One of the most prominent representatives of development business, Setl Group’s vice president Vyacheslav Semenenko, stood at the helm of St. Petersburg Construction Committee this spring. His main challenge is to make the city’s construction sector more investor-friendly. He is confident that the city must learn to work both with strategic investors and ordinary market participants. He shared his vision of the industry’s further development in his interview to CRE North-West.
– Mr. Vyacheslav, much is now said about the growing role of state in the construction market. What forms do you think this may take?
– If we look at the history of developed nations the government influence always becomes stronger in times of crises. As the market stabilizes the role of state wanes and market economy holds sway. It’s important where exactly the government consolidates its grip. In the social segment this is housing mortgage which is an instrument of maintaining the right balance in society; the influence of state is necessary to correct interest rates. The government also redoubles its interference in construction which is number one sector in urban economy. One ruble invested in infrastructure – roads and engineering – yields 6–7 rubles of tied investments. This is one of the key instruments during the crisis.
– You are a man of action and as a businessman you aim, above all, at profit maximization. The government, on the other hand, pursues other goals. Some of your colleagues fear you’ll focus on maximization of public profits to the detriment of the professional community.
– The city’s capital growth is the growth of total value, so to say, which is not only measured by material gain but also by goodwill, the increase in investment appeal and balancing the interests of the city with those of investors. Surely my primary responsibility now is to take care more of public interests than business pursuits. But the crisis puts everyone in one boat. The more attractive the city is, the better for business and vice versa: the better businesses feel, the more attractive the city is and the higher tax proceeds it can obtain.
– Will the city demand additional social responsibility from business in times of crisis?
– The social responsibility of our business is rather high even without external constraints. While residential developers are noted for an acute sense of social responsibility, commercial real estate developers create requisite infrastructure. I am afraid in today’s situation when business has nothing special to sacrifice it has to think of mere survival. Its social responsibility could be expressed in groping for the right balance and laying a foundation for post-crisis development. It is necessary to stabilize the standing of construction firms, preserve jobs and find the mechanisms of avoiding losses.
– What period do you have in mind talking of post-crisis development?
– Even experienced economists are at loss for a precise forecast. As for my personal intuition, I believe the entire year 2009 won’t be easy. Yet by the end of the year we must find the mechanisms of development in the new reality. I mean the trinity of government, society and business. It is essential to define the key sectors and work out specific mechanisms of their support. Elements of private-public partnership might precipitate the situation stabilization. It is necessary to halt any further downturn or unemployment growth and bring the interest rates in conformity with the real situation. The rates exceeding 20% are prohibitive since business cannot capitalize on such loans or use them for long-term investments. Our challenge is to drift away from temporary measures to efficient permanent mechanisms which are to be launched already in autumn.
– What do you think are the shortcomings of St. Petersburg strategic development?
– The merits or demerits of this strategy are not the point, since the business environment has changed dramatically. Prior to the crisis we had the seller’s market and booming economy. Investment and consumer demand shot far ahead of supply in any segment. Only some commercial real estate segments were on the way to saturation. Now the era of quality competition must be ushered. There was more money than the system was ready to absorb and this created a hullabaloo. The experience of participation in the MIPIM exhibition exposed our chronic inability to work with investors. And we should also bear in mind that global players – world-renowned investment funds – could not bring themselves to investing in our city.
At the time of market recovery St. Petersburg will be just an ordinary borrower without any global privileges destined to compete with leading cities of Europe for investments. The trend was due to reverse even without the crisis. The sector developed glaring imbalances. Prices could be galloping by 40–60% per annum and the quality of many regional projects was such that they would have to be taken down in 5 years or so in the wake of stiffening competition. The professional level is very low; the quality of design is a major problem; technological and urban development codes are out of tune with international standards. The urban development code leans on the Soviet practice of territorial planning. We are only approaching the issue of infrastructure development for modern-day manufacture – contemporary industrial zones, efficiently planned and centered on transportation hubs and logistics properties.
The crisis exposed the groundlessness of the proposition that our domestic economy possesses some intrinsic stability, so at the stage of market recovery we’ll have to look for new arguments to turn the eyes of invetsors to our market. We must solve systemic legal and technological problems and develop new ways of interaction with investors, both strategic and minor. I am positive that the city ought to think of the ways to support minor investors, including family businesses.
– What will the city do with unending commercial real estate development projects?
– As the market stirs to greater activity, so will such projects. They’ll see a change of owners and debt restructuring. The city does not have any particular strategy towards them. I don’t see any problem here. Our top priority now is to back residential developers, in the first place. This is what we should do for the sake of maintaining social stability. We fear mass bankruptcies among developers and must keep up the system in a workable condition. As of April, the developers commissioned 565,000 sqm which is more than last year. This is clear evidence that the sector is operative and efficient. But there is a problem with launching new projects into operation. I am afraid we are generating scarcity which will make itself felt already in 2010–2011.
– What can Smolny do in this situation?
– We are now revising approaches to the market appraisal of land. Together with valuators and market analysts we are groping for new methods. The problem is that the market is slack. We need to find new pricing guideposts. The starting land price will be around $100 per sqm at the next auction organized by the Property Fund and I am confident plots will be in demand. A strategic mistake of developers is that they do not launch new projects now. To begin with, they should resume the cycle and, secondly, the cost has dropped thus allowing for profitable undertakings. They shouldn’t miss out on the opportunity to buy land for cheap. The city’s task is to market an ample amount of prepared lots at adequate prices.
– Plenty of land was sold for complex development prior to the crisis. What is the fate of those projects?
– Neither the city, nor its strategic partners are going to give up on these. Those territories are to be dealt with; they need to be offered by lots. To the best of my knowledge, Glavstroy will market the first lots and Fishmann Group is brooding over the same plans.
– How about Petersburg Real Estate?
– This company also has some and I am afraid this land won’t be sufficient; more is to be offered. Already this summer we’ll witness the scarcity of supply in the market of economy-class residential development. For all that, the supply of complete flats has almost run out. Buyers start considering the properties to be delivered in 2010 but even this housing will soon disappear.
– How much has the construction cost dropped?
– It is falling, to be sure, but not as low as the prices - 7% at the most in the recent six months plus.
– And what do you think is the adequate rate of return on investments in the development business?
– From 7 to 15%: the profitability is not high but quite acceptable. The developer shouldn’t stake on excessive yield. Development is a conservative realm, not a business of glamour as has been the general attitude in Moscow during the two recent years. Nowhere in the regions, not even in St. Petersburg, did we see glamour comparable to that in Moscow so let’s not confuse the Moscow real estate market with markets in the rest of Russia. Our market operators are known for their conservative investor-luring. Super-profits are impertinent in this field. We need a low albeit sure yields.
– A short time ago the city introduced a new concept of transport infrastructure development. How realistic is it, in your opinion?
– It is indispensable but its realism boils down to financing. Yet we should set such goals and plan such measures geared towards distant future. Land is to be reserved for public needs already now, or the concept will be unworkable when money arrives. Unlike common citizens, the city must plan at least for 20 years ahead.
– Do you find it more exciting as a professional to work for the government, given that business cannot afford planning for 20 years? Is it easier or harder to be a public official?
– It’s interesting for me as an expert because the goals are grander. Yet I did not expect it would be that different. In business you may easily distinguish between the top and minor priorities. You may commission your team with meeting certain challenges first and tell them to put off certain matters of minor importance. Here the requests of minor shareholders and large projects align. Every day the Committee elaborates on a huge amount of issues and we have to instantly switch from some issues to others.
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