People in the Know: Another Vivaldi

In the present conditions of the financial crisis, people prefer not to talk about the deadlines of realizing projects. Alexander Vagin, president Otkrytiye-Nedvizhimost (Open-Real Estate) is one of a few who with confidence say that their projects will be realized precisely on time. The secret of his calmness is in the specialization of the company: fee-development is a rather new format in the Russian market and is presently much demanded.

During a crisis the demand for work connected with supporting projects decreases, many investors have postponed their realization. Will there be demand for the services of fee-developers?

In my opinion, now is the time when the services of fee-developers are most needed. In the market there is an automatic redistribution of property – banks are taking away the projects of their debtors for almost nothing, but then they have the question of what to do with it? And even if the banks have affiliated companies, there is not always enough knowledge and opportunities to realize projects. Therefore they need market players as partners. It is not possible to involve large “monster” developers) because they have different prices and, more importantly, a different vital concept. That is, I have financed the project, I have managed the project and consequently I want all the money. Therefore demand for the services of small professional companies with a steady reputation will grow. Now we are participating in several tenders to manage projects as a fee-developer.

Do you have strong competition?

There is one small detail: there are very few companies that render the services of fee-development. Many of them either act as investors, or have grown from large construction companies. In my opinion, practically none of them have become developers as they do not have the corresponding experience. A developer is that which comes and says that on this given land plot it is necessary to construct this, it knows which design bureau should develop the concept, what is demanded in the given area, where it is necessary to look for corresponding analytics, what is happening in the market, etc.

With what orders does your company work?

Our line consists of three global products. The first is the end stages of land-development. We take a project with different problems, for example, without approvals or that which is a matter of court proceedings, etc., we solve the problems and obtain town-planning permission for the land plot. This can then be sold. But if there is an investor, we can offer the services as a fee-developer and complete the project. The second product is development of the concept, design, obtaining all the approvals for construction. And the third is the full management of construction. If a building is under construction not for a company’s own needs we also render services for the creation of business, including tenancy, accounting, legal support, etc.

How much is your commission?

Depending on the scale of the project it can be 5-10% of the cost of construction.

From the cost of construction or from the total amount of investment in the project?

Here there are subtleties. If a project is at an early stage of realization and it needs to be completed then a rate of 5% will more likely be estimated from the total amount of investments in the project. But if the project is at a later stage, for example when there is a project and approval to build then the rate is considered only from the cost of construction.

What services are demanded in the conditions of a crisis?

Expertise in projects. In the market today there are a huge number of projects and there are companies with funds that want to buy them. Many potential buyers realize that this is the right time to buy but they don’t understand what these projects are and what unknown issues there may be, whether there are any disputes over the projects etc.

There is another strong area - financial reporting. In order for us to provide absolutely correct reports we have had to learn a lot. We now have an excellent team, including experts on automating the necessary reporting and making the correct investment decisions. With the Vivaldi Plaza project we report to a lot of companies on a monthly basis. All foreign investors have appointed observers in the form of international legal and auditor companies which demand reporting from us in their own formats.

Do you have new deals lined up?

We are participating in several tenders for the function of fee-developer, all of them are in Moscow.

What is your company working on currently?

Projects at the stage of land-development are never advertised; I can name only those in the third group of products. The largest is the Vivaldi Plaza project. We are working as a fee-developer - we are managing construction for a fee. It is a class A office and hotel complex which is under construction in the Paveletskaya area on Kozhevnicheskaya ulitsa. The total area of the premises will be almost 111,000 sq.m. The complex will consist of four office buildings each with 11 floors, an international class hotel with 13 floors, and a 2-storey reconstructed private residence.

How did you get this project?

We got it from another development company. Previously on the given territory there was a factory which was later relocated to Podolsk in the Moscow region.

What is the budget of the complex?

About $460 million, of which $140 million is the cost of the land plot and $320 million is the volume of investments.

Who is financing the Vivaldi Plaza project?

Among the investors of the project are such companies as Deutsche Bank AG, European Commercial Real Estate Group, investment fund Starr Capital.

Who else is taking part in the project?

Well known Austrian company Strabag is working as the general contractor. Jones Lang LaSalle and Knight Frank are the co-exclusive advisers on marketing and renting out the premises.

When will the premises be completed?

Completely in spring 2009. By the end of 2008 all buildings will completed in terms of concrete construction and some of the buildings will have there windows installed.

Practice shows that practically all projects in Moscow are not realized to deadline or to budget. Are you confident your project will?

We are sure. It is our responsibility.

Despite the financial crisis?

I think that in the conditions that have developed, no matter what they say, it will be easier to build. Because many projects have stopped, very high level Russian contractors have concluded contracts of which it was only possible to dream about and have entered the market. Now they are already in a queue waiting to be invited.

What’s the future destiny of Vivaldi Plaza?

A contract with one of the largest German investment funds KanAm Grundinvest Fonds has already been signed on the purchase of a premises once it is complete. As far as I know, the deal is the largest forward transaction in the real estate market of Russia. As a rule, the strategy of the fund is that it usually keeps its real estate for a certain number of years, for example five years, and then decides either to leave the project or continue to receive rent payments.

Under what conditions has the deal been concluded?

We cannot comment on an uncompleted forward transaction, it is one of the major clauses of the contract.

What is the calculated recoupment period of the project?

I think that this wording is not absolutely correct in this case. Western investors count all income in relation with the given premises. This can be both obvious – income that a proprietor receives from renting the premises, and income connected with the costs of changing the property. One or two years ago when business plans were formed, it was considered as follows: it is possible to make approximately 10 percent profit on rent and 6 percent on an increase in the price of a property, therefore a total of only 16 percent. If we’re talking about institutional investors and these are mainly funds, this is how recoupment calculations are made.

What other projects are you working on?

The second is practically a completed project – the construction of a factory for the enrichment of quartz sand in the Ryazan region. It is the largest factory in the European part of Russia and one of the largest in Europe. We are also participating in this project as a fee-developer, managing construction and working in the interests of the investor. We also have our own project, Strazdelio Namai, a multipurpose residential complex located in old Vilnius, in the best place in the city. The project involves restoring the building and the laying of every brick is supervised by UNESCO experts. The building is only 12,000 sq.m. We are participating in it with partners, but we own the largest share – 25%.

What stage is the project at?

The project is broken into three phases. The first phase is already complete and up for sale.

How are the sales going, in fact the Baltics are among those suffering most from the crisis?

The crisis has affected many segments of the market including real estate. But our project is unique. In the current difficult environment we have sold three apartments. Sale prices are from 5,000 to 8,000 euros per sq.m.

Are there differences in the work of developers in Russia and Europe?

in Europe it is easier to work. The methods of receiving approvals are very clear. Before the financial crisis interest rates on loans were 4-5% per annum, and it was possible to take as much money as was needed.

If it’s so good working in Europe why do you only have one project there?

Because the profitability of projects in the Baltics is lower than in Russia. Earlier in Russia nobody spoke about projects with a profitability of less than 30%, and in the Baltics 12-15% is good.

As far as I know you still have a project in Tambov.

We are building a shopping and entertainment complex in the Mega format, but not to such a scale. Otkrytiye-Nedvizhimost entered the project as the developer and investor at the earliest stage of its realization. We have a representative office in the city, and we are completely supervising the process. Besides us there are two more investors participating in the project – companies from Moscow and Tambov. The total area of the shopping and entertainment center is 27,000 sq.m. The premises is located in the city center. According to the concept, there is nothing similar in terms of quality of finishing and engineering in Tambov. We plan to complete construction at the end of 2009.

Will you have enough money for its financing?

The scale of the projects in which we participate in as investors is small, therefore their financing is not critical for our business. We are sure that we will have enough funds to complete all projects that have started.

Are the tenants companies from Tambov?

No, they are Moscow chains. Currently, more than half of the areas have already been rented out. We expect the project to be successful because the construction of all other retail premises in the city have stopped.

During a crisis it is not only projects that might leave the market but also companies. What does this mean?

shareholders will lose assets, but for companies not everything may develop badly.

Is it bad that such financial “monsters” like VTB or Sberbank will become the proprietor of the ruined companies? Tomorrow they will provide money and will realize the frozen projects.

Do you have a prediction of when the situation will recover?

The way life goes is that it is impossible for everything to go badly. But I think that the bad situation will continue for at least a year. Let me tell a joke on this theme. A parishioner comes to see his rabbi and says: "Everything in my life is very bad, what shall I do?" The rabbi answers: "write a sign that says ‘it will not always be’ and put it up in a visible place." So the parishioner did this. Time passed, his life started to get better, and he received money and prosperity. The parishioner goes back to his rabbi and says: "Thanks for the magic sign, it helps very much!" The rabbi answers: "you take your time to remove it!"

When your company was established organized also who its owners?

The company was created in 2003 for a specific project on Barrikadnaya ulitsa. The headquarters of PIK are now located in this building. At that time no more than 15 people worked in the company. There are three owners of the company, including two minority shareholders who each have about 15% of shares in the company, Boris Krutov and I. Now we are the top managers of the company.

How many people now work in the company?

About 150. We have experts of all trades, highly professional teams of experts on construction, approvals, etc. We can offer clients a complete set of solutions, including carrying out checks, accounting, solving legal issues and many other things.

What’s your education?

My first diploma is in mathematics - education gives a systematic approach so you can see any situation in a clear and correct view. I also studied in economics and have a PhD.

Do you have enough time for your private life?

Yes. I already have two grandsons - a girl and a boy. And I am proud that when they grow up they will be able to go through Moscow and show their friends a building whose construction their grandfather managed.

Biography

Alexander Vagin was born on August 24, 1960. In 1982 he graduated from the Ivanovo State University in Mathematics. In 1990 he graduated with a PhD in Economic Science (Ivanovo State University). In 2001-2003 he worked as the deputy general director of media holding Ren-TV. In 2003 he moved to eastern European investment company InVEKo as financial director. In 2005-2007 he worked for Otkrytiye financial corporation as financial director, first deputy general director and operating director.