Boris Balkarov: “Our strategy remains unwavering”

- What is the ratio between residential and commercial real estate in INTECO’s portfolio? Will it change?

The ratio between residential and commercial real estate is 60% to 40%, and will remain as is. Initially, the company focused on the residential sector, and we only started to slowly acquire commercial real estate, especially offices. The third sector in which we started to work in is affordable housing in the regions. Our overall strategy is essentially dictated by demand. We constantly keep an eye on the general market situation and plan our long-term activities based on which products the market wants and in what quantities it is consuming them.

- Sometime ago the company announced its intention of becoming an active player in the hotel sector. Tell us about the projects that have been launched and about the company’s plans in this area.

We are negotiating the purchase of a major hotel operator with hotels mainly in Europe. While the negotiations were under way we began construction of hotels in Russia to be included in the overall project and to increase its capitalization. However, the transaction fell through and the company was purchased by American investors.

We decided to concentrate on our own projects that were close to completion. They are mainly Russian projects: a hotel on Ilianka Ulitsa in Moscow and a hotel complex in Petergof, St. Petersburg, which is about to be opened. We have no specific plans in this sector, our few major high-quality projects in Russia, Austria and Czech Republic are plenty for now.

- What are the company’s plans with regard to the office sector?

The company’s strategy is as follows: quality business centers can be built not only in the city center as demand for these centers is determined by their transport accessibility and infrastructure proximity. At the time, we concentrated on projects in the eastern part of the capital with the highest potential as business districts. The area between the Leningradsky and Leninsky prospekts (two major thoroughfares leading to the capital’s major airports – Sheremetevo, Vnukovo and Domodedovo), land plots along Kutuzovsky Prospekt, Aminyevskoye and Rublyovo-Uspenskoe shosses, all providing tenants with great accessibility.

The success of some projects developed by other market players, like the Krylatskiye Kholmy Business Park, located relatively far from the center, confirmed that tenants with a choice between either the center and its Kremlin or convenience will choose the latter. In all the world's major cities, except for some rare cases, the business community looks for a convenient location rather than tying itself to the city’s historical center. The same is true in Moscow and will remain a dominant factor in the future.

- Do you believe that rental rates for offices in Moscow are overpriced? Can these numbers change?

It is hard to talk about a fair price – in a competitive market prices are determined by the supply and demand.

Over the last few years, rental conditions were basically set by the landlord, since the market suffered from a great deficit of quality offices. However, the cost of a square meter is determined by the developer not only considering his profit margin and expenses but also by the land cost. Furthermore, the developer is burdened with payments to the city that are needed to receive permission to build – an indirect "tax" that is spent on developing transportation, communal and engineering infrastructures. Many projects are built thanks to debt financing and subsequently banks receive a certain part of the profits. As a result, the rates were and remain very high. In the future, when there is a greater supply on the market, the situation will change in favor of the tenants.

However, with a growing market and even with high leasing rates, everyone was earning decent money, landlords and tenants alike. Recent changes are being widely felt and market players’ earnings will drop and most likely so will overall turnover.

- INTECO is working on several multifunctional projects. What is the interest in - such projects? Are the concepts developed in-house or subcontracted?

In providing accommodation, offices and leisure facilities, a multifunctional complex is buzzing with activities almost around the clock: investments are being recouped 18 hours a day (while single function business centers are only active eight hours a day).

People stay after work or come from the city to shop and relax – and multifunctional complexes located near work or home have everything you need: parks, recreation areas, stores, restaurants, etc.

In order for our projects to attract customers, to be harmonious and organically integrated into the city’s life, we work with major consulting companies like Jones Lang LaSalle, Cushman & Wakefield Stiles & Riabokobylko, CB Richard Ellis, Colliers International, Ernst & Young and others.

- How did the crisis impact on INTECO’s commercial real estate projects? Has the company’s strategy changed in any way?

The crisis has affected all market players to a certain extent. The customer has become more discerning and decisions are taken more slowly. And this applies first of all to residential real estate as well as commercial.

We were never involved in pre-sales development, and hence the changing market conditions have not become a systematic problem and the company’s overall strategy will remain the same. All our changes pertain to tactical approaches. For instance, we have streamlined our expenses – we evaluate the financial viability of each specific technical and architectural issue at the early stages of design – we do not advocate beauty for the sake of beauty.

- Did INTECO have an anti-crisis scenario?

We always anticipate three possible development scenarios. A positive one (when it’s possible to integrate and finance new additional projects), a basic one and a crisis scenario, under which expenditures have to be cut. One of the management's great merits is that even under normal conditions it never got involved with venturesome projects – the company was never overloaded with liabilities nor with problematic projects.

According to our development plans for 2009, we will continue building our projects that we commenced in 2008 and continue designing a range of new projects. We hope to remain on course and to begin their construction as scheduled. Last November, for instance, we held the first concrete pour on the site of the future NewTone Park Office and Hotel Complex on the Aminyevskoye Shosse. In June 2009, we will develop our production plan for 2010 – plans to start new projects may be adjusted, but we do not intend to suspend any of our ongoing projects. This will provide us with brand new facilities for when the crisis ends and to start leasing out when demand reappears. Suspending and re-launching projects will lengthen the construction cycles by a whole year and postpone any possible earning by some three to five years. Suspending projects is the worst possible scenario for any developer.

- How are your projects being funded? Do you have access to alternative sources of funding?

We continue working with banks. The only thing that has changed is the price of borrowing since the Central Bank’s interest rates have increased. Consequently, our earnings have decreased somewhat, but not overly so. Because of the liquidity crisis, banks’ profits have increased and so have their risks, and so everything is quite normal.

The major share of our projects are traditionally financed in-house (essentially from proceeds from the sale of housing). And hence we are not very dependent on debt financing or having to raise funding. Recent events have shown our approach was more than justified.

With regard to alternative funding, we are presently negotiating with European companies that work with mortgage financing. They successfully sold their assets when prices reached their peak and are now looking for new investment opportunities. Western players hope that prices will drop in Russia and they will be able to purchase some quality facilities. They have the resources, the desire and are not afraid of the Russian market. The only thing that is slowing down negotiations is the lack of understanding by all parties as to how far the pricing adjustments will go. I hope that the situation will become clearer in the next few months and that things will finally take off.

- Will you still be working with foreign architects during the crisis? How important is the input of a renowned contemporary architect?

An architect’s name is very important, but his level of expertise is just as important. During tenders, we work with dozens of architects, Russian and foreign, and among our partners there are many so-called stars.

Western architects have a lot of experience in designing Class A office buildings, they have ready-made quality proposals on hand. However, they have difficulties adapting to our local peculiarities, for instance to our construction directives and rules, regulatory documentation, rules and so on, especially since the regulatory system is far from having been finalized and something is always continuously changing. Needless to say that the cost of a world renowned architect can be substantially higher than that of a young newcomer, but this expense is relatively negligible in regard to the overall budget.

- In times of crisis, many companies plan on strengthening their teams since highly qualified specialists become available.

Competent administrators in times of crises do everything possible to keep their best players and together save their business. For the time being, skilled top and mid-level managers are remaining in their present positions.

- How can the crisis affect the market’s power structure? Do you agree with the principle that under such conditions only the strongest will survive?

The crisis is like a storm at sea. If the vessel is sturdy, regardless of its size, the storm will throw it around, but it will survive. But should the vessel be built half haphazardly, it will sink in no time. The same will happen to well built vessels that are overloaded. I don’t believe that only the strongest will survive. Companies structured around resilient strategies and free of excessive debt will also survive.