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24.03.2011 Ministry of Defense protects developers, The Kommersant, March 24, 2011

In 2009-2010 developers made 3.2 billion US dollars out of government contracts.
The biggest Russian housing developers whose sales decreased by ten times during the crisis found the way to use their idle capacities. According to the estimates of The Kommersant, in 2009-2010 they built for the Ministry of Defense about 2.6 million square meters and earned nearly 90 billion Russian rubles (3.2 billion US dollars). But the real estate market began to recover, and lots of developers are skeptical towards their future cooperation with the military because of the low profitability of such projects.
 
In 2009-2010 thebiggest Russian developers operating in the economy-class residential housing market built for the Ministry of Defense and other security agencies 2.6 million square meters of residential real estate throughout Russia and earned nearly 90 billion Russian rubles (about 3.2 billionUSdollars). Thelargestsums of money, accordingtothe estimates ofTheKommersant, were received from the military by Mikhail Balakin’s SU-155 (21.2 billion Russian rubles or 747.3 million USdollars), Obid Yasinov’s MSM-5 (16.45 billion Russian rubles or 580 million 16USdollars) and Andrey Molchanov’s St. Petersburg-based LSR Group (12.3 billion Russian rubles or 433.5 million USdollars). Upon their heels are: Veniamin Golubitsky’s RENOVA-StroyGroup (10.1 billion Russian rubles or 356 million USdollars) and DSK-1 (9.9 billion Russian rubles or 348 million USdollars). Following are: Oleg Deripaska’s Glavstroy (7.8 billion Russian rubles or 272 million USdollars), Aleksandr Ruchyov’s Morton Group (6 billion Russian rubles or 211 million USdollars) and Suleyman Kerimov’s PIK Group (5.8 billion Russian rubles or 207 million USdollars).
The developers cooperated with the Ministry of Defense under two main schemes: the first implied wholesale purchase of apartments completed or under construction, the second – the involvement of developers as general contractors. As tender participants put it, the margin in the first case could reach 10-15%, while in the second case it tended to zero. Nevertheless, developers undertook the implementation of such projects. In October 2008, in his interview to The Kommersant Mikhail Balakin, the owner of SU-155, said that his company planned to increase the share of government orders in the project portfolio to 75-80%. “It is Hobson’s choice: we can focus on government contracts or freeze projects at the initial stage”— explained the developer. In November 2008 sales of all major real estate developers fell by ten times against those in the summer: from 40-50 apartments per month to four or five. According to Obid Yasinov, MSM-5 General Director, the construction of residential facilities for the Ministry of Defense allows for the contractor’s margin of 3-3.5% but it is still beneficial since it also allows using capacities. “Developers had to secure cash inflow even at the prime cost to have the opportunity to continue the ongoing projects’ implementation” — Mariya Litinetskaya, MIEL-New Construction General Director, is quoted as saying.
Not all the market players managed to make use of the military’ aid.  Those developers who focused on luxury housing and commercial real estate development could not participate in the distribution of public orders. That was one of the reasons why some of them had been forced to pass under the control of lending banks (Sistema-Gals and Don-Story Invest), to part with some of the projects (Capital Group) or to freeze most of their development portfolio (Mirax Group). However, these companies succeeded to find the way out by diversifying their business. “Our cash flow proceeds not only from the sale of residential property; hence, when we were experiencing problems with the sale of apartments, we were able to redistribute cash flow from commercial real estate in a way allowing us to continue construction” – said Valentina Stanovova, Senior Vice-President of Capital Group. In 2010, the housing market demonstrated signs of revival. For example, PIK Group’s retail sales of residential property increased by 2.5 times, those of SU-155 – by two or three times depending on the region, and those of LSR Group (St. Petersburg) by 62%. As a result, the interest of developers to government contracts began to decline. “In 2011 we plan to increase sales by at least 50%. We focus on individuals as main clients, but we also consider wholesale offers from government agencies” – says Vitaly Korolyov, an official of Glavstroy. PIK Group also says that it has no current contracts from the Ministry of Defense and the company is not sure whether it is going to participate in such tenders. “We are interested in building residential facilities for military agencies and will participate in all competitions” – insists Obid Yasinov, co-owner of MSM-5.
Developers earned most from the construction of residential real estate for the military personnel in 2009-2010  
 

Company

Main owners
Contracts with Defense Ministry (bln RUB)
Contracts with Defense Ministry (thousand sq. m)**
Total volume of housing construction
(thousand sq. m)
 
 
 
 
 
SU-155
Mikhail Balakin (80%)
21.206
599.6
2,200
MSM-5
Top-management: Tatyana Chalykh, Obid Yasinov and others.
16.450*
470.0
1,600
LSR
Andrey Molchanov (58%), management (12%)
12.300*
361.0
1,157
RENOVA-Stroy Group
Viktor Vekselberg, Veniamin Golubitsky
10.112
290.5
no information
DSK -1**
Top-management: Anatoly Konstantinov, Andrey Pankovsky and others
9.900
300.0
no information
Glavstroy
Oleg Deripaska
7.805
223.0
646
Morton
Aleksandr Ruchyov
6.006
171.6
860
PIK
Suleyman Kerimov (38%), Kirill Pisarev and Yury Zhukov
(22.5%)
 873
167.8
1,623
*According to The Kommersant, based on average housing purchase or construction price for the military personnel in the region of construction. Forexample, in Moscow 35 thousand Russianrubles per 1 square meter.
 



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