Maxim Levchenko: A Reason for Optimism

It is not even about our company entering the market in the capital city in the beginning of 2018, and managing five shopping and entertainment centers there, including Golden Babylon in Rostokino, with a total area of 250 000 square meters, or establishing ourselves as one of the Top10 Russian companies in the commercial real estate market.

            The main reason for optimism is that commercial real estate market is changing drastically. Just a year or two ago, commercial real estate market was barely alive and, frankly, it didn’t seem all that exciting to anyone. However, in 2017 real changes started to happen. Several significant mergers and acquisitions took place. FORTGROUP became a hero of one of them. Everything started to move and shift, and we have yet to understand why.

            Regardless of what people say, the investment model in commercial real estate is quite conservative, with 8 to 10% margin. In 2014, it made no sense to be cooped up in an office all day, when a bank deposit could bring a much greater return. The annual 15 per cent earned on a bank deposit, basically led to a decline of any activity. It was much easier to sit around, pick your nose, and do nothing.

            Then, everything has changed. Only four years ago, a credit line with 11% interest rate was a dream. Current interest rates for long-term corporate credit lines have dropped to 10% or lower. They will continue to drop, reaching 6 or 7%, or go even lower. Could we dream a little? Ruble interest rates have never been as low as we see now! Credit has become more affordable and market started to recover.

            Speaking of money, lease and capitalization rates are returning to pre-crisis levels. At the same time, commercial real estate has changed drastically, or it will be changing in the near future. The rule is as old as the world: change or lose!

            Do you remember soviet model of happiness? A dacha, a car, and a dog. Lately, people need much more! To attract potential customers to shopping malls and make them spend their money, we must offer a whole lot. Don’t be surprised, but we should have more food and entertainment in the malls. It makes people spend more time there and come with families. There is a new word “eatertainment”. How could we say it in Russian? It signifies food and fun, or as Romans called it: Panem et Circenses! Bread and Circus!

            The ratio of shopping and entertainment is not the only thing that is changing. The concept of shopping malls is being reconsidered as well.

            Customers are changing too. Not long ago, many stores targeted customers with high spending power. However, in the last two or three years Russian middle class seized to exist. Thus, the consumption model has been transformed as well. These days, customers are very sensitive to discounts and very careful about the amount that they are willing to spend without regret. It is important that we leave with a good impression. To put it simply, stores should be attractive and affordable. Attractive does not mean opulent. These days, opulence does not attract customers, but scares them away.

            At the same time, customers are becoming more sophisticated. These days, no one will be impressed by a regular food court or a standard collection of brands. Customers are looking for novelties, and one of our goals is to bring strong brands to Russia that can become successful in the current economic conditions.

            For a very long time, our market has been expanding. The volume of commercial real estate has been increasing rapidly every year. Believe me, I can share a few examples when stores, as large as 2 000 square meters, were paying rent 10 000 Rubles per month! We can consider it rent-free. We have excess space in the market, which has devalued. Competition is fierce and quality becomes the most important factor.

            Currently, we are managing almost half a million square meters of commercial real estate in Moscow. Our main goal for the next three years is simple – changing the concept of ALL shopping centers in Moscow. The first year was dedicated to strategy development. Now, we are developing a new concept. The construction will begin in 2019.

            We do not plan to slow down in St. Petersburg either. Several shopping centers here will be renovated as well.

            A new concept does not just mean replacement of tile in the bathrooms, expanding leasable area, or designing a new floor plan. A truly new concept entails a full re-set and creation of a qualitatively new shopping mall. In other words, a major construction project is ahead of us.

            Just a few examples. Do you know what color is land in Moscow? It’s golden! We inherited a low-performing parking lot from the previous owners, and we are paying high property taxes for this land. It is clear that things cannot continue the way they are. We received a proposal to build a fitness center on this lot, but this proposal did not seem attractive to us because fitness will not generate profit. On the other hand, there is a shortage of residential buildings in this neighborhood. We have calculated that instead of a small parking lot, which brings only losses, we could build almost 70 thousand square meters of residential space.

            Another shopping center, which we manage, is located in a very profitable area with a lot of traffic. This area is heavily populated and well-developed, and there are no competitors. However, there is one problem with this shopping center: it is small and its design is obsolete. There is not enough space for modern stores. Almost overnight, our architects came up with a solution that will allow us to increase the leasable area almost twofold, and the value of this facility threefold, or even fourfold.

            We plan to act this way everywhere. Another trump card that we have for the Moscow market is increase of efficiency. We are very careful and thoughtful with operational expenses. Usually, three and sometimes four managing companies operate our shopping centers. One company is in charge of leasing the space to vendors, another company is servicing the engineering systems, and a third company takes care of security, cleaning services, etc. Contractors in Moscow are used to a good living. However, the slice of sausage that we put on our sandwich today is very thin. If it were thicker, we could have shared. We aren’t greedy, but as of right now, there is nothing to share. Otherwise, we will be left with nothing! For this reason, we are trying to do everything in-house. We are insourcing instead of outsourcing. We are cutting costs without compromising the quality. For example, we’ve laid off many security guards, who weren’t very useful. It is much more efficient to work with surveillance cameras, and quickly resolve any disputes that may come up.

            Unlike many companies, we will not be moving our headquarters to Moscow. Our head office has always been in St. Petersburg, and it will remain there. Physical location in a particular area is no longer an important factor for the success of the business. Strategy is discussed in a boardroom, project design is done on computers, and a plane is flying faster than a car driving from one part of Moscow to another.

            I don’t like big words and loud statements about social responsibility. I believe, that a strong and successful modern company must not only maintain culture, but bring culture with it. That is why FORTGROUP initiated a project called Brodsky Online, which was started with the support of Akhmatova’s Museum. We use this virtual museum to create a real museum One and a half room of Joseph Brodsky. And we don’t plan on stopping here either, everything is just beginning for us.

THE MOTTO IS AS OLD AS THE WORLD: CHANGE OR LOSE!