Crisis Could Spell Trouble for Consulting Firms

VedomostiMiel Real Estate's stand at an exhibition. As developers freeze new projects, consulting firms could be left in the cold.
The country's budding real estate consulting sector is headed for an imminent downturn as oil prices plummet, forcing developers to freeze ongoing projects, Panorama Estate said in a report released Thursday.

The industry, $40 million-per-year sector, has seen heady growth rates of 20 percent in recent years, with up to 110 registered companies now vying for influence in the sector, compared with just 30 in 2003, the report said.

But demand for consulting services could be on the wane, as the credit crunch pushes more construction firms to cut back on projects and nonessential services, experts say.

"In view of the present economic meltdown, we expect the consulting services sector to shrink by 50 percent next year," Omar Gadzhiyev, a managing partner of Panorama Estate, said in a telephone interview. "Up to 25 percent of market players are also expected to close shop."

The number includes new entrants forced to exit as well as consultants rendered redundant by mass closures of consulting departments in non-core realty companies, Gadzhiyev said.

Grigory Kulikov, CEO of MIEL Real Estate, said the present crisis would force out at least a third of market players, adding that 40 percent of realtors closed their businesses during the real estate crisis of 1995-1996.

"Only top professionals who are able to work in crisis conditions will survive," Kulikov told Interfax last week.

"Even those that retain their market positions will have to reduce staff as a way of cutting back on expenses."

Experts and industry players said most of the problems being experienced by realty firms stem from the fact that they normally focus on promising projects at the development stage.

But because of the crisis, demand for basic consulting services, such as making optimal use of land or attracting investment to develop virgin territories, are expected to fall.

"There are practically no long-term projects on the table," said Olga Shirokova, head of Consultancy Services at Blackwood Realty.

"Projects that have already been completed are being sent back to the drawing board for re-evaluation and analysis."

In addition to cutbacks in expenses and consultants, the present credit squeeze will lead to structural changes in the market for consulting services.

"We would see a narrowing of the market niche for realty consultants," Gadzhiyev said.

While the need for some services could fall, others are expected to come to the forefront.

Re-conception -- a process by which consultants add new value to an already built object by recommending beneficial changes or redesigns -- would be in high demand, experts say.

Although re-conception used to account for just 15 percent to 20 percent of a consulting firm's revenues, it is now expected to bring in up to 50 percent of all revenues in the entire sector, Gadzhiyev said.

James Brooke, an independent real estate consultant, said the crisis situation has been in evidence since October, and that renter service agreements signed earlier are now coming under scrutiny by clients.

"People who signed rental contracts in July and August with consulting firms are very eager to renegotiate the terms of their contracts," Brooke said.

Some experts said, however, that the introduction of new services could prop up the domestic consultancy services market and ensure that it does not sink too low.

"Consultants are in a process of renewal," Blackwood's Shirokova said. "New services like project auditing, re-conception and product promotion are appearing daily. If you factor in these new services, the market contraction should be far less."

Shirokova said the crisis has forced Blackwood to optimize its operations, cutting back on staff and expenses.

The retrenchment would affect between 5 percent and 15 percent of support staff only," she said.

"We need to retain our consultants to help us weather the crisis."

The biggest winners in the real estate crisis are the government and commercial banks, and both could also become the biggest employers of consultants, said Gadzhiyev of Panorama Estate.

"There is a clear signal that the government is preparing to enter the real estate market as an independent player," Gadzhiyev said.

"City Hall today controls colossal financial means that would enable it realize its social programs independent of developers."

Gadzhiyev said commercial banks also hold big chunks of land as collateral securities that they would have to sell quite soon to resolve liquidity problems.

"There are hard choices to be made between what to sell and what to keep and consultants are the likely arbiter."

Experts said the dire situation could stabilize in a year or two, and many consultant companies that had suffered in the crisis could reestablish themselves on the market.

"It all depends on the price of oil," Brooke said.

"If the price of oil is good, there will be a lot of big development projects going on and consultants coming in."