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. Last Updated: 07/27/2016

Turning Old Factories Into Prime Property

For MTWhile preserving the gingerbread-house-like facade of the 120-year-old Badayevsky brewery, Hines plans to turn it and a nearby pencil factory into a residential development.
Once a symbol of Soviet industrial might, Moscow factories, many of which are located within walking distance of the Kremlin, are now seen as a detriment to the city's development as a capitalist metropolis.

Moscow factories occupy an area that roughly corresponds with the entire size of Stockholm, or from 17,000 to 21,000 hectares of land, according to various calculations. By another estimate, the area is twice as big as Barcelona.

Furthermore, as much as 600 hectares of central Moscow, or about 10 percent of its total area, is taken by Soviet- and prerevolutionary-era factories -- despite the sky-high prices of prime, downtown real estate.

"A factory a few steps from the Kremlin is nothing but nonsense from a modern developer's standpoint," said Valekh Rzayev, a spokesman for KRT, which is overseeing the mammoth $2.7 billion Golden Island development project opposite the Kremlin. "The relocation of factories from the center is very logical from both an environmental and economic point of view."

The 1.2 million-square-meter development on 40 hectares envisages the construction of a new tourist and recreational zone, complete with entertainment facilities, elite homes, hotels, stores and offices.

The heart of the project is an ambitious redevelopment of the historic redbrick Red October chocolate factory, a city landmark since prerevolutionary days. The factory's owner, Guta Group, has promised to keep much of the castle-like complex, which covers five hectares of prime Moscow land on the banks of the Moscow River. It will be converted for other uses, including restaurants and loft-type studios.

Guta will soon begin building a seven-story, state-of-the-art factory to house Red October next door to its Babayevsky confectionery plant in northeastern Moscow, and production is to move there by early 2007, said Anton Chernov, the factory's deputy director in charge of relocation.

Chernov said construction of the new factory building and the relocation will cost Guta about $100 million but that the investment will more than pay off. "It makes a lot of economic sense -- we will save a great deal on land taxes, while our production effectiveness will increase many times over," he said.

While Red October's relocation costs are expected to ring in at about $600 per square meter, the elite housing that will be built on Golden Island will go for as much as $12,000 to $15,000 per square meter, Rzayev said.

"The relocation will increase the project's capitalization 20-fold, not to mention the fact that future residents in the area would hardly appreciate having a factory right next door," he said.

Vladimir Filonov / MT

The heart of the Golden Island project is a redevelopment of the prerevolutionary Red October chocolate factory into a luxurious apartment complex with restaurants.

But unlike Red October, which remains profitable, many centrally located factories are either no longer operating or are inefficient, robbing the city of potentially enormous revenues.

"About 350 production facilities in central Moscow are obsolete and absolutely unprofitable," said Irina Rukina, who heads the economic reform committee in the Moscow City Duma and will speak at a Moscow Times conference titled "Investment in Land and Real Estate" at the Marriott Grand Hotel on Friday.

"Many of them are being leased out as offices or warehouses and could not by any possible stretch of the imagination be called factories," Rukina said.

For example, the Parizhskaya Kommuna shoe factory near the Paveletskaya metro has maintained its production lines but leases much of its area as office space. One of its former buildings on Shlyuzovaya Naberezhnaya is now occupied by the Katerina Hotel.

To solve the problem, City Hall approved an ambitious plan in 1999 to "rehabilitate" industrial areas by relocating factories from the city center. Under the plan, the city intends to clear about 300 hectares of prime land in the center by 2020. A total of 128 hectares has already been freed up.

About 6,000 hectares of land throughout the city will be prepared for redevelopment over the next 15 years, Rukina said.

While some factories have already been relocated to the Moscow region in recent years by their owners, the city is planning to encourage the reopening of factories in specifically created industrial parks in the suburbs. The first industrial park is to occupy about 100 hectares in the northern suburb of Molzhaninovo, while another is being planned for Yuzhnoye Butovo in southern Moscow, City Hall announced late last year.

"The city must not lose its industrial potential, but from a patchwork quilt we will create highly concentrated, technically savvy industrial zones," Rukina said.

However, due to an array of bureaucratic hurdles, work has yet to begin on the Molzhaninovo industrial park -- and Moscow remains one of the most heavily industrialized capitals in Europe.

"This is what sets Moscow apart. Nowhere else do you have such a unique opportunity to redevelop industrial premises right in the center," said Lee Timmins, vice president of Hines, a U.S. developer that turned an old tobacco factory on Ulitsa Gasheka, near Mayakovskaya metro, into a series of Ducat office centers with Class A space. The old factory was relocated to the Orekhovo-Borisovo suburb in southeastern Moscow.

Hines is now involved in the ambitious Park-City development behind the Ukraina Hotel. The 14.3-hectare site, now occupied by the 120-year-old Badayevsky brewery and Sacco & Vanzetti pencil factory, will be turned into a 400,000-square-meter residential development that will include office and retail components. While the Soviet-era walls of Sacco & Vanzetti will be torn down, Badayevsky's ornate, gingerbread-house-like facades are protected as an architectural treasure and will be preserved.

Badayevsky's buildings will be used for retail, restaurants, a movie theater, as well as loft-type offices and apartments, Timmins said. "If it weren't a protected monument, we would have preserved it anyway. Its architecture gives the project a unique look," he said. "If it is a historic property, it becomes very valuable after redevelopment."

Reconstruction is to begin in 2006.

Timmins' sentiments were echoed by other developers, who agreed that a factory's historic look was often an asset to a project rather than an impediment.

"Many of our tenants are actually proud of their building's attractive facade and its large windows," said Nina Bocharnikova, a spokeswoman for developer Forum Properties, which built one of Moscow's prime Class A buildings -- the Aurora Business Park -- on a three-hectare site formerly occupied by the Krasnokholmsky textile plant and preserved elements of the plant's turn-of-the-century facade.

Vladimir Filonov / MT

Developers kept the 19th-century redbrick facade when they converted a silk clothing factory into the Red Rose office center.

Another example of a successful re-development of a factory building is the Red Rose Class B office center near the Park Kultury metro station, which used to house a silk clothing factory. Much of the 19th-century redbrick complex was preserved by the developer.

While the redevelopment of old factories offers numerous challenges -- including removing earth spoiled by industrial production from the site and reworking the whole neighborhood's infrastructure -- the acquisition of an old industrial site is usually a win-win situation for a developer.

"It is difficult to find vacant land plots in Moscow. It is often easier to buy a factory with all the land that goes with it," said Yulia Nikulicheva, deputy director at Jones Lang LaSalle.

This is exactly what city developers have been doing in recent years, as factories often cost far less than the valuable land they stand on.

"Old factory buildings are extremely attractive for redevelopment -- you get a building with enormous windows, very high ceilings and as much electricity as you could wish for. It is nearly impossible to make it unappealing," said Oleg Myshkin, director at Colliers International.

There is little disagreement over whether the relocation of old factories is good news for both the city and the factories.

"Production costs in Moscow are far greater than even in the neighboring Moscow region. Therefore, the relocation of factories is a natural process for a city with its high cost of land," said Konstantin Romanov, director at Knight Frank.

"It is in the city's best interests," Rukina said. "If we decide to maintain the status quo, we'll have to admit that we are facing a real crisis as there are no land sites left for development in Moscow."

"The city is getting rid of smoke, dirt and traffic problems. I only see positive things about it," Myshkin said.

"Land use becomes far more economically efficient, and this tremendously improves the city's image," Nikulicheva said. "Moscow had too many factories built in it in years past, but a modern metropolis should be service-oriented."