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Attractive Real Estate Market
In the early 1990s the attractions of the Russian market for foreign construction companies were obvious. The competition was relatively negligibleand the rewards for entertainingthe risks inherent in working in the Russian capital were huge.
"Profit marginsat the start of the decade were three times what they are now," said Pietro Giello of Codest, which has been operating throughout Russia since 1984 and has been involved in some of the capital's most prestigious projects including the Ducat buildings.
"Marginswere huge and it's only recently that they have come down towards a more realistic level," agreed Konstantin Gusakov of the Stolny Grad, formed originally to manage thedevelopment of flagshipproject, like the Penta Hotel in the mid 1980s.
Standards of construction(quality) also sometimes left a lot to be desired."The competition was so scarce(small) that international companies were sometimes paying pre-lease(advance) payments for 4-5 years for accommodation that was not of the best quality simply because they had no other option," said Gusakov.
"Originally, you could build anything and put it on the market at that time," confirmed Calvac O'Carrol of Murray O'Laire, one of Moscow's longest serving architectural firms having first entered the market in 1991.
Domino Crisis
There was, however, soon to be a flip side to the coin of potential riches in Russia. A dramatic slump in confidence in the banking sector in 1994 and then in 1998 severely curtailed development finance as banks, previously tripping over themselves in their anxiety to explore the lucrative real estate sector, reigned in the money, causing many projects to stall(slow down).
Not surprisingly, one of the hardest hit by this was the construction industry assilence descended on construction sites throughout Moscow. The falloutwas considerable. One victim that was still awaiting completion is the massive Zenith development at Yugozapadnaya, another the Meyerhold project at Novoslobodskaya. Even Smotensky Passage, which promised to be one of Moscow's most exciting developments in 1998, stood still for a number of years asfinance dried up.
"A lot of banks were very badly burned during this period and payments, particularly to Russian firms, were often 6-12 months late if they arrived at all," said Gusakov.
"Other firms employed by the Moscow City Government sometimes had to settle for (agree) payment in non-monetary terms such as apartment blocks as the authorities simply didn't have the necessary funds to pay in dollars."
A lot of contractors were forced out of business and, in a market that is as interdependent as real estate, the knock-oneffectsthreatened to be dramatic.
"Pulling out of the market did become an option for us although we had made such an investment already in Moscow that we never seriously entertained it," said O'Carrol. "We actually never stopped working during this period although it wastouch and go at some points but we were sure Moscow would come right eventually," added his colleague, Pascal Mahoney.
Recent Boom
Come right, it seems to have done with a vengeance in the last 12 months. The malaisethat had affected the industry since 1998 and which was exacerbated by the political uncertainties surrounding the destination of the Presidency began to lift almost as soon as Putin's victory was assured. "The change in market has been dramatic in the last six months or so," said Mahoney while Gusakov commented, "Moscow is now in the midst of a serious construction boom."
That the market has recovered is perhaps most evidenced by the renewal of foreign interest in Moscow and re-entry of banks as investors, most notably witnessed by Moscow Sberbank's USD 50m loan to Smolensky Passage.