. Petersburg, is convinced.

There is steady opinion that the St. Petersburg market is repeating the development of Moscow, but just a few years behind. Is this still true?

It is a known formula. But it has become outdated.

In both cities there is still talk of unsatisfied demand in the shopping and office real estate segment, but the number of announced projects proves that saturation of the market is not far off.

It may be very close. There are indicators, which allow to draw such a conclusion. As soon as rental rates stop growing with average speed, then the correlation between supply and demand has changed. The market will start to move towards a tenant’s market. Now it is important to make an exact forecast, especially when concluding long-term contracts, in order to understand, for what length of time it would be profitable to make. To remain within the limits of the market rental price is important for both parties - to the tenant, and to the landlord.

Now what party dominates?

Landlords. The question is however, how long will they continue to dominate and for what periods is it now necessary to conclude rental agreements.

In Moscow rental agreements have become more and more long-term...

In St. Petersburg it is also the trend. And one more indicator of future saturation. Rates while grow, but soon tenants will dictate the conditions.

And who will be first to get to this point - Moscow, Peter or even another region?

Moscow is a country within a country. Here it is more complex to predict, laws that are different from the market can operate. St. Petersburg is unlike Moscow - the normal mega city is closer to Europe. So it is not imperative that saturation will first come in Moscow. Although, of course, it will not escape it.

It is already known that Kazan has overtaken Moscow in saturation of shopping space. Kazan has demonstrated that for the anniversary of a city you should not try to simultaneously bring onto the market so many square meters of commercial real estate.

St. Petersburg is also a rather demonstrative city, it now shows what will happen in the regions of Russia, first of all in cities with a population of a million, and in the retail and office segments.

What are the current rates of capitalization in St. Petersburg?

This question is a secret. Each premises is so individual that it is not possible to make an objective estimation. Not in one segment now are there even five deals, which are the same, in order to compare and calculate an average.

So it’s a range - from 9 per cent to 18 per cent?

Quite right. In the market there are not enough investment products, but negotiations are now being carried out for future deals. On ready products that have been present in the market for more than a year, costs and incomes have stabilized. But capitalization rates depend on a set of factors: from the offer, the area of a premises, the concept, the set of tenants, the managing company, etc.

In Moscow everything is also not simple, but averages can be deduced.

In St. Petersburg they are a little higher than in Moscow, maybe, by 1 per cent. In Moscow real estate is more expensive. If in the capital good retail real estate premises wrangle at a rate of 9 per cent, then in St. Petersburg, accordingly, they are about 10 per cent.

You said that the rates depend on the set of tenants. But there are few new, good brands in both Moscow and Peter. How do we solve this problem?

The operator should have good will to come to the country, to the corresponding region. It is not possible to bring a certain operator just because we need it. We work with those who are in the market. You are right, today there are catastrophically few of them. There is only one solution which has been thought out by regional developers - they especially feel the shortage of brand stores, understanding, that new brands still have not moved on at all from Moscow to St. Petersburg, and even further from their reach are bought franchises. Regional developers if possible, become franchises. This is the civilized way, but it should not be confused with the situation where the same goods are brought by small consignments by some privately owned enterprise and half legally are represented in some shop.

And we get such “multi-brand” boutiques? Are there are lot of them in St. Petersburg?

They are everywhere. Earlier I was amazed with the Univerbyt project in Yekaterinburg. The whole shopping complex was full of such shops. For example, Zara had not come yet to Moscow, and in Univerbyt the goods of this brand in a boutique with a similar name were already on sale.

So it’s an important concept for shopping centers? Especially when it’s the same for all regions. How necessary, for example, is a significant entertainment component in shopping centers, moreover with the inclusion of exotic options like an oceanarium?

Practice has proved that combining shopping and entertainment components gives a strong synergetic effect. Of course, a developer that decides to include something brand new in a shopping center takes a risk. But the success of a typical shopping center depends not only on the chosen location, the size and configuration of the land plot and the skill of the developer and the consultant, but also how well it fits in the generally accepted classification and corresponds to typology. The right concept defines zones for a coverage of clients.

But in almost all Russian cities there are no approved rules of land tenure and building. It often happens that identical shopping centers are under construction side by side, and accordingly, their coverage zones cross. In Peter how are they solving this problem?

It is possible to struggle with this problem in one way: foresee the growth of competition. It is necessary for not only the one who is first to enter the market to think about the future, but also the one who follows it. We found this problem when we opened the Sennaya shopping center - a large premises for which we were the consultant and broker.

Near to it there was another large shopping complex (Pik), which was late in opening and entered the market a year later. Its location was primarily more favourable - it is near to the metro on an open area, unlike Sennaya. But both these premises are successful and supplement each other well. Although initially no negotiations between the proprietors on coordinating their concepts, retail operators and entertainment functions were conducted. But attendance is high at both centers.

Competent marketing is in the foreground?

The furthest forward. In comparison with residential real estate, commercial development is more vulnerable, especially at the initial stage when the concept is being developed.

How important then is the role of consultants? For a beginner developer has the presence on a project of a famous consultant to which it pays absurd amounts of money become something like a symbol of quality?

In retail the name of the company and the name of the specific person which conducted this or that project are not the only things that hold significance. In fact in almost all well-known companies there are also trainees and apprentices, and it is clear, that established professionals cannot simultaneously work across the whole of Russia. Therefore there is no sense in talking about the trademarks of consultants?

But with their arrival to St. Petersburg your company, for example, has lost its position.

We have lost in that, maybe, we have not managed to get some new absurd project. For a long time we have not wasted our time on projects that are not ambitious for us because we get to choose. We think it is necessary to do projects that are worthy of our name, and with those who trust us.

Do you intend to participate in any projects as investors?

We have not participated as co-owners in any project yet. Now we mainly work as external managing directors and we provide a full package deal - from the idea of the shopping center to its embodiment.

But we are going to develop our own projects as investors. Although it is too early to speak about it - it is a question of reconstruction and re-profiling multipurpose complexes of buildings in the historical center of St. Petersburg. The pilot project is small - a total area of 10,000 sq.m. Although now in the city there is a real boom in large commercial, especially office, projects.

When was the turning point in the realization of developers and they started to announce large-scale projects?

Before the start of 2006, even new and not reconstructed office projects were a maximum of 20,000 sq.m. Then projects measuring 50,000 sq.m began to be announced and then up to 200,000 sq.m. And then large-scale projects appeared, for example construction in the alluvial territories of Morsky Fasad (on 400 odd hectares). Here together with residential real estate, 6 million sq.m of commercial real estate, mainly offices, is planned for the market.

Multi-million projects, are they a blessing or a problem for the market?

A problem with the required investments and infrastructure. One developer cannot always realize such large scale plans. Therefore the reasonable thing is done: the project is broken into lots, which are carried out by different developers.

Also it turns out, for example, in the case with Zolotoi Ostrov (Golden Island), like the fable about the swan, the crab and the pike.

Experience shows that different developers should have one “head.” So that there will be no unnecessary competition, but the necessary architectural harmony of premises, and their harmony with the environment. Imagine, you are creating a place where every morning tens of thousands of people will go to work.

It is good that you mention respect for architecture. Is it respected because in Peter it is strictly kept an eye on? Or has the status of the cultural capital of Russia prevailed over developers?

It is very strictly kept an eye on. We sometimes complain about it - but in this case it is better to be over cautious. The government acts absolutely correctly, in treating high altitude regulations very strictly, well, maybe except for Gazprom-City.

And how are foreign architects treated?

The city has always been open to western architectural masters. It has brought only advantages. Even now there are western stars, so-called "icons" operating in the city.

In Moscow invited stars add to the weight of a project, local masters help to get it approved, and students carry out the draft work.

This is a completely normal set-up. In St. Petersburg now they are starting to create something similar. Because they have come to understand that without a star you don’t get world class. Local architects act in the role of subcontractors, sub designers and become more and more fastidious to architecture. It is inspiring.

Do you have a favourite shopping center, which you consider a model standard?

A shopping center should not be a model standard. It is a functional thing. For example, there cannot be another Mega. But a fashion-center, especially placed in a historical building, should engage with the architecture. I can name such a premises, a small shopping center at 56 Bolshoi prospekt.

Is it correct that companies that initially specialize in residential real estate (RBI, LSR, LenSpetsSMU), develop commercial projects?

Those who are engaged in residential and commercial real estate have a different mentality. But those who build shopping centers can build offices. But the problem of specialization in the development business in St. Petersburg is not the main one. The main problem is in the organization of this business. The customer is important, they are always the same. They initiate a project, realize the project and then leave the constructed premises. The work of the customer still combines both executive and controlling functions: the customer-developer does everything itself and supervises everything. But it is a temporary stage, I am sure that this will end soon owing to competition.

Last year St. Petersburg became the leader among Russian cities in terms of the volume of area suitable for rent for retail that came on the market (almost 1 million sq.m).

For example it is possible to name the project of Sistema-Gals not far from Pulkovo – the Leto shopping center. Do you know what they call in St. Petersburg the space from Ploshchad Pobedy to the place where it was built? A cemetery of shopping complexes. There the most powerful shopping area has been created, and it continues to develop - here already stands the Masshtab shopping center, Pulkovo III, and nearby, Lenta and Karusel, and more projects have been announced.

The source of this glut is in the competitive struggle between grocery hypermarket chains, each of which thought it was right to stake out a place on Pulkovskoye shosse. As a result almost all large players who are present now in the market have built themselves in a row. Leto by Sistema-Gals has become a kind of "fifth" Mega, in addition to the existing ones. It is perplexing that this shopping complex is under construction 10 minutes drive away from Mega Dybenko and similar in concept Raduga shopping center. The buyer, in fact of all of them, is the same.

Perhaps the construction of underground shopping centers will appear? At the recent international Proestate forum in St. Petersburg this was named among the future trends of the development of the city.

At the moment it is only talk. Although it amazed me, that, for example, in Moscow 8 per cent of all area to come on the market, including residential, is located under the ground. And the continuing task is to bring this figure to 15 per cent. This is good. It seems to me, a mega city more effectively develops downwards than width ways.

But underground construction is more expensive.

To build new infrastructure above ground is even more expensive. But there are also companies that wish to immortalize themselves even by doing expensive projects. The development of underground space and the creation of significant projects is a calling. It is difficult to estimate what dividends a developer can receive. I think the city will find a way of compensating it. But someone should get involved in it. For me development of underground space should, first of all, be new transport centers because you already cannot drive anywhere.

As a Muscovite, I can say that the construction of new flyovers is a dead end: they provide only temporary relief.

Sooner or later we will need to restrict entry to the city center, as in London and Prague. But one is in conflict with the other. In Petersburg there is still no concept of the development of underground space. Although like Moscow, it needs it. The role of the city government is again great here. Developers will dig [anywhere] – just let them. But it is necessary that the digging is also favourable for the city’s dwellers.

You have projects in Kazakhstan, Chelyabinsk and Kaliningrad. How do you choose regions for work?

We have two different approaches. Data on the saturation of shopping space in Russian cities and data on the income of the population. And finally information is taken from the Internet, directories, local consultants and any friends in the business environment. This is basically enough information to choose a city. Then the human factor comes into business. We started with Yekaterinburg, but couldn’t remain there because of the notorious human factor.

We have come to Chelyabinsk. Currently, it of course, lags behind Yekaterinburg on saturation of shopping centers for its own reasons (low spending ability). But here the human factor is acceptable for us. Naturally in business you can’t take offence, but psychology, all the same, is important.

What commission fee do you charge?

The market average - as a rule, one month’s rent. Sometimes a little more - not 8.3 per cent, but 10 per cent, but that is rare. And on the contrary, when we provide a customer with a whole package of services it is cheaper.

When the deal is large, when the rental rate is high, it is a substantial fee, but it is necessary to understand that the risks are insane, and very often work remains unpaid. For various reasons: sometimes the tenant wavers and doesn’t sign the contract, sometimes the landlord changes his mind before signing.

Have tenants became more whimsical?

They were always whimsical. Though the word "whimsical" should not be confused with the word “principled.” There are valid technical requirements for retail operators concerning premises and logistics, and the landlord should satisfy them. I consider disputes of anchors as whimsical when they argue over who should have what place on a sign of the main facade.

Now clothes chains are actively striving to be anchor tenants.

What we understand of an anchor tenant is really changing. Grocery chains have ceased to play this role in some cases. Not only in St. Petersburg, but also in other cities. Even regions that are still insufficiently developed by national grocery chains have local, and rather strong chains. Gradually their development leads to the fact that in any city there is a good supermarket, and, in doing a new regional scale business center project, the developer should think carefully about whether a supermarket is necessary and if so what size. On the one hand, it is kind of necessary, based on the typical concept. On the other hand, from the point of view of the stream of buyers it already doesn’t serve as an anchor although it takes up a lot of space. Of 100 people, 80 will visit the shopping areas and will not go to a supermarket. And on the contrary, those who have come to the supermarket will not go to the boutiques.

Who has become a modern anchor?

Entertainment - bowling, for example. Restaurants, in addition to food courts. And quality department stores. Although developers still prefer to work with traditional stores. Even out-of-date formats like market complexes have the right to existence - more than 40 per cent of the population go to them. It is unreasonable to reject them.

Besides Moscow and St. Petersburg, there is nothing of the kind, for example, in Kaluga or Sergiev Posad. Is it correct to build the latest concepts of shopping centers instead of markets here?

I agree to consider myself a missionary but to do much good for local people, having constructed them a European class shopping complex, and then be surprised, why they don’t appreciate it, is funny. It is necessary to study consumer preferences. But it is also important to foresee their development. To invest several tens of millions of dollars and construct a premises which will without bias survive 5-10 years, is bad economics. A project should be successful for at least 15 years. But reconstruction, all the same, will be inevitable. For example, in the US of all shopping complexes approximately 75 per cent are considered stable at the present time, and about 15-20 per cent are on the verge of reconstruction, tenants have started to rotate and changes are on the agenda, and the rest are already unprofitable and demand full redevelopment.

This is information on the US. Is it the same in St. Petersburg?

Gradually it will be the same here - the market is developing under the same laws. But we have rather less successful projects. Skill has not been perfected, many mistakes are made by developers who are not chains, who in the West do not exist, but here there is a lot of. It is clear that their projects are doomed, and it is a matter of time - less than 15 years.

There is another question as to what is considered a quality shopping center. Even the consultants that call themselves international, cannot precisely define this concept - their estimations sometimes miss at times.

Yuri Borisov is the managing partner of IB Group. He was born in 1959 in Leningrad. He graduated from the Kalinin Leningrad Polytechnical Institute as an engineer-constructor. Since 1992 he has worked as a consultant and broker in the commercial real estate market. In 2001 he created IB Group, which has gradually transformed into a holding. He is married with two children. He is a master of sports in sports orientation, and a fan of Zenith football club.

IB Group is a holding consisting of several companies specializing in management, consulting, brokering, investment analysis, and also development in different sectors of commercial real estate. It is carrying out functions of the customer on a number of premises. Among the assets of the company are six open shopping complexes (the largest of which is Sennaya). IB Group is engaged in the development of 15 shopping premises in St. Petersburg and the regions of Russia; under the management of the company are three shopping complexes (the discount store center Pumba, Galereya 1814 and the Yugo-Zapad shopping center) and eight office buildings, and the company is carrying out the functions of customer on four other premises. IB Group has 120 employees. The total turnover of the premises under its management stands at $30 million.