Development as the Centerpiece

Commercial Real Estate North-West #1-2 (48) / january - february 2012
January 31, 2012
In the course of the business meeting Development as the Centerpiece: Solutions Required by Historical Center of Saint Petersburg the market experts discussed the key problems arising nowadays, whenever projects are delivered in the heart of the city.

Far from all market players share the opinion that the historical center of Saint Petersburg is in need of a special administration, which is currently debated in the corridors of Smolny. It’s a lot more important to consolidate business, local authorities and public for the elaboration of a development strategy for the central districts. Even without an official introduction of moratorium for the construction of new buildings in the downtown many developers feel the ban already. They try to solve their problems one at a time without waiting for the backing from the city authorities, and in contravention of the broad public opinion. Let’s look at some high points of the discourse.

“Museum” is closed!

Moderator of the first discussion – CEO of VMB Trust, spokesman for the Guild of Managers and Developers in Saint Petersburg and Leningrad region, Alexander Grishin – remembered an interactive poll made by one of the local TV channels. The residents of St. Petersburg were asked about their attitude to reconstruction and new construction projects in the center. The answer was unequivocal: 31,000 voted for conservation and restoration of the architectural heritage and only 1,000 supported demolition and new development. “The very formulation of this question demonstrates that we always try to juxtapose good and evil, but when the matter concerns construction in the downtown, one has to choose between good and good,” he noted.

In the opinion of Board Chairman of Petersburg City, Vice President of VTB and Vice President of GMD, Alexander Olkhovsky, the main problem of town-planning activity in Saint Petersburg is non-transparent laws in this sphere, which are not clear to a wide circle of stakeholders, while the rules of the game constantly change. In fact a moratorium for new construction in central Petersburg became effective the moment the borders of cultural heritage conservation zones were legislated. “Prior to that moment it had been lucrative and paying to work in the center. But after the new regulation was adopted, no incentives were left to develop new projects here, despite the keen interest,” states Dmitry Abramov, CEO of BKT-Development. When a historical building on the Moika Quay was being redeveloped into a business center, the developer was prohibited to alter the layout solutions inside the two front outhouses. As a result, the company experienced problems with the search of tenants for “narrow premises with high ceilings.” Moreover, limitations imposed on such projects by the heritage conservation legislation place them on the brink of profitability. “Reconstruction in the center is 60% more expensive than new construction,” he adds.

The investor of the Apraksin dvor reconstruction projects bumped into similar problems. The property was put up for auction with a certain set of constraints, but later other constraints were added; actually the demolition of any structures on this territory was banned. “The developers who continue their operations in the central districts risk ending up in minimum profit, if not in loss, because of regulatory flaws and contradictions,” complains Anastasia Kozlova, Development Director of Glavstroy-SPb.

The recent ruling of the Supreme Court that repealed the provisions of the Land Use and Development Rules and of the law about the borders of conservation zones, allowing for occaoccasional transgression of the height codes prescribed by Rosokhrankultura in the conservation zones, brought about even sadder consequences: more than 100 already approved and launched projects came to a standstill. “That’s the main problem! Go ahead and impose this moratorium that everyone would clearly see that they should better stay away from the downtown! But for now we are all in a state of uncertainty: how can one invest in such a situation? How many resolutions has the government released during half a year? How many years will it take to obtain a construction permit, and will it ever be obtained?” – asks Managing Partner of MC Teorema Igor Vodopianov.

Take the floor, or you’ll lose

The city authorities do not try to ease the task, at that, “In place of smooth adjustment of the regulation we see aggressive remonstrations. A rather dangerous trend is that our authorities hear those who yell louder. Meanwhile the professional community keeps silent; business is not good at standing for its interests and dependent on the decisions often made by incompetent people.” “A broad field for biased opinions is being created in Russia, – agrees Executive Director of CBC Okhta Inc. Alexander Bobkov. – We have an architectural heritage conservation law which clearly prohibits the construction of new objects within 6 km from the established architectural ensembles. I think this should be made final, to preclude any disputes. Just take a meter and measure whether any development on a given spot is possible or not. But there is also another provision in the same law saying that new objects located farther than 6 km from the architectural ensembles must not affect the skyline in any meaningful way. This creates a fertile ground for prejudiced public activists and slick bureaucrats.” In the opinion of Mr Bobkov, cancelation of public hearings as such could be a viable way out of this maze. “Holding public hearings in the development area is a zero-sum game for the developer. Who will salute construction activities in his backyard?” – he comments.

Mr Vodopianov shares this opinion: “I do not believe in people’s rule as a way of urban development activity regulation. Urban planning is a complex process which must be the sole prerogative of professionals. The activity of the broad public should be limited to the election of deputies or municipal MPs who will represent the interests of this very public at the legislative level.” In the opinion of Mr Olkovsky, another way of solving this problem could be the establishment of a new public board to unite municipal officials, heritage defenders, public activists and representatives of the professional community. “Rather than performing a legislative or executive function, such a public board would give recommendations and consolidate the opinions of public officials, professionals and public. Such an opinion could be stated in public in relation to the strategy of urban development activity within the city’s confines,” he says.

“We all know how the authorities deal with the professional community: chief executives of 3-4 large construction companies are invited to a meeting at the governor’s office. These companies are dependent on the authorities (they hold bulky land assets and need a heap of approvals, on which the fate of million of citizens, waiting for new housing to be constructed, hangs), but their top priority is defending their corporate interests,” Olkhovsky continues. “It would be a mistake to regard their opinion for the opinion of the entire professional community.” In his opinion, the city should build relations with representatives of independent and non-profit organizations which would express the consolidated opinion of a wide circle of market players, including small and mid-size businesses.

“Negatively charged public will always be here, but these processes are to be kept under control. On the one hand, it is necessary to interact with the public and take its positions into account, but on the other hand, let amateurs mind their own business,” resumes Nikolai Pashkov, CEO of Knight Frank St. Petersburg.

Who is the customer?

“The public expresses their opinion, but do not bear any responsibility for the end result,” says Bobkov. In his words, Saint Petersburg’s center lacks a real customer. “Is there any subject seriously interested in truly constructive dynamics in the city core? There exist about a couple dozen of investors each pursuing his or her own interests. But they are not the real customers. The customer is the one having an essential budget for the implementation of projects aimed at balanced development of the entire center and this can only be the government,” he is convinced. In the opinion of Mr Bobkov, it is the federal budget that ought to be the customer of transformations, but for now this does not happen. “Therefore in today’s situation the only thing left is to discuss spot developments, whereas nearly 9,000 buildings in Saint Petersburg are in need of reconstruction.”

“The funds now allocated for the center’s reconstruction are miserable compared to the challenges that must be met. The government has enough money only to plaster the facades and install architectural lighting, but when you get inside, everything in an appalling condition. We have some case studies of regeneration of depressive territories in the center, but these projects can be counted on the fingers of one hand. All the rest is falling apart,” adds Mr Olkhovsky. In his opinion, three private rubles are to be invested per each budgetary ruble spent on bringing the center in order – only then will things get off the dime. But it is the government that ought to be the base customer to create prerequisites for investments to be attracted to the center.

Ad rem function

While the global strategy for the center of Saint Petersburg remains an enigma, developers solve their local problems. Participants of the Ad Rem Function discussion tried to find out whether there is any conceptual approach to the zoning of spaces in the properties located in the central districts. The discussion was moderated by Ms Kozlova. “Functionality must be defined by the city and included in the Master Plan, but it must be more flexible. I think the tourist function may well co-exist with the industrial one,” pointed out Irina Anisimova, Director of the Nevskaya Ratusha project. “Now the idea to remove some of the existing functions, such as offices, from the city core is rather popular. I absolutely disagree with this position, because the presence of different functions in a single center is a unique advantage of big cities. This allows such a center to function 24 hours a day and ensure security, since it is always filled with people instead of staying idle during some parts of the day,” added Dmitry Abramov.

Deputy Director of Strategic Consulting with Jones Lang LaSalle SPb, Andrei Kosarev, said a few words about redevelopment of the old buildings in Apraksin Dvor into the modern function: “The object is being filled according to the plan, but there are some questions regarding the alteration of layout plans of the buildings dating from late 17th – mid 18th centuries, which do not suit those functions which are needed there now. At any rate, we’ll find a tenant for these premises in spite of very tough constraints. Apraksin dvor will be a unique project with themed zones, small office zones, hotels, and business-class residences for temporary residence.” “Combination of several functions is the most optimal solution for this project,” resumed Kozlova.

Business on the brink

In the Business on the Brink discussion moderated by Director of Real Estate Consulting and Appraisal at Lair, Svetlana Chevdar, experts wondered whether mixed-use complexes are capable of making up for the risks of development in the center.

Director of Business Development Maris|CBRE Kyle Patching remarked that no certain formulas or recipes exist for a project to be a success: “Each situation is unique and an object organically fits into it.” But in his opinion, the main development resource is urban industrial zones, where businesses from the center will be relocated.

Advisor of President of GC Development Group, Boris Yushenkov, cited the example of Moscow where construction in the downtown is officially “frozen” and where the main resource is the so-called gray belt. “Remove the curtains and look around: there are more than five functions. Just look what people really need.” He believes there are three levels of developer’s professionalism: “The first is economic necessity or deliberate need, when there is a dominant and natural function under the given conditions and it must be harnessed. The second level the synergy of two functions supporting one another – the so-called “cross pollination.” And the third level is when an unobvious commercial function is added to commercial functions. One example is a theatre – it may not bring any direct gain, but will definitely increase the flow of visitors to other five functions.”

Participants of the discussion mentioned several examples of mixed-use complexes and came to the conclusion that recreation of historical functions in the old city buildings is in most cases a more ambitious creative challenge than a deliberate commercial solution. And the multifunctional complex as a format fits well into the concept of Saint Petersburg’s regeneration and can be used in the former industrial zones, new urban areas and even in the historical core.

Money invested in the air

The last in sequence but not in importance discussion was devoted to public spaces – squares and quaysides, public gardens and parks, pedestrian streets and promenades. Its moderator was Alexander Karpov, Director of the ECOM Center of Expert Evaluations.
“The subject of our discussion is rather provocative: new public spaces in the center. The event organizers ask us: how will they emerge? The answer seems to be plain: buildings will start crumbling and new public spaces will appear in their place. This is an unexpected but a rather plausible scenario. Are any other scenarios a possibility?” – he began.

This idea was further developed by Yushenkov who stated that nobody would now invest in public spaces at his or her own initiative: “Examples of public gardens in the center at the initiative of public activists are a thing of the past. The time of romanticists has passed.” In his words, public zones may also be part of commercial projects (e.g. in the Konyushennaya Square or New Holland), but only under the pressure of the city administration. “Co-ordination is needed not only among developers who still think in terms of development spots, where they can do something, but nothing beyond them. But when a district head sits down at one table with him and says: you have a development spot and I have a street – let me build a cycling lane and maybe you’ll build a fountain on the territory of your office project? This is how we may get a pedestrian street where people may have some leisure time. Each party will benefit because these people will leave their money in a shopping mall or business center. This scheme will work,” illumines Mr Yushenkov.

“One of the reasons why a developer could be interested in a public space project is the attempt to alleviate the protest mood. Another option is to combine such zones with the residential function. High net worth individuals who may compare their living environment with some other world-famous cities know too well what the quality of living actually means; sooner or later they start wondering where they
can walk their dog or where their child can play. Stumping up a pretty penny for such housing and its maintenance, such citizens will demand a respectful attitude towards their needs. This can motivate developers to create a more comfortable environment that includes new public spaces,” believes Oleg Pachenkov, Deputy Director of the Center of Independent Sociological Studies.

Relevant quotes

“The professional community is often looked upon as a den of robbers who want to earn more and to squeeze as much profit as possible. I assure you, this is not so – you can occasionally find decent people among the businessmen.”
Alexander Olkhovsky, Board Chairman of Petersburg City, Vice President of VTB, Vice President of GMD

“You should not wait for approval from the project neighbors. This is always noisy and dirty.”
Alexander Bobkov, Executive Director CBC Okhta Inc.

“Even if a project is lucrative, I understand that its approval may take at least three years or a lot more time. I’d never invest in infinity, for I am not Koschei the Immortal.”
Igor Vodopianov, Managing Partner of MC Teorema

“Development and transformations always elicit protests and when nothing is done everything is quiet and everyone is happy.”
Dmitry Kunis, President of STEP, General Contractor

“A moratorium for construction in the center is the best evidence of the city’s impotence and incompetence.”
Nikolai Pashkov, CEO of Knight Frank St. Petersburg

“Automobiles are to be set on fire, although there are also more civilized ways to solve the problems of traffic congestion in the center.”
Boris Yushenkov, Advisor of President GC Development Group

“It’s better to have many monuments and think how to take care of them, than to live in a city where there are none. Basically, we are lucky.”
Nikolai Kazansky, CEO of Colliers International St. Petersburg

“As the owners, we believe that the real price is the one which someone is ready to pay.”
Yulia Dyubina, Sales and Marketing Director, Jensen Group