Real Estate

How is Sobyanin doing?

For the year that has passed since the replacement of Moscow’s Mayor Yuri Luzhkov with Sergei Sobyanin, the capital’s construction and development industry has been up in the air, as City Hall began a major revision of previously concluded investment contracts. Meanwhile, there are clear signs of re-division of control in the sector, with new players coming to the limelight and previous champions fading into obscurity.

Investment contracts are offered by City Hall for construction and development projects funded from the city’s budget and are considered quite lucrative for developers.

Investors in construction and development projects in the capital are attracted, depending on the results of tenders—a procedure that under Luzhkov reportedly lacked transparency and fairness. When Sobyanin took office last autumn, he promised that tenders would now be “maximally transparent”.

“One can confidently say that major changes have taken place—both in the methods of operation and in the market itself,” Georgy Dzagurov, general director of Penny Lane Realty, told PASSPORT. “I believe that the city’s authorities are looking for reasonable ways to execute tasks set forward for them and are changing the policy of implementing investment contracts.”

According to Dzagurov, new people in City Hall, who are free of any previous obligations, have been terminating investment contracts that were signed in the past and not executed on time.

Although not everyone is satisfied with the new rules, there are indications that the process of naming developers for projects commissioned by City Hall is becoming more transparent.

“The process of obtaining approvals has become more predictable,” said Dzagurov. “While earlier, it was necessary to turn to a dozen different agencies, and the process could be stalled at any stage, today, even though fees for approval documents have become higher—it is easier to predict the outcome.”

“It is also possible to speak about more transparency in distributing projects between developers,” Dzagurov observed, adding that complete clarity could be ensured only in a situation when, as previously promised by Moscow’s authorities, the city would first prepare sites for projects and only then announce tenders.

Winners and losers

Predictably, with a major redistribution of power in the construction and development segment, there are winners and there are losers.

“Those who counted on their personal connection in the mayor’s office are finding themselves in a difficult position,” Dzagurov said, adding that, on the other hand, large developers supported by federal agencies and banks are in an advantageous position.

One of the biggest contractors in terms of value is now a company called Glavmosstroy, which has recently secured contracts worth 13.4 billion roubles from City Hall contracts, having won six tenders out of 10, in which it took part. Back in 2010, the construction company participated in four major tenders but didn’t win any.

“There are projects that not every developer would be interested in because there is a probability of losses or no profits,” Glavmosstroy’s spokesman commented. “If a company hasn’t properly worked out costs with all subcontractors, it cannot deal with costs. And we can calculate that well, so we can enter projects.”

“Those who counted on their personal connection in the mayor’s office are finding themselves in a difficult position,” Dzagurov said, adding that, on the other hand, large developers supported by federal agencies and banks are in an advantageous position.

Another major newcomer is NPO Kosmos, which has been recently hired to construct a 14.6 billion rouble road junction at Leningradskoye Shosse and Volokolamskoye Shosse.

Meanwhile, a company called ARKS, which was one of the champions under Luzhkov, has been recently able to win only one substantial tender from City Hall, earning a 380 million rouble contract to build an underway passage below Komsomolsky Prospekt.

And two other major players in the city’s construction and development market under the previous mayor, Dial-Progress and Moscow Engineering Company (which is, incidentally, owned by Inteko, the company of Luzhkov’s wife Yelena Baturina), have not even taken part in recent tenders held by City Hall.

New rules

There have been some major changes to project financing under new city authorities. Under the previous system, City Hall would make a 30% advance payment to the developer, while the rest would be paid out on a monthly basis. Today, the developer is paid only when a specific stage of work has been actually implemented.

“When construction begins, the developer needs to invest in preparatory works, and there is no completed stage that would entitle the developer to get cash from the mayor’s office,” an anonymous market player was quoted as saying by the business daily Vedomosti. “So, [the developer] has to come up with the money or take a loan, which means considerable extra costs.”

However, large players in the sector insisted that was not a big problem for them. “A large and strong company with substantial working capital can enter a project without an advance payment and without using any credit resources, either,” commented a spokesman for Glavmosstroy.

Industry insiders have always complained that electronic tenders, to which City Hall switched last summer, could lead to a situation when the final value of a contract could be 40% to 45% smaller than the initial figure. Again, other players in the sector say that the only newcomer could agree to such a drastic decrease, while normally, a figure wouldn’t be higher than 10% or 15%, which is still enough for profitable operation.

Still, sometimes a developer could offer financial conditions that could not possibly be observed, which would result in a situation when the implementation of a project could drag out for years.

What does the future hold?

Although the growth in Moscow’s construction and development market has apparently slowed down due to the revision of previous investment contracts by the new team at City Hall, the situation is likely to improve in the short term, experts say.

“A lack of massive investment projects does not mean that nothing is actually being built in Moscow,” Oleg Repchenko, head of the analytical centre, Indicators of the Property Market, was quoted as saying by finam.info. “In Moscow’s older neighborhoods, the density of residential buildings is way beyond an acceptable level anyway, so building millions of square metres of residential property is just impossible.”

He added that since 2006, when such massive residential construction projects as Kurkino, Lyublino, Butovo and Maryino were completed, there has been no comparable project in the market.

In 2012, 42,000 sq. metres of new apartments is expected to be erected in the central neighborhood to replace old five-story buildings, which is going to be a big step forward from this year’s figure of 8,800 sq metres. Meanwhile, experts predict that between two million and three million square metres of new residential construction is to be erected every year over the next few years, unless a double-dip recession arrives.

“Even if the city government eventually cancels one half of the existing investment contracts, the implementation of the remaining half will begin, so the situation is set to be improve in any case,” Repchenko said, adding that even steps like a ban on new construction in the city centre should not have a major negative impact on the overall market, as many old buildings in the heart of the city will have to be reconstructed.

Other experts are hesitant when giving predictions about what impact the current situation could have on the capital’s property market.

One trend that has become apparent, according to Dzagurov, is the consolidation of developers. “However, the property market does not react [to the changes] fast, and today we are mostly experiencing the ramifications of a massive suspension of projects due to the [recent economic] crisis and a drastic change in [city authorities’] policies as a result of the arrival of the new mayor’s team.

In 2012, 42,000 sq. metres of new apartments is expected to be erected in the central neighborhood to replace old fivestory buildings, which is going to be a big step forward from this year’s figure of 8,800 sq metres. Meanwhile, experts predict that between two million and three million square metres of new residential construction is to be erected every year over the next few years, unless a double-dip recession arrives.