In an interview with Vedomosti, Leonid Maksimov, a PIONEER shareholder, spoke about what the property developer intends to do in the crisis in the market of commercial real estate and premium residences and about the growing demand for housing with the completion of partial mobilisation and his views on urban development and prospects for real estate developers.
– In mid-November, you decided to step down as general director of the company, a position you had held for the past two years. What was the reason for this decision?
– I have been thinking about leaving that position for a long time, and now the time has come. Alexei Miroshnikov is now the CEO. Before that, he worked in the company for seven years as CFO, most recently as my deputy. He knows all the internal processes and nuances of the business well, so I am comfortable handing over my post to him. This will create a person with his independent opinion but with sufficient power to counterbalance both the shareholder and the board when dealing with controversial issues. It is good when you are empowered and can make decisions unilaterally, but anyone can make a mistake. I want to hedge against that. I would also like more time to focus on strategic management, development, international, and attracting investors. – That said, in the spring, the PIONEER Board of Directors was prematurely terminated, and you voted against the election of a new one. What happens to that governing body now? — At the beginning of the year, after the events, I thought there would be a difficult period when decisions had to be made quickly, maybe not even the most popular ones. Then we put the brakes on the board, and I made all decisions. Now, the main shock has passed, and the situation is gradually normalising. Most people have adapted to the new realities, and it was already possible to return to the original management structure. We have restored the board of directors. Moreover, we have increased the number of independent members for greater objectivity in strategic decision-making.
“In Dubai, we will find our customer”.
– You have recalled your international plans. In the spring, the company withdrew from the Astoria West residential project in New York. According to our information, the buyer was your partner in the project, the local property developer Cape Advisors. How was the decision to sell the project made?
- Three years ago, we decided to diversify the business and try to work overseas. At that time, we assessed the different markets in-depth and decided to take a risk in implementing the project in the USA. It is a very competitive market in which it is difficult for newcomers, especially those from other countries, to work, but we believed in our strength and were right. We set up an office, selected a team and started looking for sites. We had been working on Astoria West for 2.5 years, and in January this year, we completed and put it into operation. Given the economic and geopolitical risks that emerged in February, we decided to withdraw from it. We had a small minority partner in this project, but we sold our stake not to him but to another American financial structure.
– Do I understand correctly that there are no more plans to return to this market?
– I enjoyed working in America; it is a large and robust market with huge potential. It was interesting from the point of view of self-development because we learned a lot and even brought some things into our activities in Russia. I regretted leaving there, but nevertheless, I do not give up hope that time will pass, the situation will normalise, and there will be an opportunity to return there. Moreover, after leaving the USA, the company continued its ambitions to develop internationally. We chose Dubai for ourselves, and over the summer, we studied the market conditions, the players and the projects being implemented there. Today we have closed our first deal: we bought the site between Dubai Marina and Palm Jumeirah. For the next year, we plan to buy 2-3 more projects in Dubai and start realising them.
– What will be built on this site?
– In Dubai, we are entering the premium segment. In particular, we will be able to build almost 100,000 sqm on a site of about 0.6 ha, and it will be a 45-storey residential building overlooking the bay. For the design, we have engaged the well-known Japanese company Nikken Sekkei, with whom we have extensive experience in Russia. They have an office in Dubai and have implemented several interesting projects. Working with them will help us avoid making mistakes in the new market.
– Are you planning to bring in a local partner?
– No, in Dubai, we decided to go a different way. We have opened our own company, transferred some of our employees there from Russia and America, are forming a team on the spot, and will work independently from there. We will handle the entire development process ourselves, but we decided to involve investors for more dynamic development in this region. This will allow us to develop several properties in different parts of Dubai to give our clients a wider choice.
– Are you not afraid of competition from established players in this market?
– We know how to build high-rise buildings and have experience in other countries. In Dubai, there are four companies close to the government. They get large territories to work on, develop a master plan, divide the land into separate plots, go through all the necessary approvals and ensure that all the required infrastructure is built. They produce some of the plots and sell the rest to third-party developers. The volume that these four companies sell by themselves sells very quickly and only meets some of the demand that is on the market, so there is plenty of room for everyone else. More than 100 real estate developers are working in Dubai, and all these companies get along perfectly well, while the volume we’re entering there is less than 1% of the market. Finding projects with high-quality construction is challenging, but we know how to do it, and that will be our differentiator. So I am not worried about competition, we will definitely find our customers in Dubai. Primarily we will target Russian citizens who know PIONEER from our projects in Moscow and St. Petersburg, but we will sell to all customers in this market.
“Landowners still live in the old paradigm, when prices flew up”.
– The company used to build housing in the St. Petersburg market as well actively, but three years ago decided to focus on Moscow. Are there any plans for a comeback?
– We started with St. Petersburg. It was the city in which PIONEER was born. Then we came to Moscow and started working in two cities in parallel. Because the efficiency of projects in Moscow was higher than in St. Petersburg, over time, the focus shifted towards the capital, and eventually, we concentrated on that market. I consider the possibility of returning to St. Petersburg if there are interesting, large-scale and complex projects where our experience and competence can be helpful. I like the city, and I think it is the most beautiful in Russia. Right now, we are concentrating on Moscow, we have an extensive portfolio of various projects, and we are actively increasing it. We have several residential projects in business and premium class, and we are planning to enter the elite segment. We are also building commercial real estate and social infrastructure facilities.
– What is happening with the YE’S chain of apartment hotels now? Are there any plans for its expansion?
– YE’S turned out to be an exciting project, which came about accidentally. Initially, we were planning to develop something other than the chain. Within a largely residential area, we had to build some non-residential facilities. We designed small studios and put them on the market, but they did not go. Then we started thinking about how to reanimate this project and realised that the market lacked a product geared towards private investors – serviced apartments. So we created YE’S – in fact, it’s a hotel that consists of fully finished and furnished studios with a kitchen area, developed public spaces for work and leisure, and 24-hour service. We have also set up our own management company, which rents out the apartments, providing the owners with income without any effort on their part. YE’S took off; we sold out our first project very quickly and began to launch others. To date, we have already built five such apartment hotels with around 5,000 rooms. We have now moved to a franchise development model and offer to buy our brand and technology, and we accompany the project ourselves, helping with design, construction, and sales. Our company then takes over the management of these facilities. The first facility of this kind opened last year in Astana. Three more facilities are now under construction in St. Petersburg, Nizhny Novgorod, and Novosibirsk. We have a few more projects at the stage of agreements with potential partners, but I can’t reveal the details yet. We are also considering placing YE’S in several of our promising projects ourselves.
– What was the decision to sell Open Highway?
– This project is relatively small in size and does not fit into our portfolio. Now, in the business class segment, we work with projects with an area of 300,000 sq m and more, as it is at that size that we can create all the necessary social infrastructure and landscaped areas for comfortable living. In addition, we focused on the premium segment, so we needed resources to close a few deals. We will not sell anything else in the near future, and our portfolio is balanced.
– Do I understand correctly that the company has thus decided to concentrate mainly on building premium-class housing?
– Initially, we started with comfort class projects, but as we developed, we gradually increased their level. We have always paid close attention to detail, worked in-depth on all our projects and set ourselves the goal of achieving maximum quality. But working in the low-end segment, no matter how hard you try, you are always limited by budget and need help implementing all your ideas. So over time, we have raised the class of our projects, which has enabled us to be creative and offer customers a better quality product. At the same time, the company is still operating in the business class. This segment’s main demand is concentrated, generating most of the revenue. Moreover, this segment is the most stable in times of crisis and allows the company to feel confident and survive difficult times. But we will also increase our presence in the premium segment because we want to raise the level of our projects and do something even more progressive, complex and exciting.
– What sites are you currently looking for for your projects?
– The most interesting for us is the central part of the city and places with good transport accessibility and suitable environmental conditions. We currently have a site under contract in the very centre of the city. It is one of the best locations in Moscow, and I am sure we will do a project there that will put PIONEER at the forefront of the premium property market.
– What is happening with the prices for sites now? Has it become harder to find them?
– In Moscow, it has always been difficult with projects, especially those with agreed-upon construction parameters. Now we see a small number of such projects on the market, which is an excellent opportunity to enter the market for those developers who can’t coordinate documentation independently. As for sites without agreed parameters, there are plenty of such proposals. True, the owners of these assets have not yet grasped the full drama of the situation, so the value of their land plots has not changed much. They live in the old paradigm when prices were soaring, everything was sold off easily, and developers lined up and haggled for any plot of land where they could build something. But I am sure everyone will realise that the market has changed dramatically next year, so we should expect some downward correction in land prices.
“The premium sector is the hardest hit in times of crisis”.
– Can you name your main residential projects now?
– We are building quite a lot and currently have four active residential projects. These are the LIFE-Varshavskaya business class complex and the premium High Life residential complex near Paveletskaya, Opus and Pride on Polkova Street. We also have three residential projects in design and several at the site purchase stage.
– What are you planning to build on the site in the 2 Donskoy passage that the company acquired last year?
– We are in the process of designing it now. It is a beautiful site with beautiful views of the Neskuchny Garden and Moscow as a whole. We have invited some of the best Russian architects – Tsimailo, Lyashenko and Partners – to the project, we have approved the concept with them, and we will start building it soon. It will be a fascinating complex with modern architecture.
– How are sales going in your residential projects?
– It is about the same as for everyone else. There was a rush at the beginning of the year, but it stopped in spring, and sales fell by 20 to 50%, depending on the housing class. In the summer, they gradually began to recover, which continued until the announcement of mobilisation when sales fell again. But after the mobilisation ended, we saw an increase in the number of calls, visits to sales offices and, consequently, the closing of deals weekly. In November, we have reached the level of September and hope to see an increase in sales in December, which is traditionally a month of high demand.
– Which projects are selling better now?
– A lot depends on the project, the location and the developer. However, in times of crisis, the premium sector is the hardest hit because there are more customers in the low-end segment. In addition, when selling inexpensive properties, a small discount is usually enough to keep sales down. The higher the segment, the bigger the discount is needed to motivate clients to make a deal. For most of them, buying an apartment is not a necessity – it is usually a home improvement or an investment that can wait. Therefore, the dip in volume is more substantial in this segment. We operate in different classes, and this balances and stabilises our revenue.
– What do you think of introducing 20-30% discounts, which many property developers started giving this summer?
– It is certainly not worth giving such a deep discount. Developers work with a profit margin of 20-30%, so they do not make any money with such a discount. This year was an exception because earlier, we saw solid price growth, which increased profitability and made it possible to make such deep discounts on the one hand. But on the other hand, construction cost has risen quite seriously this year. We can say that profitability has levelled off and returned to normal parameters.
– Do you support the prolongation of the programme of discounted mortgages, the prolongation of which has recently been discussed by the Central Bank, Finance Ministry and Ministry of Construction and Housing?
– Of course, preferential mortgages were a significant factor that supported sales during the pandemic and continues to stimulate them now. Moreover, this year the share of mortgage transactions has increased significantly; we are at 70-75%. However, I know developers who have an even higher percentage. The fact that the authorities have found an opportunity to extend this programme is an excellent decision. This will support developers and the construction industry as a whole, which is one of the main drivers of the country’s economy.
“The crisis mainly affects assets that are hard to reach”.
– Can you name your main projects in the commercial real estate segment?
– Last year, we commissioned the multifunctional Technopark Plaza mixed-use complex of 65,000 sq. m. next to the Dream Island amusement park. It consists of a shopping centre, offices and a YE’S aparthotel. We are now constructing the office complex Ostankino Business Park for 133,000 sq. m. we have commissioned the first phase there, the second one to be commissioned next year, and the third one in 2024. We are also constructing the Botanica multifunctional complex for 140,000 sq. m. within the Botanical Garden complex, which includes a shopping-office centre, YE’S aparthotel, and Opus business centre near Paveletsky Railway Station. We have been working on another project for a long time – Petrovsko-Razumovskaya TPU. It is a unique, large-scale and landmark project in the city. Its idea is to combine two railway and underground terminals to make a convenient and comfortable interchange ‘hub’ with a stop for Sapsan and Aeroexpress train that goes to Sheremetyevo airport. The project is technologically and architecturally very complicated, and it took us two years to develop it together with the city and Russian Railways. This TPA will include a large shopping centre, offices, and apartments. Russian Railways has already started implementing its part, it is building the Savelovskaya railway terminal, and next year it will start building the Oktyabrskaya railway terminal. Now, the economic situation is rather challenging to implement such projects. The budget is almost 50 billion rubles, and finding financing is challenging. But we are working on this issue with major Russian banks, and I hope to start implementation in the near future.
– Can you give examples of significant deals in your commercial properties recently?
– At Ostankino Business Park, of the six buildings, three have already been sold: two in retail and one as a whole. We expect to sell the remaining three buildings in the next two years. Now we are negotiating the purchase of another building with several clients, and I hope we will close this deal early next year. Everything has been sold in the Technopark multifunctional complex except for the shopping centre on the first two floors. We have a bidder with whom we have reached an agreement, and the deal should take place before the end of this year. In addition to the sale, we lease space in our projects on behalf of the owners. Some of our buyers are investors who buy for this very purpose, and we provide them with this service. The market is not easy right now, but a few companies are still considering leasing large spaces in our projects. I think we’ll make some big lease deals when we finish and put them into operation.
– How do you choose sites for the construction of such assets?
– For commercial real estate, its location concerning the flows of potential customers is essential, so the most sustainable sites are either near the metro or in transport hubs. Such objects are precisely the ones of interest to us, as they will always be filled with visitors due to high traffic. In my opinion, the crisis mainly affects those assets which are difficult to reach, where people do not come on their own.
“We may be in for a series of mergers and acquisitions”.
– Do you receive incentives from the Moscow mayor’s office for creating workplaces for commercial real estate development?
– This is not the first time we have justified our name ‘Pioneer’, as we were actually pioneers in the programme of benefits from the Moscow government for creating workplaces. The first two agreements signed in the city under this scheme were with our company, which were Ostankino Business Park and Botanica mixed-use complex. In total, we received about RUB 4.5 billion in incentives, which allowed us, despite the crisis, to implement these projects successfully. Over the past few years, developers have brought out very few commercial projects; paradoxically, there has been a vacuum in the market. Now there are only five major property developers in the city implementing commercial real estate projects, and we are among them. In the office segment as a whole, there are investors interested in investing in such facilities, and there is also demand from end users who are buying them for their own locations.
– What is the company’s interaction with the city at the moment?
– I believe that a far-sighted property developer should not look only at their own short-term profit and come to the city only with the desire to develop some land for housing. To work in a city, you have to know its needs, understand what its residents want, and with that in mind, come up with appropriate proposals. Then, suppose it is ready to build commercial facilities and social and transport infrastructure, i.e. to create a complete, comfortable and convenient environment for life, work and leisure. In that case, the authorities will approve the residential development. In this case, everyone will benefit.
– Are you now considering participating in the Integrated Territory Development (ITD) programme launched by Moscow City Hall a few years ago?
– I think that in the next 5-10 years, the leading projects will be implemented within the ITD, as this is where the main reserve of land plots is concentrated. Our company is actively involved in this programme. Another matter is how these territories are developed. The city itself prepares some projects, and there is another option where the city develops the territory planning together with the real estate developer. The second approach is closer to us, as it allows us to implement our ideas, put all the necessary components into the project, balance residential and commercial parts, and calculate the project’s economic efficiency in advance.
– Will there be more competition in the Moscow market?
– In my opinion, the events will greatly affect the market, and what we have experienced this year is only the beginning. Our industry is in for a global and profound change. In the coming years, we will see intense competition, which has both negative and positive aspects. On the one hand, it will be much more challenging to work, because you will have to fight for every customer. On the other hand, we have lived in an environment where people would buy anything on the market for quite a long time. Whatever the property developer built, sooner or later, they sold everything, just a little cheaper or a little more expensive, a little faster or a little slower. Accordingly, everyone who worked in that market survived one way or another; the market forgave all mistakes. Now the situation will change radically. Many companies which cannot stand the competition will be forced to leave. We may be in for a series of mergers and acquisitions. Clients will choose quality projects located in the best locations, carried out by experienced developers with impeccable reputations. Authorities and banks will also be interested in working with large, experienced, reliable developers to reduce the risk of non-completion or non-repayment of loans. We have always worked in depth on all components of projects and tried to give our customers the best possible experience. We have always put quality, compliance with construction deadlines and fulfilment of all our obligations as our top priorities. I am confident that with this background, we will overcome all difficulties and find new growth points in this crisis.