Money Growing: Profitable Multifunctionality

Complexes that include office and housing components are not an innovation. Such buildings successfully function in America (New York, in the Manhattan area), in Asia (Hong Kong), in Europe (London, in the City area), and other countries. Alexei Belousov, sales manager at Capital Group, notes that in the last 5-7 years world development has moved towards the realization of mixed-use projects. The dynamics and features of the modern city environment induce developers to combine various spheres of life in one multipurpose complex and most effectively use the land allocated for construction. "The idea of constructing apartments in a multifunctional complex is related to time requirements and construction trends, which are the answers to the requests of the consumers of real estate," he specifies.

A checked course

As was explained by Vladimir Zhuravlyov, the sales manager at NAI Russia, the corporate culture of many transnational companies and large business enterprises provides for, in addition to high-quality office space, the presence of special premises - apartments in which top managers and expats can live and also where especially important negotiations can be carried out. The apartments form a new class of premises, says Olga Shirokova, director of the consulting, analytics and research department at Blackwood. However Mikhail Gets, managing partner at Novoye Kachestvo considers that the importance of office and housing complexes is exaggerated. "Apartments and offices are different formats, a combination of the two results in something a bit strange," he says. In his opinion, to service apartments you need a hotel operator, therefore the most successful variant is a combination of offices not with apartments, but with a hotel.

Irena Khamukova, senior adviser of the strategic consulting and valuation department at CB Richard Ellis, says that in the West proprietors rarely use apartments as their permanent residence. As a rule, they transfer the apartment to a hotel operator, but reserve the lifelong right to use it. "When the apartment is empty, the hotel operator leases it to third parties, guaranteeing the owner annual profit at a rate of 10-15 per cent per annum," she says. For example, in the US Condor Hotel Center has developed this kind of management system for apartments, which was created by multimillionaire Donald Trump.

In Moscow the construction of multifunctional complexes with a housing or hotel component has recently begun. More than a year ago, the Moscow city authorities introduced a restriction on the construction of office buildings in the city centre. At the same time investors have suggested considering hotel projects. "This functional component is now also used to substantiate the accommodation of new office construction in the city,” says Alexei Dzeboev, deputy director of investments at Vika-Development. In the opinion of Elena Yenareva, head of the marketing department at Sistema-Gals, to obtain approval for the construction of hotel apartments is easier than housing, and this is also a serious stimulus for the realization of such projects.

The reason for active development of the hotel apartment market in Moscow, in Khamukova’s opinion is the shortage of land for new construction in the central part of the city, and also the rapid rise in real estate prices. Also, because of the specificity of the legal classification of hotel apartments as non-residential premises, the developer has the opportunity to put apartments in places where, from the point of view of the building specifications for the construction of housing, it would otherwise be impossible (for example, because of insulation regulations). Elena Ristavaara, director of consulting at Colliers International, thinks that the dynamic development of the mixed-use format has legal uncertainty. Legally the apartments equate to a hotel room, and the investors submit the construction of a complex of apartments as a hotel – an apartment-hotel. "The investor receives privileges on a number of parameters, first of all in calculating the city’s share in a project: for housing this share is 50 per cent, in hotel projects the share of the city has recently not been paid," she specifies.

According to Khamukova, the advantages of apartments within the limits of business complexes from the point of view of development is in the diversification of the purpose of the areas, allowing for lower risks of the project. Having apartments on sale attracts investments at the initial stages of construction. In the opinion of Tatyana Vakulenko, head of the elite real estate department at HomeHunter in connection with this, constructors of the most significant premises even more often allocate apartments in their projects, thus raising their status.

Everything is not that simple

Developers themselves do not think that the construction of multifunctional complexes with apartments or a hotel is an easy task, which is completed simply by obtaining land in the necessary part of the city and the gathering of a small package of approvals. In Belousova's opinion, the realization of such projects changes the labour-intensiveness: it is necessary to successfully combine with maximum comfort for all future inhabitants of the multifunctional complex to combine a residential component, offices, and zones of rest and entertainment. The liquidity of a product will depend on the market.

Dzeboev thinks that for an office project with a hotel it is difficult to obtain bank credit. "Creditors look at such projects with much greater suspicion than they do offices in their pure state, and to obtain financing for the project the developer is required to provide a signed letter or even a full contract on the intentions of the management of the hotel with a large hotel operator," he says.

The process from the beginning of negotiations with the hotel operator to the conclusion of the contract can take 6-12 months, and this is one reason for failure to meet deadlines in putting the premises into operation. In the expert’s opinion, the most painless way is the development of a project where the office and hotel components are in different buildings. But the limited conditions in which they are realized, reduces the possibility of carrying out such projects in the city centre.

According to Yenareva, the realization of different concepts in one building entails the necessity of two separate entrances and lift areas, which in turn, will increase the number of fire escapes and corridors, and thus leads to a loss of useful areas. "In the future the main complexity of a multipurpose premises will be differentiating the rights and responsibilities of the owners and operators of various parts, and defining the order of operation of the whole property: communications, public zones, engineering infrastructure, etc, in advance," she notes.

Alexander Osipov, head of the consulting department at Astera, pays attention to the fact that western experience shows that multipurpose complexes deteriorate 15-20 per cent quicker. "The cost price of the maintenance of a building while in service is higher than a usual business center," he concludes.

Priorities

In the majority of multifunctional complexes under construction or that have been announced in Moscow apartments rather than hotels are incorporated in the project. The advantage to the investor in realizing "a complex of apartments" rather than a hotel, is faster recoupment of funds invested in the project. As Ristavaara explains, hotel rooms are "rented out" daily, in conditions of quickly varying conjuncture, and being engaged in the hotel business is accompanied with high operating costs, the payment of personnel, etc. Apartments are on sale as residential units or are leased as serviced apartments for long term, which removes the risks of them being empty, she argues.

The construction of apartments is connected with the growing demand for this type of real estate. According to Osipov, there’s a class of consumers that have got used to the residential habits of the West, which is based on a live-work-play arrangement. Zhuravlyov thinks that owning your own apartment is a question of prestige. "There are rather a lot of people who want to show their status in the capital," he says.

According to Irina Rogatchyov, head of the residential real estate department at Capital Group, buyers of apartments in multifunctional complexes are mainly representatives of the business environment: owners and co-owners of large companies (oil&gas, transport, IT, advertising, banks, etc). High interest is shown by regional company employees: it is convenient for them to have an office and an apartment in one place.

In the opinion of experts, the most interesting and closest to world standards multifunctional complexes are realized in the territory of the international business district Moscow-City. Capital Group is building Gorod Stolits here, the structure of which includes office and shopping areas, premises for relation and sport and residential apartments from the 19th to the 73rd floor. The complex is expected to have one of the largest underground car parks in Europe, and every apartment will have two car parking places. Another project of the company is the Legenda Tsvetnovo multifunctional complex on the same boulevard, which will consist of three towers with different heights and a total area of 107,500 sq.m. The complex will include apartments with areas from 135 to 203 sq.m.

Mirax Group is completing the construction of the Federation multipurpose complex, which includes the 5* Grand Hyatt Moscow hotel, offices, restaurants, cafes, boutiques and apartments measuring from 160 sq.m, which will be serviced by Hyatt International. The total area of the apartments will be 78,500 sq.m. "Already now in the Western tower there is not one free meter of space, and sale and rent of areas in the Eastern tower is now being conducted,” says Osipov. Another project of the company – Mirax Plaza on Kutuzovsky prospekt - includes office, shopping and entertainment and sports and health centers, and also premium class apartments measuring 200 to 400 sq.m.

Barkley is constructing Barkley Plaza complex on Prechistenka in the center of Moscow with apartments measuring 80 to 175 sq.m. It is one of the few business centers that has not have different height buildings (seven floors), but has an excellent location and remarkable specific characteristics. Inteko has announced the Kosmo Park business-park project with apartments (Minskaya ulitsa). The total area of the future complex will be 727,000 sq.m, of which apartments will take up 7,520 sq.m.

MTK-Dialex-1 has announced the realization of a multifunctional complex within the MKAD, in the Besedinsky Most district. The complex will have a total area of 281,000 sq.m and will consist of a large shopping and entertainment center and a 21-storey hotel-office component. The 3* hotel will take up 36,455 sq.m, and the class B offices – 28,000 sq.m.

Development company MR Group plans to build the Domino multifunctional complex with hotel rooms at 1 Skladochnaya ulitsa in immediate proximity to the Third Transport Ring and Dmitrovskoye shosse. The total area of the project will be 310,393 sq.m. Incorporated industrial corporation is building the Kremlevsky shopping-hotel complex in the reconstructed building of Sredniye Torgoviye Ryady. Rubin is constructing the Park Pobedy multifunctional complex with an office component close to Kutuzovsky prospekt. AFI Development plans to construct a complex on Ulitsa Bolshaya Pochtovaya with 80,000 sq.m of residential, office and hotel premises. "Analysis of only the announced projects shows that by 2010 it is expected that the construction of more than 3,500 apartments will be for sale," summarizes Khamukova.

In business districts

The location of a multifunctional complex with a residential component depends on how the residential component will be maintained: whether they will be apartments or a hotel. In Osipov's opinion, the location of a multifunctional complex with apartments in the central part of the city is desirable. "The city centre always attracts buyers with status, high class service and the possibility of having everything close at hand," he specifies. A good example is the many apartments in the Moscow-City district. Zhuravlyov notes that apartments in the most magnificent business centers under construction in the city center are class A. "To build business centers with apartments outside the MKAD is irrational," he considers.

However, Gets is sure that it is possible to build multifunctional complexes with apartments in any generated business point of the city, for example in the zone of Leningradsky and Kutuzovsky prospekt. "Demand for housing in these zones is quite high, and the transport situation which is becoming more aggravated every year will only promote interest in such real estate," he emphasizes. In Yenareva's opinion, the construction of apartments within the structure of multifunctional complexes outside the MKAD on highways leading to Sheremetyevo, Vnukovo, and Domodedovo airport is also interesting." "In quiet areas and industrial zones such a combination is not good," she notes.

Shirokova agrees that the exact requirements for the accommodation of apartments is not present, but stipulates that the prospects of complexes located outside the central district is still not clear. In her opinion, for such complexes to be popular, factors that would attract potential buyers or tenants are necessary: besides an office component this may be an entertainment component. Among the announced multifunctional complexes with an entertainment component and apartments are Freestyle Park on Kievskoye shosse, a golf complex with apartments in Mitino, Kheops multifunctional complex with office and apartment components in the area of Timiryazevskaya metro station, etc. "But in this case it is more expedient to talk about the accommodation of apartments in multifunctional complexes that won’t be sold but leased," she specifies.

Office-hotel complexes in Moscow can be built everywhere. Hotel rooms outside the Garden Ring are even more urgent than in the city center. But also here there are nuances. Irina Dzyuba, sales manager of MR Group, thinks that with the realization of such projects the developer needs to adapt the concept to the location and environment of the premises. For example, MR Group’s idea to make a hotel in a business center on Skladochnaya ulitsa is dictated by the desire of the developer not only to offer future tenants quality premises with modern engineering systems, but also, to take into account the number of people who will work there, and provide them with a comfortable place to stay, including the maintenance of a food area, modern shopping zone, a fitness center, a conference hall and hotel rooms. The company has carried out research of Savyolovskaya and areas of the city adjoining it and has noted an obvious shortage of hotels. "It is unconditional that there will be requirements for hotel operators, but we know that they are ready to consider offers within the limits of business complexes," Dzyuba emphasizes. However the expert supposes that if during realization of the project, there turns out to be a sharp shortage of office areas or a quality hotel operator won’t be found then the building on Skladochnaya ulitsa may enter the market as just an office complex.

Calculations are encouraging

In the opinion of some experts, the overlapping of several formats of real estate within the limits of one complex promotes an increase in the liquidity of the areas of each of the presented formats, increases the investment appeal of the project as a whole, and reduces the period of recoupment. Ashot Barsegyan, head of commercial real estate at MIAN, thinks that the recoupment period of office or office-hotel buildings directly depends on the concept, what the situation is in the market at the given time, and how competently the concept has been developed. According to Konstantin Borisov, vice-president of Mirax Group, the time it takes to recoup the costs of a hotel-office complex is nevertheless much longer than just office complexes. "Hotel projects for which raised operational costs are characteristic, take on average 10-15 years to pay off and office centers 5-7 years," he specifies. As Yenareva notes, the construction costs of a hotel are considerably higher in connection with the fact that they are constructed on a turn-key basis.

Overlapping a hotel and office project allows the developer to make returns in 7-8 years, and the presence of apartments in a multifunctional complex can reduce this to 5 years, market participants questioned by Vedomosti estimate. Yenareva explains that act FZ No. 214 does not apply in the process of sales of apartments. Therefore their realization can begin before receiving permission to construct, where investments in the project long before the delivery of the premises are involved.

For multifunctional complexes with apartments the recoupment period is shorter due to 100 per cent payment of apartments (at the stage of construction), Alexei Ostroborodov, director of an inter regional company confirms.

At the same time Olga Tvorogova, managing partner at Ostogenka Real Estate, notes that the price per sq.m for hotel apartments in the primary market are $1,000-$3,000 less than usual apartments.

According to Blackwood in May 2008, apartments in the Moscow Tower and St. Petersburg Tower in the Gorod Stolits multifunctional complex were sold for $12,000 to $34,000 per sq.m (according to Capital Group - from $11,500 per sq.m), in the Federation complex (Western Tower and Eastern Tower) from $19,000 to $35,000 per sq.m. In Imperia Tower the prices reach $30,000 per sq.m. An Interesting event was the open sale in February 2008 of serviced apartments located in the new Nikoloyamskoi business center (put into operating in December 2007), which besides apartments includes class A offices and an infrastructure, for $10,000-$15,000 per sq.m.

Uliana Aliyeva thinks that the presence of apartments in multifunctional complexes is not a determining factor that influences rental rates. "And advantage is the concentration of consumer demand for two formats of real estate simultaneously, and this can affect the speed of the realization of the whole project," he explains.