A Big Buildup: Despite Long Odds, Construction Work Is Booming in Moscow
Dec. 28, 1995
MOSCOW _ As real-estate developers go, Chalva Tchigirinski is a pretty fortunate guy.
Desperate to finish a construction project here several years ago, Mr. Tchigirinski headed for the casino. He and his partner played roulette for 19 days and scraped together enough cash to complete what is now the Moscow headquarters for Philip Morris Cos.
``It was a nightmare,'' says Mr. Tchigirinski, who has 11 Moscow projects to his credit, ranking the 47-year-old former art dealer among the leading participants in a unique real-estate boom.
In a country with high interest rates, few property laws and _ as recent parliamentary elections show _ persistent political uncertainty, between 2.5 million and 4 million square feet of Western-style office space is under construction. That is about as much space as was built in the seven years since the first foreign developer erected an office tower here in 1988.
Cranes have joined the cupolas of Russian Orthodox churches and the spires of Stalin-era buildings as permanent fixtures in the Moscow skyline. To an extent, that was true in Soviet times. But now the cranes are actually moving. Nineteenth-century manors of the former Russian nobility, ignored in Soviet times, are being gutted and rebuilt into first-class offices for Fortune 500 U.S. corporations, big European conglomerates and, increasingly, Russian banks, advertising agencies and oil companies.
What is driving the market is unprecedented growth in the country's service industry. Before the collapse of the Soviet Union, there was none. Now foreign accounting, marketing and legal firms have increased their space needs by factors of 500 since coming here just a few years ago. And Russian companies are joining the chase for the best addresses.
Russian entrepreneurs are the main force behind the boom, but foreign firms have found a place in consulting, construction management and development. Earlier this month Reichmann Asia Co., headed by Albert Reichmann, former president of Olympia & York in Toronto, broke ground on a $96 million, 700,000-square-foot office, retail and residential complex on the banks of the Moscow River. Known as Embankment Place and in the works since at least 1989, the project is the biggest yet announced by a foreign developer. But the joint venture with a Russian company has yet to announce financing.
There appears to be at least as much failure as success. Construction starts and stops as financing becomes available and then dries up. Linda Breitel, sales manager at Mr. Tchigirinski's S+T Handels GmbH & Co. development firm, estimates that nine million square feet of office space is in limbo as a result of financing questions or problems with the bureaucratic city approval process. ``There are huge amounts of projects in the market that will never get built,'' she says. A few Western tenants have been burned, giving advance lease payments to projects that went under.
But a select group has found a way to overcome the obstacles, parrying funds from one successful development into another, securing loans with leases from top tenants and finding financing among the country's natural-resource producers, which have the real wealth in Russia.
The private construction business has been one of the brightest spots in the Russian economy. While gross domestic product is expected to decline 4 percent this year, most construction-related industries, from brick makers to tile producers, have shown gains. Nationally, housing construction is up almost 12 percent through August, the latest figure available, compared with the same period in 1994.
From the financial side, none of this should be happening. Interest rates hover between 20 percent and 30 percent annually. The best a developer can hope for is a 49-year or a 98-year lease from the city on the land beneath a building. That may remain the case for the foreseeable future. The Russian Communist Party, a winner in the Dec. 17 parliamentary elections, categorically opposes the sale of land. Meanwhile, there is no system for enforcing foreclosure judgments. Most skilled labor and quality building materials must be imported. When imports get stuck in customs, work is often halted.
But the market offers a reward to match the risk: Moscow rents for first-class office space are among the highest in the world. At about $70 to $80 per square feet on average, they rank with Tokyo and New York. Until recently, developers could command three-year to five-year advanced lease payments. With some of the best buildings renting fully in advance, developers tell of recouping their investments before opening their doors. In the West, developers are lucky to get their money back in five years.
At one Moscow construction site, a group of Bulgarian and Romanian workers pours Russian concrete under the supervision of a British construction manager, hired by the Russian developer, Elbert Ltd. One part of the financing for the 380,000-square-foot, $60 million office and retail project comes from a lease prepayment made by the world's largest nickel producer, Norilsk Nickel Inc. The company, which will use the office as its Moscow headquarters, is expected to put up $20 million before the building opens its doors. Another part of the financing comes from a $20 million loan, at an interest rate of 23 percent annually, from Neftikhimbank. The bank, largely owned by the country's largest oil refineries, received 40 percent of the development's ownership in return for its credit.
The land came from the Union of Theater Workers, one of many Soviet-era organizations and institutes granted development rights from the city. The union will receive about 10 percent of the space in return for contributing land.