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Construction Reloaded

Construction Reloaded

23.04.2010 — Analysis

Western business is again demonstrating interest to the construction industry in the Urals. According to experts the financial situation is gradually stabilising which means the Urals Federal District in the future can expect long term funding from abroad. The RusBusinessNews correspondent has been looking into what foreign investors should expect to get in the Urals market. 

It is easy for the Finns to build a house...

The Sverdlovsk Oblast government today sets ambitious goal for the development of the housing construction. The Governor Aleksandr Misharin has ordered that 1.7 million square metres of housing should be built in 2010 and by 2013 this indicator should reach 3 million. In order to achieve this goal the work is being carried out in the Oblast to increase the demand. All possible means are being considered - mortgages, subsidies, State funded support programmes. Within the framework of various projects 4,000 flats will be purchased with the state-provided money in the Mid Urals in 2010.

The commitment of the authorities could not go unnoticed by investors. In February 2010 the Finnish investment and construction company YIT has increased the registered share capital of its subsidiary YIT Uralstroi by 40 million Euro. Juhani Pitkakoski, the President of YIT, told RusBusinessNews that his company is planning to considerably increase volumes of the housing construction in the region.

"We consider the Sverdlovsk Oblast a region with good prospects that has good history and structure for the development in our changing world. It has a significant deferred demand for high quality state of the art housing which enables us to pin great hopes on YIT Uralstroi", Mr Pitkakoski pointed out.

YIT Uralstroi has been working for three years and in this time the company has built several housing estates in Verkhnyaya Pyshma and Ekaterinburg. In the nearest future the company is planning the construction of a housing estate in the Urals capital and the implementation of the integrated development of an area in the Severny neighbourhood of Verkhnyaya Pyshma.

At the moment registered share capital of YIT Uralstroi amounts to 1 billion roubles. The management of the company is convinced that this money would be enough to complete all the works successfully. However, when necessary, getting loans in foreign banks is possible.

The South Urals and Oman enter a "construction union"

Foreigners demonstrate interest to the Chelyabinsk Oblast. Mohammed bin Awad bin Abdul-Rahman al Hassan, the Ambassador of the Omani Sultanate to Russia, has visited the region in March 2010. Oman is considering the prospects of cooperation with the South Urals in the construction and construction material production sectors. According to Mr al Hassan the Chelyabinsk Oblast is well known in his country as the industrial centre of Russia with rich opportunities for investments.

At the moment, Insi, a South Urals group of companies, is conducting negotiations on the implementation of an investment project in Oman that provides for the construction of a plant specialising on the production of fast-erect buildings for industry or housing. At the moment the foreign party is considering which technologies and products from Insi would be in demand and in what quantities. Precise parameters of the project will be decided upon within the nearest two months.

The Urals opening doors to foreigners

Vadim Shumkov, the Director of the Department of Investment Policy and State Support of Entrepreneurship of the Tyumen Oblast, point out that on the whole at the moment there is some interest from foreign investors. "This is confirmed by the fact that the negotiations which we conducted two years ago on one of the large projects are now entering the final stage after which the implementation of the project proper will start. At this time we are closely monitoring 3 projects with foreign investment. These are MESA Formwork, production of concrete mould systems, Turkey, MC-Bauchemie Russia, production of dry construction mixes (Russia-Germany), Knauf Insulation, production of heat insulation materials (Germany). Moreover, about ten medium sized and large regional companies implementing projects in the sphere of construction materials production have purchased and are purchasing technologically novel imported equipment", says Mr Shumkov.

According to him the Russian Federation in the last decade has been an active market on whose growth it was possible to make good money. At the moment large companies which have long term strategies and clear understanding of market trends are continuing to work. Those who do not have this understanding or for those for whom the drop in the key production was unexpected and catastrophic are ending negotiations or postpone them for indefinite times. On the whole, however, the trend of the livening interest is there and will remain.

"For a long time still it will be possible to make several times more money in Russia than in Europe on the production of similar products. The question is which products and where. For instance in the time past investments went into cement, foam concrete, bricks and dry mixes, and everything needed for the high rise construction and commercial real estate (concrete moulds, metal structures, window profile), while regions of growth were Moscow and Sochi. Now you have to look for different trends in both products and regions. The crisis notwithstanding, low rise construction is growing, new technologies and constructions are coming into use", Mr Shumkov points out.

Investment companies do understand this which is why, despite the crisis, they are trying to continue their work in the Urals Federal District. For instance, Yamata yatirim inşaat turizm ve ticaret a.ş., a Turkish company, is building very actively in Yamal. At the moment the Turks are building the Yuribei hotel in Salekhard. Moreover, the company is the main contractor in the construction of the new building of the Kartavozh boarding school which has started in March 2010.

"I reckon that the market has started to liven up, foreign companies are starting to come into not only the construction proper, but into the construction industry as well. For instance, at the moment we have the Swiss OMIA and Maxit, a part of the French Saint-Gobain Group, implementing projects here", Yuri Chumerin, the Director of the Union of Companies of the Construction Sector of the Sverdlovsk Oblast, pointed out.

Since September 2009 OIMA is working on the construction of the ground marble plant in Polevskoy. The capacity of the enterprise will amount to about 300 thousand tons of products per year. Some of its products will be exported to European countries and Turkey. Maxit will establish a dry construction mixes plant on the same site.

Moreover, according to Mr Chumerin, PERI is continuing to work in the Urals; PERI is one of the world's largest organisations specialising in the supply of concrete moulds and scaffolding. In Ekaterinburg the company participated in the construction of the third train of the Antaeus Business Centre.

Waiting two years for what was promised

Experts point out that the return of foreign investors to the Urals will not be too rapid. The financial crisis has delivered too powerful a blow to the construction industry, the market virtually froze due to the lack of funding which is why the investors' interest will be restoring gradually.

"Recalling to the experience of personal negotiations with Knight Frank, London, on the project of the construction of the "Technoborough in Crop Farming" I can reaffirm that our construction market is really interesting for foreign companies due to its high earning power. This applies to mid-term prospects, and not to the short-term plans, because the "thaw" has just begun and the real recovery will happen in two-three years time", RusBusinessNews was told by Alexey Kozyukov, the Director of API Land Fund of the Urals

It is worth mentioning that the "Technoborough in Crop Farming" project envisages the construction of industrial area, warehousing and logistics facility, trade and exhibition sector, and a business centre. It is planned to build these facilities on an area of 68.5 hectares. VUZ Bank JSC is the investor of the project. At the moment the negotiations are ongoing on the participation in the project of Knight Frank, the leading global consulting company in the high quality real estate markets.

According to Mr Kuzyukov foreign investors are more conservative than Russian and assess risks more carefully which is why so far they are still just looking. Only a few projects start working like, for instance, the 2009 deal between the Ural Mining and Metallurgical Company and METRO which purchased from the industrialists the plot for the construction of their next hypermarket. Some livening of the participation of Russian and Sverdlovsk Oblast banks in the investment into and crediting of construction projects would be a good signal for foreigners to start concrete actions. Because if Russian bankers do not start investing into local projects then how can we convince foreigners of their attraction? 

As well as the participation of the banks, authorities should also take steps for the increase of the investment attractiveness of the regions. "Many foreign investors today are not prepared to go into the regions as this is too risky for them. First of all, and this is a common knowledge, the construction market is extremely far from being transparent and a lot here depends on who you know, on connections with officials. Secondly, even Ekaterinburg market has some examples when foreign players encountered serious difficulties. Strabag, an Austrian company that declared itself to be a general contractor for the construction of the Akademicheskiy neighbourhood, can serve as an example, nothing is heard from them at the moment", commented a real estate expert Tatiana Shushakova, the Director for Development of

According to her the construction market, while being highly profitable, presents high risks to foreign companies. It is better to come to the Urals region with your business in partnership with a strong local player who already has certain strong links with representatives of authorities. It cannot be ruled out, however, that in the next year or two the situation will change as the Russian Prime Minister Vladimir Putin instructed the Prosecutor's Office to check the adherence to the city construction laws in the regions. He listed as priorities getting rid of the rigidity of the bureaucratic machine when approval of new projects takes years, and severing the shadow links between developers and authorities. 

According to Konstantin Selyanin, a stock exchange analyst, foreign companies will start coming to the market more actively in two years time when the situation in the market is back to normal. "When the demand for real estate starts to grow, when incomes of Russian people increase, then the Urals will be more attractive for foreigners", the expert believes. 

Maria Truskova

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