Money Growing: Bury Your Money

But the land market in Russia is still not very civilized. In the Moscow suburbs almost half of land plots on the secondary market or held by large land owners are involved in criminal cases or claims. Land owners have a big task in front of them – to raise the appeal of land plots to investors and to sell them for more money.

Not all large land owners are able to do this themselves, not being used to "tinkering with land." But in the market there are already a number of companies operating that are prepared to help land owners raise the capitalization of their land for a reasonable price. However the time has not yet come for this new service – land development – to come to the Russian market.

Ready for construction

Until now, the work of many land owners has been as follows: buy up thousands of hectares of collective-farm land, investors allocate the most profitable plots in their opinion, then the land is transferred to the most suitable category, they undertake a number of activities directed at increasing the price of the land and after that the land plot is put up for sale.

However, many have managed to this even without transferring the purpose the land: when land has been bought for three kopeika, and it’s possible to sell it for a million even agricultural purpose land, there is no sense investing additional funds and effort in its development.

But in due course land owners, especially those who entered the market after the first redistribution, have understood that land is not the type of asset you give away and sell in its organic state. If you invest a small amount in the development of each plot it will be possible to sell that a much higher price. And so land development has started to arise in Russia.

This term is understood "as the process of increasing the value of land, not through speculative rises in prices, but through the provision of a number of services, including transferring the land from one category to another, laying of communications, developing the concept of the land plot, developing architectural plans, etc," says executive director of Blackwood Maria Litinetskaya. For example, the consolidation of small allotments into one large plot or, on the contrary, dividing a large plot into smaller ones. And also the creation of the concept of the use of the land, engineering preparation and legal registration of the land, lists Andrei Kroiter, development director of the cottage real estate at Inkom-Real Estate. According to deputy general director of Vesco Consulting Oleg Razin, the end result of land development is that the land plot is completely prepared for the construction of a permanent premises or any other purpose.

In Kroitor's opinion, the are various sets of services in the sphere of land development: "The minimum is the variant whereby the land owner of let’s say 100 hectares of agricultural purpose land divides the territory into five 20-hectare land plots and sells them. Land development on a turn-key basis includes the development of the concept of the use of the land plot, registration of its legal status, the laying of all communications, connection to electric grids, construction of access roads, etc. In this case a constructer receives a land plot completely ready for the realization of a project and can start construction whenever he wants."

Without such groundwork any construction in general is impossible. "A construction project for a cottage settlement or administrative, retail or industrial complex has several stages of development, at each of which a price is formed,” says general director of Geo Development Maxim Leshchev. Land Development is the first stage, the correctness of work on which, in many respects, influences the success or failure of the future project.

The features of Russian land

Alas, in Russia until recently, in many respects there was a “couldn’t care less” attitude to this part of preparing the project. The market was constantly growing, and demand in almost all segments was less than supply, allowing constructers to avoid the problems connected with the pre-design preparation of a land plot, which would without doubt arise if working somewhere in the European market. Hence the backwardness and defects of the land development market in Russia. "In western countries the approach to land development is different due to different legal systems and highly developed mortgage markets," comments Leshchev.

This is exactly where the differences lie, explains Kroitor: "In all developed countries the government is engaged in the preparation of land plots for construction. Builders come to a land plot with already issued legal status, communications and roads, and already connected electricity. Such an approach can accelerate the realization time by many times: the construction of a cottage residential complex will take 1.5-2 years. For comparison: in the Moscow region just the preparation of a land plot for construction and to receive all necessary approvals and sanctions for the construction of a cottage settlement will take, at best, the same 1.5-2 years."

But even when purchasing a land plot on the secondary market, a western constructer will never receive documentation for the land, transfer it to the necessary category or be engaged in other work with the land himself. They build and finance the project, while special companies – land developers – prepare the land for the specific purpose. This business is quite well developed in the US and Western Europe.

Russian developers try to carry out the whole cycle of work with the land plot independently. With the purpose of saving money, considers general director of Tweed Irina Mogilatova. According to her, in the Moscow suburbs there have been attempts to realize some large land development projects, however they have not met a response among market participants who consider prepared land as expensive, preferring to buy cheap agricultural-purpose land plots and even "solve the problems" in the future." We have constructers and jack of all trades, and other players, says Mogilatova. “As a rule, they have their own administrative resources to change the special-purpose designation of land and receive both the necessary technical solutions and approvals. And this is cheaper than the same service of a land-developer."

And large land owners do not burn with the desire to share their profit with land developers. As a rule, they divide up a land plot and prepare each one for sale themselves. In order to this companies specializing in land have whole departments of experts and their administrative resources are accessible to all large land owners. As a result, if the work is successful, the "improved" land plot will be sold at a price several times more that the starting one. "If the land has been transferred to the category of land for settlements it will be worth approximately 3.5-4 times more than agricultural purpose land. The land will rise in value by approximately the same amount if it is transferred to industrial purpose land,” calculates Kroitor.

Closer to the point

But gradually the mentality of Russian market participants is changing. In particular, they understand that independently developing a land plot means including working with not the most competent staff, bearing the risks of losses, etc. In the market there are already companies that help land owners to carry out pre-sale preparation of the land.

Land development companies can be divided into two types. The first are, as a matter of fact, land owners themselves, but smaller, poorer or those who came after land was redistributed in the Moscow suburbs. They buy up agricultural purpose land, then carry out all the necessary improvements and sell the land to an end user for a profit. The second type don’t buy anything, and only provide services to the owner of a land plot that improve and increase the capitalization of the land. The first type are a hybrid of a land owner and a land-developer, while the companies that fall under the second type are high-grade land-developers.

The majority of announced mega-projects are, as a matter of fact, good examples of the first type of land development. For example, Nafta-Moscow controlled by Suleiman Kerimov, sold the Rublevo-Arkhangelsk project at the beginning of 2008 to the structures close to the owner of Binbank Mikhail Shishkhanov, for $530 million (the estimation of experts). Masshtab, which owns state farm Kommunarka is selling part of the land in the territory of the A-101 project. "The sale of land is not our business, but there are land plots we don’t need, and we are able to optimize our portfolio," says Mikhail Malikov, chairman of the board at Masshtab and chairman of the board of directors at Avgur-Estate. Some time ago there were rumours that Coalco may become a co-investor in the realization of the Bolshoye Domodedovo project but this information has still been proven to be true.

All things aside, the developers of such projects have acted competently: having gained control of a large land plot, they have not shattered it into tens of small plots and sold off all he pieces, but have carried out complex development and increased the value of the plot by several times within the limits of the projects. Now they can start independently developing these territories, and can sell plots within the project to other developers (as Masshtab has done) or sell the large plot in its entirety for a good profit, as Kerimov has done.

We rarely come across the second type of land development. According to Leshchev, in most cases land owners independently carry out any improvements: "Only recently have new large landowners begun to involve organizations similar to ours, to improve the characteristics of a land plot with the purpose of increasing its value and liquidity.” "The classical land development market in Russia is only just forming, and its development is slow and difficult,” adds Litinetskaya. “This is connected with the opacity of the land market, administrative barriers, the long time it takes to change the category of land and receive the necessary approvals and permissions." Consumers of the services provided by land-development companies may be both land owners and developers. The first are interested in such services when they need to sell a land plot for as much as possible, and the latter are interested after the purchase of a "crude" land plot. But developers only use the services of these “foreign” companies in special cases. "Land development is particularly demanded with the complex construction of large territories,” says Konstantin Korolev, general director of Smart Property. These may be industrial-warehouse complexes, logistics hubs, residential blocks with infrastructure. This is connected with the necessity for as well designed logistics and interrelation of various functional zones of the territory as possible."

However, experts questioned are assured that the development of the land-development market in Russia will certainly take place. "The market is constantly developing, and companies operating in the market can now be successful, but only with a professional approach to the business," says Leshchev. "The given service will develop, as international experience of the development of land assets will sooner or later come to the Russian market,” approves Mogilatova. “In any case if this service seems competent and the cost is reasonable there will be consumers."

"The land-development market (the first type), certainly, will develop, especially in conditions of a financial crisis when land becomes cheaper and a burden for the owner,” says Dmitry Tsvetkov, sales manager at MIEL Cottage Real Estate. “In this situation stronger developers and investment-development structures will buy up land with the purpose of then using them for the realization of large projects."

The profitability of this type of land development is traditionally higher, as in addition to the improvements of the land raising its value, the company also makes money from the rise in prices for land, which until recently have been rather impressive. "The profitability of land development projects is formed first of all due to the rise in prices for the land," agrees Tsvetkov. "Our land owners in some projects have made 3000% on their invested capital; the more problems the land plot has when bought, the more money you are able to make from it. Now we probably don’t have such opportunities. At present actual earnings with an optimum level of risks is 50-100% per annum," ascertains Leshchev. This also isn’t bad.

In the short-term future development of the land-development market will slow down a little. "In conditions of financial crisis this service is practically not demanded at all, as many developers prefer to freeze already existing projects and not enter into any new ones,” Razin explains. “Now, land-development is mainly being carried out under old arrangements reached before the crisis." However, when the situation normalizes, the service will once again be extremely in demand.

"Recently the size of development projects has grown and they quite often occupy more than 0.5 million sq.m. Of course, in such projects land development should include as detailed study and preparation of the land plot as possible," says Korolev.