Market know-how: Live according to your means

The saying ‘to save the drowning is in the hands of the drowning’ is a particularly relevant saying. During the global financial crisis the main task for the majority of development is to keep your head above water: to not go bankrupt and to carry out the obligations that have been taken on. When introducing anti-recessionary measures in a company, some reduce the amount of work, others look for new fields of activity.

Cutting costs

Constructors who work on both commercial and residential premises have serious problems. Commercial premises that came onto the market at the end of 2008 have not found tenants. Companies are not expanding or moving to new offices. Companies that have reduced staff have also affected the increase in vacant space, considers Dmitry Zolin, managing partner at London Consulting Management Company | LCMC.

The main problem with the residential real estate market is the same - absence of demand for apartments. Many potential buyers have decided to wait, hoping for further falls in prices, says Sergey Lushkin, marketing and sales director at Kvartal Estate.

Development structures are actively looking for resources for optimization: freezing projects, reducing prices, changing suppliers, etc. According to Vladimir Voronin, president of company Lider, the company has rejected plans to expand activity this year. "We will not acquire new areas. Meanwhile we plan to realize all projects on paper and under construction," he says. LSR Group plans to move the operations of its production facilities to one-replaceable schedule of work, in order to not pay for processing. Furthermore the company will not invest in the expansion of its existing building material manufacturing capacities, added Igor Levit, general director of LSR.

According to Andrey Nesterenko, general director of Kapital Group holding, the speed of construction on some initial cycle premises have slowed down. "Previously we tried to get the premises up for sale as quickly as possible, Now we adhere to established IRD terms," he says. Alexander Vagin, president of Otkrytiye Real Estate, also thinks that draught projects have not stopped, they will slow down, as "more time is needed for analysis, examination and decision-making." The construction of the Vivaldi Plaza complex in the Pavletskaya area is planned to be completed at the end of December 2008. The hotel within the limits of this project has been completed. LSR Group is following similar tactics: they are completing projects under construction (the Novy Balchug and Grunwald multifunctional complexes), but will only start investing in new projects when there will be the necessary volume of solvent demand, specifies Levit. Meanwhile the company is continuing to conduct pre-design and design work.

Glavstroi has “price compromised with buyers” and at the beginning of the year the price for housing fell 10-25%. This has allowed for the number of apartments to be sold to return to the levels of August 2008, according to the press-service (at the moment of delivery of number). PIK has announced that for all clients that buy an apartment, on the day of concluding the contract the dollar rate will be 25 rubles.

Outsourcing and replacing suppliers can also reduce expenses. For example, Otkrytiye Real Estate has analysed the expenditures on the management at the head office at Bolshoi Sukharevsky pereulok and the complex at Barrikadnaya and have replaced the management of the company with young firm Bareks-1, saving almost 30%. Furthermore, after revising legal, accounting and personnel support costs a decision was made to transfer these functions to professional outsourcing companies. This has allowed the company to save 25-30% on direct costs and eradicate indirect costs (on consulting, directory systems, personnel training, etc).

Significant costs can be reduced by reconsidering contracts with suppliers. Prices for many building materials have fallen 20-40%, notes Voronin. For example, for steel reinforcements they have fallen 3 times, and for concrete have fallen more than 20%. "As a result the cost price of construction has also decreased,” he adds. According to Immoeva, due to negotiations with suppliers of building materials, transport, consulting and other services, a company can save up to 20%. "It is also possible to offer to business partners to join together and choose the same suppliers who give the best conditions, and ca result in discounts of more than 30%," she continues. Companies that do not have inflated prices and are competitive, have the best chance of advancing, considers Immoeva.

Another way to reduce costs is the optimization of the internal structure. According to Omar Gadzhiyev, managing partner of Panorama Estate, the number of employees remains as before but their salaries have been cut by 30%, have stopped providing company expenses and have stopped advertising. The company is also considering moving from an expensive office in St. Petersburg to premises in a lower class business center. Kvartal Estate has reduced expenditures on advertising: the budget for mass-media has been reduced by one and a half times by accommodating modular advertising. The company has stopped holding any corporate events. In December 2008, Kvartal and Kvartal Estate moved into their own new office, thus getting rid of costs on rent, adds Lushkin.

Lider has cut staff numbers; 10% of employees have been made redundant and “key divisions and experts” have been kept. The operating organization of Glavstroi has cut 30% of jobs, all business class flights and corporate activities have been cancelled, costs have been minimized on additional training of personnel.

Konti have preferred to keep workplaces, but reduce the salary fund by 20-30%. According to Yury Sinyaev, marketing director at Konti, in the last three years salaries have grown quickly in development companies, mainly due to poaching good experts from competitors. Companies, not wanting to lose their "pupils", raise their salaries. "As a result, in the construction market salaries were swollen and, for example, a project head could receive $7,000-$12,000 excluding possible bonuses. Now salaries are becoming more adequate."

Mosstroirekonstruktsiya (a division of LSR Group) plans to cut expenditures within the company by 20-25%, although each separate item of the budget is optimized in its own way, says Ivan Romanov, operating the companies.

New directions

Besides optimizing costs, companies are actively looking for other opportunities for business - from repair work to new services. Mosstroirekonstruktsiya, according to Romanov, plans to reorientate commercial real estate projects to housing. In particular, a project on Leningradskoye shosse which was initially intended to be a multipurpose business centre.

Otkrytiye Real Estate is developing new services on the valuation of investment projects. There are currently many projects on the market that are on sale at basement prices or are repossesed. According to Immoeva, valuaing projects allows potential investors to understand the prospects and risks, to reveal any pitfalls of a project, and make a decision on whether to buy or not. "On average we currently make 1-2 valuations of varying complexity a week," she specifies.

Besides development, Panorama Estate has actively begun to develop consulting services. In particular, it has offered clients free-of-charge annual services for all consulting work. The company shares the fears of those investors who, when ordering consulting work, think to themselves whether the received results will be appropriate in 2-3 quarters, Gadzhiev says. Clients can make the work appropriate in accordance with a new market situation even after the report is done.

Domstroitel has offered clients a new service – renovating and decorating apartments. At the end of last year the company completed the first phase of the Yugo-Zapadny residential complex in Moskovsky (almost 100,000 sq.m) and the first phase of the Parkovy residential complex in Kotelniky (60,000 sq.m), and the company also plans to offer painting and decorating services in these complexes, says general director of Domstroitel Alexei Smolentsev.

City - XXI Century has developed three anti-recessionary scenarios for 2009. Already in spring last year, the company optimized its managerial functions, by putting place international consulting software IDS Scheer. As a result the organisational structure is not build around dividions but around the projects of the company, and work which is separate to this has its own independent business process. " We managed to mobilize and effectively redistribute internal resources and approach the crisis fully prepared," says Sergey Lyadov, head of the PR department of the company.

Find money and complete

The most significant problem for developers is finding financing on good terms. Some look for co-investors like MR Group with its business center project on Ulitsa Skladochnaya, others count on buyers of housing, and some on western investors, etc. As has been noted by Voronin, to get credit at a reasonable rate for businesses of 16-18% per annum in rubles is now difficult.

Voronin considers lider’s low credit obligations as a big success, "the company possesses enough of its own funds for business dealing and the construction of premises." According to him, the company opened a credit line worth 700 million rubles with Bank Moskvy (Bank of Moscow) at the end of 2008 and is negotiating with several banks, with one for a sum of 2 billion rubles.

In particular, this money will be used to realize a project for the construction of a residential micro-district in Gelendzhik on an area of 10 hectares. The architectural concept for the project was developed in December last year. The company thinks that it has been possible to avoid expensive decisions in realizing the project due to optimizing the size of the apartments. The prospective starting price will be from 45,000 rubles per sq.m. But as sales will not start until summer, prices can be corrected. Completion is expected in summer 2009.

At the end of last year Konti received consent from an (unnamed) foreign bank to open a credit line to finance a new project in St. Petersburg – a residential, comfort class complex with an area of 350,000 sq.m. The project is currently at the design stage, specifies Sinyaev. Currently the company is completing the Continental residential complex and building the Ilyinka settlement.

Kvartal Estate expects to complete the construction of three buildings with its own funds. It looks like the realization of new projects of the company will be postponed until the situation on the real estate market normalizes, Lushkin complains. LSR is also not boroowing if there are fears that there may be complexities in paying the funds back. To finance construction, the funds of buyers is mainly used, Romanov says. "The main lesson we have learnt from the crisis is that it is necessary to live on your own funds," he notes.

Big prospects

The crisis is an excellent time to assess and analysis what should be done next to reach even better results, assures Voronin. "In a year the market will come back to life, and the crisis is the best time to prepare to enter the market at a new level of development," he says.

Companies that have financial resources, in expectation of the predicted stabilization, are planning expansion. City - XXI Century will almost double the volume of area under construction in 2009-2011. Projects will be realized in Moscow and the Moscow region, and also in regions in the Central Federal district (a total area of 1 million sq.m is intended). In the next three years, according to general director Elvira Eremina, City - XXI Century "intends to increase the share of the construction of housing from 60% to 70%, to keep a share of projects in the business class segment, and also enter the elite segment.

Rodex Group plans to “expand the horizons of construction,” says Gennady Teryaev, director of the business development department of the holding. The construction of a recreational center at Mozhaisky’s Zolotiye Peski-2 lake and a business center on Rublyovka has been started and the holding ilso entering several regions (Nizhny Novgorod and Yaroslavl). The company is currently actively negotiating the purchase of cottage construction projects in the Moscow region and regions of presence of the Rodex Group network (the Leningrad and Samara regions, the Perm region, and the republics of Tatarstan and Bashkortostan). It is considering several variants - from the purchase of projects at an initial stage to projects whose realization will be carried out in partnership, i.e. the holding will conduct construction on the land plot of a landlord. "Now is a good time to buy liquid real estate premises at lower prices - discounts can reach 15-30% depending on the state of affairs of the developer," notes Teryaev. Furthermore, the costs of realizing projects, including construction, have decreased. And this means, that those who effectively take advantage of the opportunities of the crisis period, can make lots of money, Vagin is assured.