Money Growing: The Emptiness of the Moscow Suburbs

In the last 7-8 years the federal and Moscow region authorities have announced the start of the realization of about ten programs and projects for the accommodation of industrial zones in the territory of the Moscow region. So far none of them have been completed and at best are at an initial stage of development. The program of moving enterprises from Moscow is being carried out by basically closing manufacturing companies and moving them outside the city. But only a few factories have received land outside the city and can continue operating on this land.

A significant share of industrial enterprises demand serious modernization and their work concepts updating or will be forced to close.

When there is no money

In order to gradually reopen the manufacturing companies and move them to an innovative manufacturing business model, the government of the Moscow region has created its own program of development of industrial districts. Originally with the support of several industrial Italian groups the program for the construction of 72 industrial zones on land outside Moscow has been developed, with the total area of land used to stand at 13,500 hectares. The program was approved in the summer of 2005 and is intended to operate over five years. Within its framework no less than 7 million sq.m of space for the accommodation of class A and B logistics premises is planned, as well as 4.5 million sq.m of office space, no less than 0.3 million sq.m of social infrastructural premises, and 1 million sq.m of low-rise residential premises. In addition about 400,000-500,000 work places would be created.

The most significant thing is that these areas would create a new taxable base providing almost 28 billion rubles to the budget by the end of 2010. However, it looks like that these plans will not be realized by 2010. The main reason is simple – the absence of budgetary funds for these purposes.

The Federal government has also refused to participate in this program: Minister of Finance Alexei Kudrin has not approved the allocation of reserve funds for the creation of communications and infrastructure, ascertaining that it may entail "even greater inflation and corruption." Thus, all expenses on the creation of infrastructure and networks is borne by the investors. In their opinion, the real length of time it will take to see any results for even part of the plan to creation industrial zones will be 2015-2020.

"Currently in Stupino we are engaged in the preparation of the necessary documents, and laying communications. The issue of water is a particularly troublesome question. All these procedures take a lot of time, and as the government of the Moscow region doesn’t have sufficient funds to help us, we think that the real period of realization for the project will be extended to no less than 10 years," says Maxim Sotnikov, the co-owner of Komstrin.

Currently no more than eight industrial districts included in the program of the government of the Moscow Region are at the design and realization stage. But the level of completion of each of these projects, according to experts, is no more than 20 per cent. Projects being realized include a 2,000-hectare industrial park in Stupino, the AFK Sistema and Information business-systems techno park on 428 hectares in Dubna, Kulon-Istra on 33 hectares near to Istra, the Bely Rast and the slow industrial park project on 474 hectares belonging to Terre di Llama in the Volokolamsk region, which has been presented at international exhibitions for several years but is still an embryo.

Experts are unable to estimate the real state of affairs with the realization of this program. "In 2006, according to the data of the Moscow region government 72 industrial districts were planned for construction, and in 2007 54 were planned, 10 of which were newly announced. It is not clear on what basis they raised the number by such an amount (25 per cent)," says Oksana Zhiltsova, the managing partner of Promyshlenniye Zemli. According to her, more than two years has passed since the publication of the Moscow region governmental order on the start of the realization of the project, but information on the results appears in the mass-media rarely and full-scale action has still not begun.

"There are precedents whereby development companies building commercial premises in the territory of industrial districts have not been included in the list of investment companies within the limits of the above-stated program. The given fact once again confirms the low supply levels of information on the process of the realization of the program. It is possible that, the bill approved on January 31, 2007, in the Moscow State Duma "On the industrial districts of the Moscow region," will accelerate and optimize the process of realization of the program," hopes Zhiltsova.

And no desire

The business community has recently got used to solving financial problems independently. The city’s authorities also do not always help to solve other problems connected with the transfer of the purpose of land and connecting the land and premises to communication links.

"Companies that joined the program hoped for a pragmatic approach in the realization of obligations taken by the Moscow region government in reducing the length of time for the approval of the design documentation, the granting of some tax privileges, the connection to networks and the granting of the necessary volume of technical quotas and even help in attracting credit from Russian and foreign banks and international and foreign financial organizations. However more often all this remain just promises and no more," comments Vladislav Lukian, head of the strategic consulting department at Novaya Ploshchad. Moreover, according to him, many well-known individual’s opinions are that in certain cases the program has harmed developers more than helped then. This is first of all connected with the necessity to receive many more approvals than a usual project.

Another problem is that practically all the land in the Moscow region is now private property and proprietors are not in a hurry to get rid of this land. The influence of the government is not great enough to insist the sale of land for this or that project. One of the few examples whereby the authorities and the owner of land have found mutual understanding is the Bely Rast project on the highway to Dmitrovsky. The project is simultaneously included in the plan for the creation of 35 Russian Railways logistical centers and the project for the creation of industrial districts in the Moscow region. The initial owner of the land was Stroiconsulting+ (the area of the site is 177 hectares). According Vladimir Kornienko, head of this project, Russian Railways has signed an agreement with Stroiconsulting+ on the sale of land and both the sharing and development of it. On the territory the cargo areas of several Moscow railway stations will be transferred here as well as some other manufacturing enterprises being located here.

The project is currently the first large-scale program for the creation of a large logistics center in the whole country. They were able to agree with the proprietor of the land due to the guaranteed high profit of the project as the land of the cargo areas in Moscow will be provided for a commercial building. But this example, according to experts, should not be perceived as the rule.

The owners of the land are traditionally not prepared to develop the land and create industrial zones. "Why would we invest our own funds in development of this land when we don’t know when we don’t know when we will see any results, and if the price of the land is rising 15-40 per cent depending on the area without doing anything? Investors have no guarantees of results," says the head of a large company-land owner in the Moscow region. For example, Znak, which belongs to well-known businessman Tsvetkov, owns the Panfilovsky state farm in the Volokolamsk region where a territory measuring about 200 hectares has been reserved for an industrial district. However, according to the authorities of the Volokolamsk region, Znak does not plan to participate in this program in the near future. The company has confirmed this.

It turns out that the initially planned use of the industrial purpose, which meets the requirements of investors is not possible, as there is practically no such land left in the Moscow region. To solve this problem the use of land of settlements and agricultural land, which requires complex and time consuming preparation to be able to be used for industrial districts is stipulated. "Despite the fact that the program to create such districts is part of a national project which requires the interaction of all levels of authority, conflicts are arising in obtainin land that is the property of other companies, and in the registration of the land. It is also necessary to note that the quality of the preparation of the sites leaves much to be desired. All work in solving judicial and legal problems connected with the land are incurred by the managing company established by the investor," notes Alexei Tonkonogov, head of the development department at MDK-Group.

"There is an impression that the lack of will of the authorities and unwillingness of many landowners to participate in the program has led to a significant delay in the creation of industrial zones which could become a serious tax contribution to the Moscow region budget and guarantee the further development of the region. For the realization of such programs a powerful managing and distributing center is necessary,” say experts at Zemer.

Lack of coincidence

As a result the program on the creation of industrial districts in the Moscow region has almost completely been neglected. Investors should decide themselves whether or not they should undertake this or that project, relying during its realization mainly on its own forces. In the Moscow region there are currently not that many powerful organizations. "Not every large investor will choose a project when there is not complete clarity in the registration of the land, when there are no guarantees from the authorities on the carrying out of engineering communications, when there are problems with getting the design documentation approved, and also when there are problems with the initial work on the development of the land plot", says Zhiltsova.

However many developers often want to be part of projects in the program, expecting governmental privileges in the future. Such status requires the formation of a precise business plan, a clear marketing strategy and also the presence of essential investment funds. Infill development projects or "cloisters" for companies’ individual needs are not the basis for joining the program. There are few examples of logistics complexes that have been constructed by developers that have been included in the program on the creation of industrial zones.

"In 2006 a decision was made to transfer the purpose of the land of a site belonging to Espro, which is building an industrial park near Istra, from agricultural to industrial. This project in Novaya Riga has been included in the governmental program. In the nest three years here, the construction of the Davydkovskoye industrial park on an area of 33 hectares is planned. Kulon-Istra is acting as the investor. The park will include a class A logistics complex measuring 120,000 sq.m," says Tonkonogov. But as Lukian notes, "it would not be right to think that the program is just a screen for subsequent speculative realization of the most attractive commercial real estate premises."

The current situation with the realization of the program is also being influenced by the market situation with land. It is possible to say quite surely that demand for industrial land currently considerably exceeds supply. Even with enormous land plots in areas within the limits of the program (with the plan to transfer their purpose to industrial use land) a misbalance in supply and demand still remains. The paradox is that in the structure of demand, sites with an area up to 2 hectares dominate, and the specific share of this demand is constantly increasing and currently stands at 63 per cent.

"In total the share of demand for land plots measuring 2 to 5 hectares for industrial use is more than 80 per cent. Only large investment-development can buy land measuring more than 50 to 100 hectares, of which there are not a lot of on the commercial real estate market. And more often large companies realize their own construction projects on the land,” says Zhiltsova. Therefore, according to her, there is hardly likely to be a reduction in demand for land plots for representatives of small and medium-sized business at any time in the near future.

Demand for small sites will remain until the owners of industrial districts will divide it into pieces. "The solution of this problem lays in the interaction of the government of the Moscow region with companies working in the land development sphere. It is precisely them who can develop significant land plots in the region in the interests, for example, of a pool of small and average sized investors. At the initial stage they can take on the whole project, dividing the site between the future owners having prepared it for construction. Unfortunately, such interaction is still not being fully carried out," summarizes Zhiltsova.