Empowered Development

Vladimir Filonov

Veniamin Golubitsky

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Why did you move across into business from the Yekaterinburg government?

Veniamin Golubitsky: Everyone has a limited number of opportunities, and since life is short, one wants to try different things. I felt that I had achieved most of what I could in state administration, and an interesting chance to get involved in a big project arose at Renova.

Did you know Viktor Vekselberg, beneficiary and owner of Renova Group, personally before your appointment?

VG: Yes, I did. He invited me to come and work for the company. As one of the company’s primary programs was connected with realizing projects in the Sverdlovsk region, and given that the administrative situation in Yekaterinburg was stable and I thought I had fulfilled my duties, I decided to move into business.

Are you a shareholder in the firm?

VG: Yes.

How would you rate the prospects for profitable commercial real estate construction in the regions currently?

VG: Office real estate has not got great prospects at the moment because, on the one hand, a large number of office projects have not been finished and a lot of incomplete projects remain standing, and, on the other, a lot of office space is not being rented, while at the same time rental rates have fallen and are continuing to fall. So office is the last segment of the market that will revive following the crisis.

Retail real estate is less dependent on the economic overhang. It is clearly connected to the willingness of the population to consume, but, for example, as we build our Akademichesky project, it is natural that a commercial area will be needed. For residents it is always a case of easy access, to be able to get to goods regardless of the economic climate. This makes the retail sector more stable. Projects are being completed and will be completed. It is in a reasonably decent position as a sector, considering the level that the crisis reached here in Russia.

As for the hotel sector, it is definitely a difficult business in the regions. It is a segment particularly linked to local conditions and not just the general economic situation. A lot depends on the regions where hotel projects have been attempted. It is a complicated sector, I would not call it high-return. Of course, it will develop, indeed is developing, but it will hardly be developers’ priority.

So will some regions have a more developed hotel sector than others?

VG: Yes, some will be better provided for than others. But the hotel sector is directly linked to business activity. If business tourism falls, if some companies reduce their activities in Russia, then it will be hit. But, as I said, it will develop in time, although it will not be a priority for developers.

As for warehousing, this has also been hit massively by the crisis, but on the other hand, Russia does not have a large enough supply of warehouses, in global terms and standards. So, again, this will develop, indeed activity is already returning.

Judging by your projects, it seems you put your faith in residential development.

VG: Yes, I think that for developers, residential will remain the priority and, at the moment particularly, economy-class housing. This is a more voluminous sector with greater demand and one where the state is active in helping the sector perform its social function. But while economy class is voluminous, there will still be demand for other levels of housing, such as business class and elite. We are studying and trying to develop this — at Akademichesky and at other projects we have a variety of classes. In fact, this is one of the main advantages of an Integrated Urban Development project. An IUD is the creation of a mini-town, where we are introducing various levels of real estate, of housing, retail units, office space and warehousing.

So you will have warehousing in these developments?

VG: Yes, there probably will be warehouses, since these plans include supermarkets and other retail outlets and the area, which at Akademichesky will number about 350,000 residents, will need it.

Do you agree with Vladimir Kritsky, deputy head of the Sverdlovsk region administration, that the growth rate for housing in Yekaterinburg remains the same as it was prior to the crisis?

VG: It depends which period you are comparing it with. There was a period of nurtured growth in real estate when everyone tried very ambitiously to make volumes of real estate increase, and there was huge demand. Of course, you cannot compare the current situation with that. Now this market is seeing gradual growth, but the volumes have mostly been kept, in part thanks to our company. As for now, we make up about 30 percent of the market and the company’s share will likely even amplify going into 2011.

For the real estate market, can you say that Yekaterinburg is Russia’s third city?

VG: Absolutely. Yekaterinburg is an important financial center. It is the third in Russia, I think, in terms of trade volumes. Plus it is a city that is assiduously trying to develop: It is a university city and it is also a center for migration. Historically, people migrating from Asia to Russia would travel via Yekaterinburg. It is near to resources and the oil and gas trade of Siberia and the quality of living there is markedly high. For instance, a lot of people who have finished working in the oil industry retire there or raise their children there. Therefore, we have calculated that it makes sense to construct Akademichesky — a project significant on a European scale — in a place particularly significant for migration in the Sverdlovsk region, where there are industries and prospects.

And that is not just a reflection of a vested interest?

VG: It is an objective fact. If it was just my personal view, then I would be a bad businessman, imposing my view on the market. We follow the market and the processes that help develop the market.

Which local governments are easiest for you to work with and how do their approaches differ?

VG: Our basic product for the market is the IUD. We are developing these projects in Yekaterinburg, Yaroslavl and the Moscow region, for instance. We have postponed our project in Perm partly because of lack of active support from the local government. Like any such project, our construction requires government approval — even more so for us since it is a public-private partnership — and if government support does not materialize, then launching it is pointless. As for Yekaterinburg, if we were not able to cooperate successfully with all levels of the local government, then the project just would not be possible.

There is a new governor in the region, but this has not hindered anything. In fact from the very beginning he actively supported this project: He regularly visits the site and definitely helps with the construction of the local infrastructure. When we began there, we collaborated successfully with Governor Rossel, with whom I myself previously worked, and we also got a huge amount of help from the Regional Development Ministry.

Medvedev also supported this project in its early conceptual stage, before he became president. We showed him the model for the project, and he said, “This is a project of the future.” This has been a key phrase as it has defined the position and support of the federal structures. The next time he saw it, as president, he was very supportive of the construction operations. This was significant in helping attract private investment, which is particularly important since the whole project costs in the range of $30 billion.

It is crucial to interact with all levels of authority, as roads, utilities and infrastructure all involve the various levels of government right down to the municipal level. There is of course a lot of interaction with banking structures too. All this demonstrates that developers are not in a straightforward position.

Is work on Solnechnaya Dolina in Chelyabinsk ongoing?

VG: Yes, it is ongoing.

Do you have state support for this too?

VG: Well, let’s say that on a federal level it too has support, and it is also under the attention of the city authorities. There is due to be a change in governor there, but I think that we will continue to work successfully together.

Which factors most affect the ease of operating with such local powers? Is it more than just personal acquaintance?

VG: The main factor is how progressively the manager of a project appears to think, how effectively he initiates useful dialogue. First of all, there is the prospect of local job creation — Akademichesky will create up to 8,000 new jobs. There is also the demand on industry, the demands for construction materials and for other industries. Most of our materials in Yekaterinburg come from the Sverdlovsk region, which makes it very tax friendly. The effects and use of new technologies and energy efficiency are also important. All these things are helpful for creating successful partnerships with local government — there are masses of areas that can help.

You looked at models from the West in the 1960s and 1970s to gather ideas for your IUD designs. Are you trying to replicate in Russia what was done then?

VG: No. What we are trying to do here is learn from things that were not done properly there. For example, one mistake in Paris when they built satellite towns around the city, they made towns for the poor and towns for the rich. This immediately creates social instability and unrest. So, we are not trying to make a divided town. It will be a town for all: The forests will be accessible to all, the water drinkable by all, good roads for all. The differences will lie in the size of apartments. So, one major lesson that we learned is that you must not build walls between the various social groups; it is very dangerous and works badly.

How about the green question?

VG: Between the various quarters of the town and surrounding the whole town is a forest that covers more than 400 hectares. This is on a rental basis, it is a completely non-commercial part of the project. We took it on knowing that we are not going to be using the woodland materials for commercial means, but that it helps make the project as a whole a commercially interesting venture. People want to live near the forest and clean water. We are creating cycle tracks all around the town, something characteristic in Europe but that in Russia does not generally exist. It all corresponds to international environmental standards. There will not be traffic jams in Akademichesky!

Do you use the services and products of other companies in the Renova Group?

VG: Renova Group is built such that each business is sufficiently independent. Mr. Vekselberg has different businesses with different partners. In some ways, we probably can turn to one another and assist each other, but every business is developed completely on its own and from this point of view, the group does not really interfere with the running of businesses. I am the head of this business. Interaction is likely, such as for instance in terms of energy efficiency, where it is useful to be able to draw on the experience of Complex Energy Systems — a Renova Group energy company — but that is just personal contact. Autonomy and independence of the businesses are fundamental principles of the group.

So to what extent do the various financial positions of the Renova Group companies influence the other companies?

VG: They do not have any influence.

How much money do you owe to banks?

VG: I cannot say precisely how much. I can tell you how the business is set in terms of interactions with the banks. Today, about 70 percent of our business is credited; the projects where we are going to be selling our finished housing projects to the state, for which we have great governmental demand, are practically entirely financed by bank credits. We have a strong relationship with a number of banks and they know that they are effectively not taking a risk by lending to us as we have contracts with the state, with well-defined repayment periods and conditions. So banks are really willing to work with us. Sberbank recently lent us over 8 billion rubles ($257 million).

But it is still a debt. How do you intend to pay off your debts?

VG: As I explained, our sales to the state fully cover our bank loans and we still have our margins, so we can live very peacefully in this regard. It is another major advantage of our project. Akademichesky is scheduled to be built in about 15 years and as we took into account the crisis cycles, we knew that we would not get lost in any of them.

Why did you consider it necessary to set up your new closed-end investment funds?

VG: Because the projects that we are building are capital heavy, and this means we need to attract quite significant financial resources. Equally, the state purchasing our products also makes it quite attractive for investors. So, we are setting up the funds, on the one hand, to attract cash and, on the other, to be able to offer very good conditions to investors via this project. Our projects will offer a rate of return of around 25 percent, while a bond, say, gives around 5 percent to 6 percent.

So is this a good financial advertisement for your company?

VG: No, it is not an advertisement; it is a way of attracting money. Yet for the fund investor, it is a way of earning good money. They are not seriously risking their money and will get high returns.

Are they similar to REITs?

VG: Similar, but not the same. With a Real Estate Investment Trust you need to pay tax on 90 percent of the profit, with these funds, ZPIFs, the tax regime is more favorable.

Ferens Management, your subsidiary, announced it would be building 20 hotels by 2012. Is that still going ahead?

VG: This project has been halted because of the state of the market, although we have not scrapped it. The hotel sector, as we discussed, is not the most promising sector in the market at the moment. We hope to come back to this project as soon as possible.

When did you decide to stop the project?

VG: It is not that we have stopped it entirely: We decided that this year we are not going to put our money into this project. It would not be right at the moment to divert funds away from our primary housing projects.

Was your decision to merge your Renova real estate and development operations in 2006-07 into the present company a response to other companies on the market, like Glavstroi, doing the same?

VG: No, it was not a response. It was necessary for the system of management that we had in place. It was an economic decision to avoid wasted expenditure on excess management. It was also connected to the company’s decision to define its priorities in terms of development.

Do you consider yourselves competitors of companies like Yartt Development, whose management used to work at Renova-Development prior to the merger into Renova StroiGroup?

VG: We compete with all companies on the market, but then at the same time the segment in which we are most active does not have particularly wide competition. Only really large companies with significant financial resources and lobbying power can afford to get involved in this segment. In that sense, I do not think that we compete with the company that you mentioned.

Besides, management comes and goes, it is nothing unusual in the market for that to happen. People do that all the time, it is normal.

So, they didn’t steal your secrets.

VG: For us, much of the time, there is no real secret. Everyone understands the idea of completing a project. It is a question of qualifications, resources and talent. This is really the opposite of secretive. We try to do what the country needs, promoting housing with a significant social result. We promote what we do, so that regional leaders can see and learn from it. It corresponds to Mr. Vekselberg’s aims for socially responsible ventures. I think that Akademichesky helps the Skolkovo cause, through the experience of being involved in public-private partnership that it provides. Also it is a technologically advanced project.

Do you intend to take part in the development of the new Silicon Valley-style technology center at Skolkovo?

VG: I think that Skolkovo will be decided through tenders.

And will you take part?

VG: We need to wait until that happens. But why not?

Were you not interested in Sochi?

VG: No, Sochi was not really our kind of project as it primarily involves commercial real estate, while we are mostly focused on housing. But we work in many areas, such as Krasnodar, Yaroslavl, Perm and Aprelevka, Shyolkovo and Sherbinka in the Moscow region.

You plan to provide mortgages to buyers at Akademichesky. Do you think that the mortgage market will seriously grow this year?

VG: Yes, it is growing and will continue to grow. In some of our projects over 50 percent of our properties will be sold using mortgages. We actively use a mortgage program with VTB 24, Gazprombank, Metcombank and Sberbank. We have a serious mortgage structure in place that puts us ahead of competitors since we offer excellent conditions. I do not think that anyone else could offer such favorable conditions in Yekaterinburg.

In general, do you intend to become the main partner for the state in such public-private partnership housing projects?

VG: Well, it is hard to say the main partner for the state. The state will always have a choice, and secondly, it is a pretty big market. Yet it would be fair to say the state is our main partner, because it is not possible to realize the kind of project that we are engaged in without state support. The state would need to help with such a project anywhere in the world. The government was a great support to us during the crisis, and we have been supportive of the government as state housing purchases are at prices fixed by the Regional Development Ministry, something not offered by many developers.

What problems do you encounter most in the construction of projects like Akademichesky?

VG: Well any problems that we have tend to relate to the fact that it is a long-term project. Yet many of the budgetary conditions for housing that the government looks to set are for short-term projects. So you constantly have to fight your corner for those resources, since you cannot simply build a road for one year and then stop building it the next. Government selection procedures are conducted every year and it is very important that we secure government resources not just on a one-off basis but also with some kind of long-term view. This is quite a serious problem that occurs — probably the main problem. Beyond that, all other problems are more tangible and resolvable, even if a project like Akademichesky requires virtually all the construction resources of the Sverdlovsk region. We have lots of subcontractors, main subcontractors and secondary subcontractors — currently five principal operators and maybe more in the future.