Vedomosti: Interview with General Director Konstantin Filippishin
Interview: Business on Special Terms
Real Estate. Housing, 07.12.2011
Though the Ecodolie Group built (and not even completely) only two low-rise housing developments in Russia, the company has already received all awards available for such projects. The Company closely works with NAMIKS and is successful in cooperation with government authorities. Mr Konstantin Filippishin, General Director of the Ecodolie Group, talks about the prospects of public private partnership (PPP) in low-rise housing development.
- Why did you start with a project in the Orenburg Region? Effective demand for housing there is clearly low.
- The Orenburg Region was the first in Russia to adopt My Home regional program and at the expense of the regional budget (with federal co-financing) laid utility lines to the south of the city where land for integrated low-rise housing was auctioned off. The regional authorities agreed to build kindergartens and schools as residents move into the housing development. They also made arrangements with gas and energy suppliers to finance from their investment programs the construction of a gas pipeline and an electrical substation to the borders of the construction site. That made it possible for us to exclude [expenses for] external utility lines from the net cost of housing we are building there.
Orenburg likes low-rise housing and is among top twenty regions in Russia by effective demand for housing. That’s where Gazprom is located.
- Did you immediately make a bet on PPP?
- We consider public private partnership for 70-80% of new projects. We are looking for options in regions with a high market demand [for homes]. If there is no demand, no PPP can help. About 30 regions have passed PPP laws and they look at our company as an example and ask us to share our experience.
- Are they also asking for money?
- They are but they are also willing to invest their own funds. The PPP format has not unfortunately been regulated by the state yet and each comes up with their own ideas. We are often the ones to show the way as an icebreaker. For instance, we practically from scratch developed new mortgage programs with Sberbank and the Housing Mortgage Lending Agency. Low-rise housing does not qualify under Article 214 of the Federal Law on equity participation, and at the stage of construction people could not purchase low-rise homes [with a mortgage]. We have provided this opportunity to our buyers.
In Orenburg a townhouse with land and all communication lines to the house costs 1.5 million rubles, and a small detached home with land – a little over 2.1 million rubles. We built and sold 350 homes in a year and a half with 50-60% of homes sold with a mortgage.
- Homes at such price are offered, for instance, in Novoye Stupino, just a hundred kilometers from the capital.
- We see the risks of selling “permanent homes” remote from the city. We build for people buying a “permanent home” and not a dacha. In the Moscow Region right outside the first highway, transport infrastructure does not allow to comfortably go to work every day unless there is a train station [next to the housing development].
- What is the price of homes you sell in Obninsk?
- We do not have the same PPP here as in Orenburg. It is a commercial project. We build utility networks, roads and a kindergarten. The average price is 40,000 rubles per square meter including land and utility lines. We plan to hand over the kindergarten to municipal authorities free of charge.
- What are you asking for in exchange?
- We would just like to provide a high quality of life to our buyers. We are also building two stores in Orenburg and in the next year we will start building in Obninsk. We already have investors for a restaurant, a car wash and a sports center in Orenburg.
- Do you purposefully rent land as opposed to purchasing it?
- We purposefully wanted to rent land. If land is municipal, buyers of homes that we built can privatize six hundred square meters for 200 rubles in Orenburg and for 3,000 rubles in Obninsk. Next year they will have to pay more but it still very little as compared to market prices.
- Is that the reason you do not build homes in the Moscow Region?
- There we would have to pay a lot for land upfront. If we make a big investment in the beginning, that will make the entire project ineffective. In the Moscow Region almost all land is private and real estate taxes are minimal. Land owners prefer not to sell land waiting for prices to go up. They are even not eager to develop land in partnership.
We would like to make projects for mass buyers and to earn on a large turnover even with a small margin. We go to regions, buy inexpensive land with postponement of payment and partner with land owners.
- With banks?
- We talked to two banks with good land. They got this land at a high price and are not ready to let [a developer] pay later or are almost not willing to lower prices.
- Why do you think many market participants cannot adjust to new crisis conditions?
- There are two reasons. First, it is not yet an urgent necessity. During the crisis those who own land are on the Forbes list. They are not in a hurry to offer their assets on the market. Second, the government has not sufficiently regulated the land market through taxes and town-planning programs. Taxes (primarily, a real estate tax that authorities intend to introduce in the near future) need to be given to municipalities like in developed countries. They can use this money to maintain current utility lines and build utilities for new developments. They would be interested in developing infrastructure to collect taxes.
The reason I like the Kaluga Region is that it has established regional development institutes and the governor suggests calling him directly to report any facts of corruption. In many regions there may not be too many cases of corruption but manual control is everywhere and there is no system.
- Is that the reason why ideas of authorities are not very successful when put into practice, for instance, regarding energy efficiency of low-rise housing?
- In Russia gas is several times cheaper than in Europe. It is not profitable to implement energy efficient technologies. The payback period, for instance, of a heat pump unit, exceeds 10 years. Until the government starts encouraging [the use of energy-efficient technologies] and prohibiting the building of detached homes violating regulations, there is no use to talk about energy efficiency. For instance, if a house in the USA does not comply with energy efficiency regulations, an inspector may prohibit people to live in it and violations may result in criminal proceedings. In Russia people live in half-finished homes without any concern for heat losses.
- Where do we find inspectors for everyone? Everything is limited by the interests of municipalities.
- They are not even allowed to do that as there is no [relevant] law. Land is sold to private buyers and unorganized development has nothing to do with world's best practices of building low-rise suburban housing. For instance, roads in a housing development need to be built with a certain vertical slope to prevent water flowing to houses and to avoid standing water, mud and dust. Does anyone actually think of that?
I’m not against selling land with any noble purpose but people will try to build houses as amateurs or with the help of migrant workers. Conditions (affordable mortgages, lower taxes) need to be created in the market for developers to build affordable homes for people.
- Aren’t your houses built by migrant workers?
- Our contractors also use migrant workers but we perform the function of the customer and general contractor. We design homes and utility networks to the smallest detail. If a house is well designed, anyone can build it under proper supervision. Detailed utility line designs are developed for us by US specialists to say nothing of the layout. We hold tenders, select contractors and supervise their work.
- Are designs adapted “in a Russian way”?
- Yes, they are. We were probably one of the first in Russia to receive special specifications of the Emergency Ministry for the minimum fire safety separation distance between homes. We can build homes within 6 meters of each other and not 15 meters as provided by Russian standards.
- You are good at negotiating special conditions.
- We do everything officially which takes a lot of time and money. If a developer is small and does not have such a powerful founder as we do, those become significant barriers.
- I do not understand why your founders wish to develop low-rise housing projects.
- They look far ahead. We are building a company that should become a factory for producing low-rise housing. Our country has an unsatisfied demand for it, and the government started supporting this industry. Low-rise housing has so many actual advantages as compared to high-rises. Most importantly, we build a home in three months. We practically exclude a possibility of unfinished construction. Building a high-rise requires dozens and sometimes hundreds of millions dollars.
Someone needs to be the first. The entire world went through that. There are beautiful low-rise housing projects even in Mexico and Brazil. They did it. Why can’t we do it? There may be more obstacles in Russia but we are dealing with them in an attempt to improve the [market] environment.
- What is the average profitability of the mass segment?
- It always depends on the turnover. Despite the crisis, we made the project profitable. The EBRD invested in our project because we proved that our business model is viable. I will not disclose our profitability as we not yet a public company. It is not a huge amount. We intend to make money on the amount of construction and not prices.
We are not interested in projects that sell 50 homes per year. We are looking for projects to build and sell a house s day. We would like to create a company that would go around the country and build such projects. In five to seven years we would like to have a dozen or more projects.
- Do you sell homes in two projects now?
- We are getting two more projects ready. We use the EBRD funds to assess land in five regions, primarily Samara, Yekaterinburg, Ufa, then the Leningrad Region and the Moscow Region.