Money Growing: Roadside Developers

According to Rosavtodor, of the total 1.145 million km of road in Russia, almost 60 per cent have deteriorated. Russia needs new roads like it needs air. The state is trying to appoint a process of construction of new major roads in a big way. In the last year the law "On highways" which should become the distinctive road code has been introduced, as has the Highway Federal Target Program on the Modernization of the transport system of Russia.

The state approach

Last year almost 200 billion rubles was allocated for the construction and repair of roads, and according to the new program in 2008 and 2009, 212.3 billion and 223.5 billion rubles accordingly have been allocated for these purposes.

However, this money is not even partly enough to satisfy the need for new roads. Therefore in recent years active talk about the construction of toll roads, which will be built by private investors, has started. Under these projects money from investment fund will be allocated, and applications will be made to receive the money (more than 40 per cent of all applications to receive funds from the investment fund have been for road projects). The selection of investors, which will act as the applicants for the construction of toll roads, will be carried out through tenders. There are already many interested parties: among them are western investment banks, European construction companies and large Russian investors.

The cumulative demand for roads in Russia is estimated at 1 million km. It is clear that such volumes will not be constructed even in the next centuries. But the first large federal projects and toll roads will start to appear in the foreseeable future. The improvement and reconstruction of old roads will also be carried out. Construction and reconstruction will be especially active near large cities - first of all Moscow and St. Petersburg.

But many investors are interested not so much in participating in the construction of roads, the period for recoupment of which is still not clear, but in buying cheap land along the future roads and participating in the development of roadside infrastructure.

More roadside development projects have recently been announced, and speculators can’t wait for construction of the first highways to start. In fact, the start of work at a building site guarantees an increase in the value of the land plots and the profit for investors from their resale.

Secondary redistribution

Today in the Moscow suburbs, several pilot construction projects for toll roads have already been announced. Speculators wanting to make some money from the resale of land plots in zones near the future highways are swarming around such projects. "New roads are becoming the catalyst for buying up land plots in areas along these routes,” says Svetlana Yarova, head of the department for projects at Astera. “As soon as the construction of a road is announced, the mass buying up of land begins. In most cases these sites do not become places of construction, but are kept until the last minute and then sold at much higher prices.”

In the Moscow suburbs the main areas of investment activity are on the Moscow to St. Petersburg route, the Central Ring Road (TsKAD), the dual Yaroslavskoye shosse, the Don route, the dual Gorkoye shosse and the Odintsovo bypass on Minskoye shosse, the reconstruction or construction of which is just about to start. Investors, of course, understand, that "just about" is constantly postponed, but this fact does not diminish investment activity. "Speculators bought up all roadside territories a long time,” says Maxim Leshchev, general director of Geo Development. “More than half of them have already found an end user, and in these territories premises are being designed, and construction is being carried out or has been completed."

Now in the secondary market resale deals on bought up territories at over valued prices are being made, and some sites are already passing into third hands. "The land market, at least in the middle area of the Moscow suburbs, has been divided for a long time,” confirms Victoria Korneyev, a representative of TransRegionInvest. “Now there is a "secondary" distribution, "mass buying up" of land along major roads does not happen any more - everyone who wanted to has made their money already."

But, one way or another, new roads in the Moscow region will appear, so investors should pay greater attention to earlier experience which could also be duplicated in the regions where the road and investment boom is just beginning.

As an example of the raised investment activity around roads experts questioned by Vedomosti name the frenzy surrounding land along Kievskoye shosse, the reconstruction of which was announced in 2004 and is now coming to an end. The cost of land plots along this highway, according to chief of the development department at MDK-Group holding Alexei Tonkonogov, since 2005 to the present day has increased by more than 3 times. "Land directly on Kievskoye shosse was already sold out last year, and even then the price seemed impossibly high at $15,000 per hundred sq.m,” Leshchev agrees. “Now buyers are ready to invest $30,000 per hundred sq.m, and there is no supply. Not so long ago (at the end of last year) a deal was closed on the sale of 43 hectares at the 2nd km of Kievskoye shosse at a price of almost $23,000 per hundred sq.m, but the site has been encumbered by power transmission lines and there was "a discount for wholesale." It is necessary to note, that the seller owned the territory for less than two years in which the cost of the land has more than doubled. Two years ago the cost per hundred sq.m did not exceed $10,000."

Another example from recent experience is the Don route. "When there was information that the road would be tolled, it became more attractive for the residential sector as freight traffic and transport would most likely be transferred to Staraya Kashirka, and therefore the transport accessibility of the Don would improve," Tonkonogov explains.

Now investors have new projects on their agendas. "Among new roads situated near Moscow the Central Ring Road, which will be laid in the Moscow suburbs at a distance of 30-50 km from the MKAD is the most attractive,” says Kira Butba, director of the consulting department at NAI Global. “In towns near the Central Ring Road, investment projects on the construction of residential and commercial real estate have already been declared." Gennady Teryaev, director of development at Rodex Group adds: "In places where this road will pass there has been serious activity by speculators and large land owners as the Central Ring Road may cardinally change the situation in the cottage/out-of-town market real estate of the country."

According to rumors, land lengthways along the Central Ring Road has actively been bought up by Otkrytiye Investy (Open investments), which is an affiliated structure of IR Development. Also, according to anonymous sources, the company has bought up land along the future Leningrad route. Otkrytiye Investy would not comment, but informed market players say that it is a matter of about 22,000 hectares. Basically the land was bought up at early stages by companies close to officials who are responsible for the realization of road projects and, hence, possess the most trustworthy information about the future route of the road.

With the Central Ring Road something interesting has happened: In addition to the deadline of this project already having moved several times, the location of the road has also changed. The road in the west and northwest, according to new designs, will take a hefty 120-km detour, bypassing the Kalininets military station and several cottage settlements which may make a fool of some investors, but will allow others to make money – those whose land will end up in the "zone of influence" within this detour without intention. "It will not become officially known where exactly the Central Ring Road will be laid until no earlier than 2009, but already today land investors/speculators are buying up practically all attractive land plots located lengthways along the "future road," says Oksana Zhiltsova, the managing partner at Promyshlenniyie Zemli (Industrial Land). The word "future" is not casually quoted - who knows what other changes may be made during the designing of the road and what consequences they will have for investors. Recently Eric Bugulov, general director of JSC TsKAD promised that the construction of the road will be completed by 2015, however, the former project heads of the ring road in January, 2006 vehemently testified to the author of this article that the road will be completed by 2011.

Another venture project of the Moscow and Leningrad regions is the Moscow - St. Petersburg route, the exact "channel" of which has also not been approved. Lets hope investors will be more careful this time. "The period of construction of this highway is constantly being moved, but the majority of land in its area, as well as in the whole western sector of the Moscow suburbs, was bought up a long time ago by large landlords," shrugs George Kuzin, executive director of RDR-Holding. Nikolai Ditsman, director of marketing at Eurasia Logistics confirms this information.

Sink or swim

Speculators are the main buyers of land along the future roads and are prepared to risk their heads for the sake of huge profits. "This is a high risk business, as it is started on the basis of insider information about the projected new roads, which is true on a ration of 50:50," says Zhiltsova.

It is possible to buy up large blocks of land along the future road in advance counting on considerable speculative profit, but it suddenly appear that the road will be laid in an absolutely different place (where the land was bought up by a better informed speculator), or the project come to a standstill. According to Zhiltsova, this kind of business is only possible with a powerful administrative resource, when inside information is 101 per cent true.

"When a project is announced, then there is already nothing to make money on,” says Korneyev. Information on prospective projects is widely known in narrow circles long before it is made official, and accordingly, those who are interested have already exercised their "option." Naturally, the first make the most profit from projects. While only a single investor knows about the future road, the land along it can be bought for almost nothing. And if the project suddenly "fires," the profit of the investor will go off the scale. As always, those who are more cautious get less. "After the territorial borders of the road project become known, the cost of land on specific sites along the road can increase several times. Once construction of the road starts the rise in prices of the specified land decreases a little, as the most liquid sites by that time have already been bought," Zhiltsova explains. "The construction of a motorway is a long process, and therefore the purchase of land plots near it is a long-term investment," says Maria Litinetskaya, executive director of Blackwood.

Flashing amber

Once information about the project becomes widely known, the structure of buyers of the land along the road varies. At this stage companies which are going to develop the bought land plots enter the game. Andrei Bushin, general director of MIEL – Commercial Real Estate, divides roadside investors into two categories: "The first are speculative investors who, as a rule, possess insider information and up to the official announcement of the construction of roads buy up the land in their area. The second are developers who begin construction only once the road is practically complete. This is because a development project can be realized in two years, while the construction of a road can take tens years." Litinetskaya confirms this: "Developers start to show activity when the road has already been approved and work on its realization has begun.” Tonkonogov specifies: "If interest in land along the road is first shown when information starts to appear on the market, then more serious interest starts to form when there is a design and map of the road and when construction of it begins.”

The main signal to purchase for developers is the appearance of construction equipment in the territory of the road - this indicator is the green light for developers. "If the exact route of the road is approved and there are guarantees of its performance, it is possible to get land and build," agrees Ditsman.

But buyers are also in no hurry to leave the acquired land. "Our company is currently working with two financial structures that want to acquire such land, and at present we are only seeing several real offers where the proprietors, understanding the importance of the assets, are dictating the conditions," Leshchev says. It is clear: when the road will be almost constructed, it will be possible to gain even more.

And already the first roadside projects along the future roads are appearing. This land is most in demand by developers of warehouse, commercial and cottage real estate, and smaller sites are bought by the owners of chains of gas stations, roadside hotels and restaurants, wanting to locate premises along the new road. "Developers are most interested in land in close affinity to large towns situated near Moscow, and also areas by the junctions of new roads with existing nationally important roads,” says Butba. “Transport accessibility is the prime factor in choosing land for construction. Therefore for people interested in constructing large warehouses and cargo terminals roadside sites become very attractive."

Ditsman says that Eurasia Logistics always buys land for its premises near existing roads: Severnoye Domodedovo (the Moscow suburbs) is located no more than 500 m from the М4 (Kashirskoye shosse), and Kolpino (St. Petersburg), and is directly on the Е95 (Leningradskoye shosse). On the junction between the Central Ring Road and the М4 Capital Partners is building the White Park warehouse complex, Ghelamco is constructing the Bely Rast technopark, TransRegionInvest is realizing several large scale cottage settlement construction projects on previously bought land in the zone of influence of the Central Ring Road. Other investors are looking for sites for shopping centers.

Land directly bordering the road is particularly interesting to developers of commercial real estate (especially shops). "In the first 20-kilometer zone from the MKAD land is 50-150 per cent more expensive depending on the direction than the next 20 km, and the very first line is 20-50 per cent more," estimates Leshchev. Constructors of residential real estate, on the contrary, prefer "to hide" the settlements far from the road, whilst at the same time remaining within its zone of influence. "To construct a cottage settlement directly onto a national highway is difficult as or the land is difficult to buy, or is very expensive (and very few people will agree to live near a constant source of noise). Therefore settlements are under construction some distance from the roads, but each settlement is practically local to the road,” says Teryaev.

The future of roadside development in Russia completely depends on the activity of road authorities. New highways will be constructed and old ones will be reconstructed quicker if the flashing amber traffic lights for investors and developers will be replaced with green.