French Connection: Petersburg Gets Real Estate, Road Business

Vedomosti

In St. Petersburg, French firms are few in number but are building major hotel, infrastructure and retail projects.

ST. PETERSBURG — St. Petersburg is physically closer to France than almost any other Russian city, but French real estate and construction companies as a group have made only small strides into the northern capital.

"There is a small number of French companies in St. Petersburg, and their numbers are less than that of other foreign firms," said Andrei Rozov, head of the St. Petersburg office of real estate consultant Jones Lang LaSalle.

"Most of all, in the real estate market, the French are interested in the retail segment," he said in an interview.

The major investors in St. Petersburg have hailed from Britain, Germany, Arab countries and Israel. Currently the most active foreign firms in the city are Scandinavian companies with a long record of real estate experience, according to real estate adviser Astera.

Yet, despite the small footprint of French companies in the city's real estate market, the companies have made in-roads — literally. France's Apsys Group and Russia's Sistema-Hals have launched a shopping mall covering more than 100,000 square meters, and France's Accor Group, an international hotel brand, opened two hotels in the city. A much different project, the reconstruction of the St. Petersburg Zoo on almost 300 hectares, went to Beckmann N'Thepe. Meanwhile, construction and infrastructure giant Vinci Concessions, through its Northwest Concession Company, is building the highway cutting through the Khimki forest as it heads out of Moscow on its way to St. Petersburg.

The most widespread form of development is built-to-suit, in which the landowner pays to construct on his land a building specified by a potential tenant and then leases the land and building to that entity. French activity in real estate, in fact, illustrates that trend.

This May the shopping and entertainment center Leto, or "Summer," had its full-scale opening. Co-launched by Apsys, a major developer and asset manager in Europe, the mall is 114,000 square meters and has 80,000 square meters of leasable store space. Media Markt, an electronics chain, and Auchan, a French food and home-goods chain, had already opened their stores in the mall at the end of 2010.

A large shopping mall, Leto includes a food court, movie theater, skating rink, entertainment complex and more than 200 shops, including the first store in St. Petersburg for French sport brand Decathlon. Apsys Group located its new mall in a development zone in St. Petersburg, on Pulkovskoye Shosse.

"St. Petersburg and the Leningrad region are the areas in Russia most similar to Europe in terms of development," Alexandra Averkina, human resources director at Apsys Russia, said in an interview. "St. Petersburg is a cultural capital, and especially during the summer, foreigners feel at home here. So, there wasn't really a difficult choice among regions for the new shopping mall location," she said.

In addition to its six Auchan-brand stores here, Auchan Group also handles the Leroy Merlin brand. Moreover, Auchan Group has a special department for financing construction of its own sites. That's why Auchan builds its own superstores in St. Petersburg in addition to renting space in shopping malls, according to Astera analysts.

"Today, our main task is to provide quality management for the shopping mall, and maybe later shopping centers that have already been built will come under our management," Averkina said.

Alexander Voloshin, head of investment consulting for Astera, said in an e-mail interview that a "quality shopping center with a good geographic location has all the chances for beating the competition and attracting tenants and customers from another site following its conception."

'Most of all, in the real estate market, the French are interested in retail,' said Andrei Rozov, Jones Lang LaSalle.

Hotels are another piece of the economy pulling in French investment. The most active French hotel brand is Accor Group, whose brands include mid-range Novotel, economy Ibis and luxury Sofitel. The company is reported to be interested in opening three- and four-star hotels near the center of the city, the area most frequented by tourists. Currently, Accor has two hotels in St. Petersburg, a 233-room, four-star Novotel and a 221-room, three-star Ibis, which were opened in 2005 and 2007, respectively. Accor's plans include the construction of a second part of the Novotel hotel, construction of another hotel near the Ibis and perhaps the building of an apartment-hotel, according to the web site ProHotel.ru.

Meantime, the French expansion into the mini-hotel industry is represented by Hotel Nouvelle Europe, which is in the center of St. Petersburg.

"There are many French people among the guests of the hotel, since belonging to the home country makes the hotel more reliable for foreigners," Oxana Stepanova, deputy director at St. Petersburg's Hotel Nouvelle Europe, said by telephone.

Beckmann-N'Thepe is embarking on a far different set of accommodations. The French firm won the bid to construct a new zoo for St. Petersburg. It is planning to be built on 288 hectares, which is 40 more hectares than the current zoo. Beckmann-N'Thepe has a record of such projects, with past work on zoos in Vincennes, France, and in Helsinki. Reconstruction of the St. Petersburg Zoo "is estimated at" 10 billion rubles to 11 billion rubles, Pavel Pikalev, from Penny Lane Realty in St. Petersburg, said in an e-mail. Construction is expected to finish by 2014.

Like all sectors of the economy, real estate and construction can be defined in terms of "pre-crisis" and "post-crisis." Overall, the amount of foreign investments in the Russian market decreased 10 times in comparison with indicators in 2008, before the global economic crisis arrived, according to Astera.

"The crisis had a strong influence on the geography of foreign investors," said Voloshin at Astera, which partners with BNP Paribas Real Estate in Russia and Ukraine. "Before, they were interested in commercial real estate throughout the entire European part of Russia. Since 2009, however, the situation has changed," he said.

"Investors are mostly concentrated in Moscow, and St. Petersburg is being considered even less," Voloshin added.

A significant project by a French company, however, dates from before the crisis. Shopping and entertainment center Raduga, or "Rainbow," opened in 2007. Vinci Construction Grands Projets led the construction, and Raduga was bought by the fund Ralmir Holding B.V. According to Penny Lane's analysts in St. Petersburg, roughly $5 million was invested in the complex.

Raduga isn't Vinci Construction's best-known project in Russia, however. That title belongs to the St. Petersburg-Moscow highway that Vinci's Russian daughter companies are laying out. The highway, to be named the M11, is supposed to offload the traffic from the busiest stretch of the federal road known as M10 Russia.

The road's builder, North-West Concession Company, is 100 percent owned by Vinci Concessions Russia, which in turn is owned by Vinci Concessions, Vinci, Vosstran Invest and individual investors including Arkady Rotenberg, a longtime friend of Prime Minister Vladimir Putin, Vedomosti reported last month.

"Vinci is a part of the North-West Concession Company LLC (NWCC) alongside the Russian partners that has been awarded the Concession Agreement, signed in 2009, and related to the first section (43 kilometers) of the Moscow-St. Petersburg Highway," Maxence Naouri, a Vinci spokesman, said in an e-mail response to The Moscow Times.

'French investors … introduce higher standards of construction and make Russian companies come up to their level,' said Yevgenia Vasilyeva, Colliers International.

According to Vinci's figures, the total construction cost is about 1 billion euros ($1.4 billion). The concession contract came into force during the first half of 2010. The concession approach involves a number of public-private partnerships. The whole M11 motorway is slated to be finished by 2017, according to Sergei Kelbakh, first deputy chairman of state company Avtodor, which signed the concession agreement with NWCC. Vinci will operate and collect tolls on the roadway for 30 years.

"Concession is a new model in Russia, and Vinci Concessions is interested, as a world leader, in sharing expertise and learning how to operate in this field in Russia," Naouri said.

"Construction works by NWCC have not started yet. Current works are related to the preparations of land plots that is a public task by the grantor," he added.

"Land plots" are part of the project's controversy: Outside of Moscow, Vinci has cut down swaths of the Khimki forest to make way for the road. Grassroots activists have staged myriad protests against the logging. At least two journalists and activists have been physically attacked by unknown assailants over the issue, with one of the journalists left disabled.

Last summer the controversy was drawing so much attention that President Dmitry Medvedev halted the road and ordered a government review. In December the Kremlin approved the project.

The St. Petersburg-Moscow road through Khimki, however, is an exception in terms of its violence and controversy. In contrast, French companies can raise the standards of construction here, analysts said.

The participation of French companies in the construction sector "has a socio-economic significance," said Yevgenia Vasilyeva, deputy director of consulting at real estate firm Colliers International.

"It's important that French investors come to our market. They introduce higher standards of construction and make Russian companies come up to their level," she said in a telephone interview.

Attracting French companies is a challenge for the St. Petersburg and Leningrad region administrations. But, at the start of this year, Leningrad Governor Valery Serdyukov met in the city with Elisabeth Barsacq, the French general consul for St. Petersburg, to discuss economic cooperation.

A number of French companies have already been operating in the Leningrad region — in the Gatchinsky, Slantsevsky, Tosnensky and Vsevolozhsky districts — business cooperation has room to grow. Barsacq said she wants to stress economic cooperation and attract more French companies to the area, the region's administration said in a statement on its web site.

That is easier said than done. Apart from restarting projects that had been frozen, the investment market is paralyzed, Astera said.

"A foreign company was a rare thing for St. Petersburg when we were hiring employees. For St. Petersburg, work in a foreign company is a good pull, while in Moscow, employees don't pay so much attention" to the cachet of a foreign employer, said Averkina at Apsys Russia.

Analysts agreed that St. Petersburg doesn't have enough attractive elements for French real estate and construction companies. One significant way to increase interest in the local market: Reduce bureaucratic difficulties hindering developers in these fields.

"As soon as the developers start to construct a project, laws appear that, for example, prohibit them from doing something, or restrict their work," said Astera's Voloshin. "This non-

transparency of the market, the misunderstanding of the mechanisms that are operating on the market — this all has an effect on the number of French and other foreign developers," he said.

The need for "numerous agreements of documents complicates the activity of foreign developers," Vasilyeva said. "The riskiest are documents regulating the urban area."

"When the developers put in financing, they want maximum business transparency during the first stage" of development, she said.


Russia - France 2011
Russia - France 2011
Companies from France make up a sizable part of Russia’s business fabric, and French firms' strategies are covered in-depth in this supplement. What's more, for the first time in our country supplement magazines, you can view the extent of French business activity by federal district in a specially designed map.
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