People in the Know: Deadline is a Tough Word

How did you get involved in this business?

I got involved in this business with my partner, who is now the general director of the company. Everything happened simply enough: about seven years ago there was demand in the country for office areas in connection with the beginning of the active development of business, which has significantly increased. Attempts to rent a premises for business frequently came to nothing. There just simply were no suitable areas. Initially we considered working as a redevelopment company. At that time it was widespread to take something old, do some small renovations, decorate and then lease it out. But during this process we decided to try and initiate projects independently. To build, instead of being engaged in intermediary variants. My partner then was the co-owner of a small building company.

Did you have any difficulties? Did you make any mistakes in the beginning, were you scared?

Everything was scary. For example, you start collecting the documents to construct a building, and the surrounding inhabitants arrange meetings and demonstrations.

Are you talking about the Aeroport business center?

Yes, exactly. People laid down in our concrete. They broke fences. We put up fences and at night they ripped them down and stole them.

Was it possible to eventually agree?

If you asked anybody, even you: near to you a building is under construction, at a distance of 100 m de jure it does not affect you in any way and has the right to exist. Do you want the building to be under construction? Of course you would say no. Because it’s dirty, there are vehicles, it’s noisy. But is this the basis to stop construction? The documents were received lawfully therefore we continued to build.

But legal regulations exist...

Laws exist, but it is necessary to solve disputes with inhabitants of the neighboring buildings independently.

I could argue with you - near to us they are constructing a building and nobody has held a meeting yet.

Practice shows that everywhere is different. A lot depends on the inhabitants. People are different.

Let’s return to the company – judging by what’s written on the company’s website, MR Group is a full-cycle company.

Not completely. At several stages of the development process we outsource with the purpose of minimizing expenses and optimizing human resources.

Why?

There is not time to do it and we don’t have plans to increase our staff. In particular, we had a general contracting company for the first premises we built independently, but now we don’t construct. We carry out a tender for a general contractor and choose the best. As a result an independent company does the building.

What about the assets of the company? You must need to monitor and make sure they are functioning as they should. How do you manage the operations from a distance?

It’s not the same as manufacturing. There is an area. If there is property on it we lease it out. We have our own operating company that is engaged in everything.

Why have you decided to create your own operating company?

Initially we worked as a full-cycle company and wanted to do everything connected with development, construction, the subsequent operations, sales, etc, ourselves. Firstly, this was additional money. Why give it to someone else? But then we consulted, analyzed world experience and tendencies and decided that we don’t need to do them. As a result we work with the leading consulting and sales companies - CB Richard Ellis, Knight Frank, Jones Lang LaSalle, Colliers Int. But we have decided to take on the management and operation of premises ourselves and have created MP-Servis.

What is the current market value of MR Group?

We have an internal estimation of the market value of the company. But in the near future we are not going to issue an IPO.

You have no plans for an IPO?

In the long term.

Can you be more specific as to when?

As the market develops. There are no plans for an IPO in our strategy to 2012.

And after 2012?

It does not necessarily have to be an IPO. It may be sale to a strategic partner. It is possible that tomorrow someone might come and make a very interesting offer.

So it’s a question of price?

In general yes. What profit we will get. The buyer wants to buy with a discount, and we want to sell with a profit. The question is at what discount and at what profit. The company is actively growing, so why sell a growing organism?

Tell me about the company’s projects in the sphere of commercial real estate, maybe some of them are significant for you?

There are projects that have either hardly moved ahead, or are taking a long time. These are headache, toothache level..

Do you have toothache?

A magnificent complex on Viktorenko ulitsa at metro aeroport. We defeated everybody and everything but before that there were huge difficulties. I wouldn’t say they were our fault or that we made mistakes. It took a long time for us to get the documents for this project, as the spot for the high-altitude building was small. It is known that there are certain time periods allocated to get the initial planning permission documentation. If get it earlier, it is a merit of our experts. But when it takes 20-30 per cent longer than it should, this is nonsense. If we’re talking in more detail, then now, for example, we use a system of automated parking in our projects, which is very actively and successfully used in Europe. Cars are put on a platform that moves in this or that direction. It allows for the allocation of a lot of spaces. The business center on ulitsa Viktorenko was one of the first projects in Moscow to test the system, and it straight away caused many problems and additional requirements. It was necessary for us to either refine it or change it. As a result we needed more time for testing. The second aspect was connected with the location of the business center, in particular the geology and soil. Bauer and Soletanche-stroy tested their technologies there in order for us to strengthen the piles. As a result experts in underground space Mosinzhstroy solved the problem but it took additional time. This premises has been our hardest project. We have lost more than a year at the preparatory stage. But the rise in price on the office real estate market has compensated our losses and we have already sold most part of the space in the business center on ulitsa Viktorenko.

How do you finance large projects? Are the volumes of investment large?

We obtain extra funds and we have our own. We have co-investors at the initial stage. And also banks that consider providing credit when planning permission has been received. It is not a secret that the company has sold many projects at an early stage in the form of design documentation. This way there are funds for the development of new projects. Besides the aeroport business centers and that on ulitsa Viktorenko, there are complexes which are interesting to the market, namely for sale by floor. By that we attract end users who were co-investors of the constructions.

And are the volumes of investment more?

The volume of investment depends on the class of the project. If we’re talking about a complex with an area of approximately 50,000 sq.m, the volume can reach about $100 million

Let's talk about Sochi. It’s clear that after the city was crowned Olympic city, everybody started to buy land there.

We started construction in Sochi two years prior to this event. The announcement of the winner of the Olympic city was in the summer and in Sochi the company will put its first residential complex into operation this year. Almost 50 per cent of apartments in it have already been sold, and the complex is at the completion stage of construction.

After Sochi won the bid did you not get any offers to sell the projects, did nobody try to buy them up?

Of course. But we already had a construction. We received various offers but there were no serious negotiations. Our position was that we had a premises already under construction, it was being realized, it was clear how it would develop and the price we offered was already at at the Olympic market level. Initially when clients called and found out how much apartments cost there, they weren’t prepared for this situation because they thought that the price level was still much lower. Today the situation for many has become much clearer.

A state corporation has been created specially to control the construction of Olympic premises and everything connected with the Olympics. Some market participants have not gone to Sochi because this state corporation is able to take away any land plot for the construction of Olympic projects. But it has not been stated that this will be done at a market price. On the market there are rumors that will be done by the formulation of a "contractual price." Does this not frighten you?

When all this happened one complex was already 50 per cent ready, and will be completed this year. And another was at the stage of gathering all the documents. It is known where approximately 60 per cent of the Olympic premises are planned to be built and territories for them have been reserved. And if any company goes to Sochi, it goes to a specific address. It is always possible to do preliminary checks – whether the land is in the zone of interest of the state corporation. It can’t be that the state corporation had plans for the whole city. MR Group had already received permission to construct by then and paid the city administration for the land.

You understand, I couldn’t not ask you this.

Everyone knows that in Sochi after the announcement about the Olympics there has been large scale demolition of premises.

Nothing catastrophic is happening. They are basically demolishing in the area of Adler and Imeretinskaya Bukhta, and in most cases it is squatter settlements.

Do you have much money invested in Sochi projects?

As much as was necessary for the purchase of the land until the first sale. Mainly now the financing of construction is conducted from the sale of apartments.

You said that you get extra funds. Has the notorious world crisis affected the company in any way? Has it become more difficult to attract credit or are banks working under the same conditions?

They work now as they did but it has become slightly more difficult. Rates have increased.

Dramatically?

1-2 per cent.

Some employees in the financial sector talk about different growth rates.

This concerns mortgages. There is existing real estate, and this can be pawned. In this case rates practically have not changed. There are permission documents for construction. The bank in this case most likely stipulates the amount of credit, and the period. Now the absence of liquidity for banks is due first of all to time periods. Therefore they give money but for a short period of time.

Tell me about multipurpose complexes. These are not only office real estate, but shopping areas? Multipurpose complexes are not only office areas, but also hotels, shopping areas, necessary infrastructure. Because high-grade shopping complexes have certain requirements in terms of location. In our projects an accompanying retail component is necessary for the future workers of the offices.

So you don’t plan to develop this direction separately when it’s known that Moscow doesn’t have enough shopping premises?

We are looking. But it’s difficult to find a site. And for a shopping center the location is a matter of life and death. While offices have certain requirements in terms of their distance from the metro for a shopping center a prime location is absolutely essential and if there is already one nearby it is critical and extremely risky.

If you find a good site will you develop this area?

Yes. In general we consider all kinds of commercial real estate and do not limit ourselves to just offices.

as your way, whether, the Moscow market of the real estate which already from different directions is declined by everyone to whom not laziness requires changes? Or all of you arranges?

There is such a phrase as “Leave well alone.” When the rules are clear to a person then they start to work to by them well. But the human essence never happens is happy. Imaginations on a theme as though also begin was good, if... But if all to realize, it is not clear, whether actually it will be good. The practice in any country shows that it is an individual process, not a conveyor. And it is also a business where there are no small margins. For example, in Germany or Switzerland, everything is organized for convenient business dealing. But try to buy a land plot and gather all the documentation. There it takes years to collect.

But it doesn’t take us a day either.

But in Europe it takes even longer

As far as I know in order to get initial permittance documentation it is necessary to obtain no less than 40 approvals.

And in the West do you think it’s less? I think its the same. For example, legislation on ecology is stricter. According to civil rights, any citizen can submit to court. In Russia this institute is still insufficiently developed and sometimes it is possible to agree, to satisfy their requirements with inhabitants, and abroad it is not. In Europe in many respects it is more complex, even at though the market is more transparent. True, it is easier to buy a land plot. But this is the only thing. The price of land abroad is more expensive than Moscow. Because anyone can buy it. And also it is not necessary to receive approval from the city. You come and you buy it. It is expensive, but very simple. But everything else is more complex complex.

You have 1.5 million sq.m...

More than two million already.

But not all the premises have been realized yet. For the market its not news for many of the announced premises to not even reach the stage of realization. Is it like this at MR Group?

The company has [projects] at the stage of design documentation. We do not announce what we have bought, and in three years here there will be a garden city. We only announce that we have bought a land plot and that we are starting to develop it. Some time passes and we say what real estate will be there and how big it will be. If someone comes to us at this moment, we will sell it. And in the future the buyer will answer for the project. There is an opposite example, lets use our business center project on ulitsa Dvintsev: the project has been sold, but we are carrying it out and building it. As stipulated MR Group will therefore represent itself as the operating company and carry out the construction of the premises to the end. There are situations when the company works under the scheme of fi-development, whereby we buy a land plot with a developed concept, but change it at our discretion. For example, the land plot on ulitsa Viktorenko: we bought the land with a ready concept, but it has been completely changed.

More than 2 million sq.m is a lot. Is it not difficult for the company to work with such a large amount of land?

All our projects were started at certain intervals and are at different stages. Each department within the company has its own responsibilities: approvals, sanctions, search and purchase of land for construction, development of project concepts. The most important is to do this before the reception of the sanction for construction. Accordingly, each department can simultaneously have up to five projects. Once we receive the permissions, the project passes on to the construction department, which currently has five premises at different stages. The commercial department is responsible for marketing and sales and is currently working on three projects. The top managers of the company carry out the general coordination of all the projects.

Competition is growing, what are your forecasts for the development of the market?

None of the forecasts for the last 5-7 years have come true. What sense is there to predict the future? Competition is felt, especially at the stage of looking for a site. For premises there is not strict competition. But there are few good sites in Moscow left. For example, the last plots were simultaneously being considered by us, Sistema-Gals, Horus Capital and the question was who will decide quickest. A bit like an auction. Today’s deadlines and requirements on restrictions in construction have also become tougher. This narrows a circle of large companies that are capable of realizing a project right up to the end.

From what you’ve said, would I be right in thinking the company feels confident?

For now we manage to control everything. Though we spend more strength and time. Now one of the strategic purposes of MR Group is the development of relations with banks and the possible involvement of international partners in our new projects.

Victor Labuzdko was born in April 1965 in Liepaya, Latvia. In 1987 he graduated from the Pushkin higher school of radio electronics, specializing in radio engineering. Up to 1992 he served in the Russian Army. From 1992 to 2002 he worked in the sphere of trade, and later organized and headed a company that specialized in logistics services and transportation. In 2003 he united resources with Roman Timokhin, the current general director and co-owner of MR Group, with the purpose of developing a development business. He is married and has two sons.

MR Group specializes in the creation and realization of full-scale development projects. The company was created in 2003 and operates in the real estate market in Moscow and Sochi. The owners of the company are its top managers. Over five years MR Group has developed 16 projects with a total area of 2 million sq.m. The company has entered the elite residential real estate market in Sochi (in 2006) and is currently realizing residential complexes with a total area of 171,000 sq.m. the company is also working on 3 multipurpose complexes with a total area of 1.22 million sq.m, two of them in partnership with developer Central Properties (and up to rebranding М.О.Р.Е. - Moscow real estate), has a business center on ulitsa Viktorenko up for sale and plans to start putting areas in the business center on ulitsa 8 Marta up for rent. The capitalization of MR Group’s projects is more than $500 million. It’s annual turnover in 2007 was a little more than 5 billion rubles.