Interview with President of CJSC “RENOVA-StroyGroup”

SNiP: - Veniamin Maxovich, what is principally new in the Ural project “Akademia City” which you consider to be your company’s style and developer’s know how?

- The characteristic feature of RENOVA’s developer’s business is complex land development or as we call it “CLDs”. The idea was a success because it was born in the right place at the right time. The traditional Russian point construction has exhausted its potentialities in the cities. It happened not only because the space for point construction is unavailable now but due to the fact that in Russian cities the network is fairly worn out and technologically backward. And this problem can’t be solved on a separate plot of land within fully formed urban environment.

When we just started “Akademia City” one big businessman asked me: “How is it possible to build residential buildings in the open country cheaper than in a big city?” I said, “It is possible because sometimes in Russia the labor cost and document turnover for the construction of one building is more expensive than the construction of a new town. And, secondly, it is definitely more expensive to dig up the existing roads and service lines than to build them on a new site.

So this “open country” for our projects is an absolute carte blanche allowing us to use up-to-date technology which is impossible to adapt to Russian conditions on a small plot of land. Great volumes of construction significantly optimize material and organizational costs. This is our “know-how” # 1 as you put it. Secondly we involve developers in different spheres. While promoting our project we don’t call ourselves experts in development of shopping centers, hotels, etc. But having a large territory and entire freedom of design (which is sometimes unavailable under existing development conditions), we can attract more creative developers in every business sphere.

The third advantage is the opportunity to attract greater volumes and variety of financial resources for the same reasons.

SNiP: - But tell us who didn’t do the same while creating new town blocks and entire cities in metropolitan suburbs? What is the difference of your CLDs from such districts under development like “New Town” (VTB project) or “Greater Domodedovo” (Coalko)?

- By the highest standards of all complex development sphere in today’s Russia is “Akademia City” and perhaps “Greater Domodedovo” – a project closest to ours in building volumes (11-12 mln m2 of residential and commercial realty, term of project implementation is 7 years – SNiP). Everything else in today’s market is different in volumes and has fundamentally different investment models. Nobody but us has ever tied up the entire developed territory into one investment complex. Today all developers sell houses and square meters. We sell a town, it is our product. By the way, it may bring profit at every development stage. That is why we involve allied businesses. For example, “Akademia City” area for 300 thousand residents is a gigantic energy-intensive project. Therefore it will have its own generating supply of 6000 MWt of electric power and this business will also make money. If there is anyone wishing to build a pharmacy we will offer him to make a chain of pharmacies for 300 residents, etc.

SNiP: - Let us assume this format is actually new for Russia. But have you taken into account the world-wide experience in complex development available today?

- Of course we have. But if you look around you won’t find many cities where land is available for the development of residential districts occupying millions of square meters. Such practice exists in China, Latin American countries and much less in North America and Europe. Why did we turn to French expertise? We appreciated not only the professional skills of Designer’s Bureau “Valode et Pistre Architectes” but also its conceptual approach towards town-planning and urban territory development. A lot of residential districts are under construction around Paris and in the process both positive and negative features are being exposed. For example, French developers tried to demarcate different social groups of population and build budget housing primarily in the eastern part of the city. It resulted in social tension when people burnt cars and destroyed everything around them in Paris and other cities. Our colleagues said, “Don’t repeat our mistakes. You can’t build separate towns for the rich and the poor”. We are sure one must not hide elite houses behind high fencing. Common social environment, equal access to entire city infrastructure and recreational areas will reduce social tension in community.

SNiP: - What is the proportional niche of your project? In other words, can you imagine 300 thousand future inhabitants of “Akademia City” and are there enough buyers for the houses you are going to build in Ekaterinburg?

- 51 percent of residential development will be economy-class housing which makes an actual resource for implementation of the national project “Affordable Housing” in Ekaterinburg. Even without marketing research that we have made it is evident that today’s Ekaterinburg lacks economy-class housing. What is being built is sold overnight. Elite housing does not exceed 4 percent. The rest is mid-market product. As for social priorities one of our rigid requirements to investors participating in mass housing tender is a guaranteed range of cost per square meter. I would rather refrain from mentioning exact figures since we plan to start the sale only in 2008, and by that time many changes may occur.

SNiP: - Last year “Akademia City” received a status of a pilot project for launching the mechanisms of state-private partnership (SPP) in town-planning sphere. Has the draft Resolution of RF government been approved which Rosstroy promised to get ready by the end of last year? Which of “Renova” Group proposals were taken into account and which ones were turned down?

- The Resolution has not been approved yet, it is still waiting for its visa. We do not have any information which of our proposals will remain in the final document. But our initial position when we started the talks with the government was as follows. Implementation of such large-scale investment projects as “Akademia City” and some others which we offer in the market today is impossible without state participation and without mechanisms of attracting private investors’ resources. We believe that businesses and the state should arrange that the great resource of federal target programs is not scattered all about Russia: a building here, a road, school or sanatorium there. In order to get a cumulative effect of social programs one should make new living conditions a priority, not a certain number of new apartments and beds. We should build new towns with new infrastructure and a full-fledged and comfortable social environment. To do that it is necessary to accumulate national resources in large “locomotive” projects like “Akademia City” and the like where business itself starts to create points of increase and centers of attracting investments within the country.
At that we offered the government a real model of state-private partnership. The amount of state financing allocated for national projects accounts for only 20-30 percent of what should be done with that money. It means that if the state helps with networks and roads – that’s something at least. And housing and square meters are the investors’ responsibility. It turns out that for every 20 Rb of state investment we will get 80 Rb of private business. Specifically, it will give a significant impulse in “Affordable housing” sphere because in case of our project we are not talking of a dozen of houses but about several millions of square meters of living space.

We also proposed to establish a special contest procedure for complex land development projects, both for the selection of investors and land allotment. It is impossible to put up the land for an office center for auction on the same terms as a plot for a new town. Please note that we raised this issue not only in our own interests. We just bought our plot of land near Ekaterinburg when such practice as auctions did not exist.

SNiP: - What kind of entry qualification should exist for a state-private partnership? Did you have your proposals to the government on that issue?

- First of all, a significant volume of land resources must be available. For example, our plot of land is 2.5 thousand hectares. In this case the minimum qualification should be about 400 hectares. Secondly, we believe that creation of engineering infrastructure is a fundamental condition: all service facilities should bó planned from the beginning. And complex development must be the third indispensable condition. It means that the investor should propose not just “bedroom” community but all at once – kindergartens, schools, hospitals, shops and the potential for new jobs in different spheres. As early as the design stage we know that “Akademia City” will have an express tram which will connect the micro-district with downtown Ekaterinburg, reducing the journey by 10-15 minutes. We negotiate with the companies dealing with express transport. The project should include a shopping and leisure center of approximately 300 thousand sq.m, and the talks are going on with the companies that will professionally create and develop the land.

SNiP: - Do you already know the names of retailers?

- I would rather not tell you the names because all our future partners will be selected on a tender basis and I would not like to breathe on anybody if the choice is not in their favor.

SNiP: - How do you estimate your risks of cooperating with the government, known to be a rather unreliable business partner?

- You already mentioned the risk factor. Any development usually involves two types of risk: money and time-frame. Of course if the state will let us down with financing it may gravely affect the time-frame. But in fact we finance the construction works ourselves realizing that in a dialogue with the state we will anyway ensure the recurrency of some resources – at least in the part which interfaces the direct functions of the state (roads, infrastructure, etc.). But it should not be the rule and the entire construction process should not be arranged in this way. We hope that upon the approval of the RF government resolution on complex land development we will debug the mechanism of interaction with the authorities. However we feel serious attention to our project at every level including a separate President’s order. So we are not going to complain. The only risk is that everything goes on very slow.
We’ve been dealing with “Akademia City” for almost three years. And today it is far from being “open country”. Firstly, the planning design of the territory has been made. For that matter a tender was arranged and the designer’s bureau was invited in order to realize who is able to cope with such projects in the world. An I may assure you that there are not many professionals in the world who may plan not just one new building but an entire city – and we’ve chosen one of them: a French Bureau “Valode & Pistre Architectes”. Indeed under local conditions it is impossible to do everything with just western architects’ support because Russian GOST (state standard) is sure to “refute” and the reality will flood everything. Therefore the French Bureau was working on the project together with “Master Plan Studio” Ekaterinburg.
Further we needed to find engineering structures because the new city was not just a picture of houses. Underneath and between them there should be water pipeline, sewage system, roads. These involve sophisticated engineering concepts. And we have raised our standards up from the very beginning saying that the city will be based on the state-of-the-art technology. We used pipes of the new generation, roads with new kind of pavement and houses with the latest heating system, etc. Thus we need to use every achievement of modern engineering ideas, taking into account price and quality. This very task we do achieve when we announce open tenders in every type of work. We have already built 4 km of pipeline and in summer we plan to start the construction of houses.

SNiP: - The investment capacity of “Akademia City” is 400 bln Rb. Will this amount increase and how big will co-investors’ (including the state) shares be?

- The amount will not increase and the main volume will be formed with our own resources. We actively cooperate with the banks. Today the European Bank for Reconstruction and Development is actively involved in advisory activity (according to our European colleagues this bank has been long looking for projects of this scale in Russia). Everything concerning power engineering and infrastructure is a topic for EBRR which can provide us with long-term money loans with very good interest rates. As for state investments, next year the Government of the Sverdlovsk Region will allocate 500 mln Rb for road construction in “Academichesky” community.

SNiP: - What about the remaining share of government investment?

- Firstly, we ask for a state guarantee for loans in which we are already cooperating with the banks – this will in itself be a significant contribution of the state. Secondly, we ask for the money for road construction and it will make approximately 1.5 bln Rb in the first stage of construction. We also hope to get financing of social infrastructure projects (hospitals, schools, etc.) which make a non-commercial part of the project.

SNiP: - Will the company attract investment of stock markets or you as before deny the possibility of establishing contacts with IPO as was declared in the process of merging of “Renova’s” developer’s structures?

- The idea itself is quite good. We are just not in a hurry with this for the simple reason that the company started with capitalization which amounts to dozens of million dollars. Today the company’s price equals almost a billion.

SNiP: - According to Russian standards it is already a sufficient price (the first construction company in LSE “Open Investments” from “Interros” holding cost USD 500 mln. – SNiP). Do you expect to surmount your inner “threshold” of cost?

-Yes, of course. I suppose the company will reach USD 3 bln capitalization.

SNiP: - That is, it will exceed all modern “vangyard” in the Russian CH-market?

- We’ve made sufficient start. We do not plan just one project. In the Urals we also have “Solnechnaya Dolina” CLD near Chelyabinsk (according to the project it will equal over 3 mln sq.m of living space in the territory of 700 hectares). In St. Petersburg the talks on selection of territory are being held and we have done some work in Moscow region as well.

SNiP: What profitability does “Renova” expect from its developers’ department? What were the initial plans for construction business – was it considered a reserve ground?

- I would say that even for “Renova” the site is too expensive to be a reserve variant. Of course the return is not as quick as in oil and gas sphere but still. The group invests enormous amount of money in development projects and according to its estimates it will be one of the most profitable businesses.