Knight Frank: Reaping benefits of real estate boom

THE MOSCOW NEWS N 16
BUSINESS
27.04.2007
KNIGHT FRANK: REAPING BENEFITS OF REAL ESTATE BOOM
By Dietwald Claus The Moscow News

In Russia's surging economy, the real estate market is one of the hottest sectors: after growing 7 percent in 2006, it is predicted to add another 7.5 percent in 2007. Not only is it hot, it's pricey: Class A office space rents for $715 per square meter per year - only London, Hong Kong, Tokyo and Paris are more expensive. And a 180 square meter apartment in central Moscow can set you back $15,000 per month.

Russia's real estate companies contribute a lot to the growing economy, and one of the biggest names in the business is Knight Frank. They arrived in Russia five years ago, when real estate was just about to take off. Curious as to how they have been doing, I set up an appointment with Kyrill Starodoubtsev, the managing director and head of Knight Frank in Russia and the CIS.

Walking up Timura Frunze Street - just a few minutes from Park Kultury metro station - one can sometimes see an eye-catching black London cab with the Knight Frank logo. The office is not easy to find - there is more than one House #11, so one has to pay attention to the building designation 2-5.

Seen from the street, the building is not overly impressive, but that's often the case in Moscow - never judge a building by the outside. Once inside, the interior is modern, pleasant - and most welcoming. Getting past the guards can be a hassle, but this time they have my name on the visitor list, and I'm let in right away.

There are a number of big name international companies in here, and I am tempted to take a peek at TNK-BP on the first floor before going up to the fourth where the offices of Knight Frank are located. The building is even nicer on the upper floors - big open entrance areas, large windows, lots of light. When Kyrill and I first meet, he says he'll give me half an hour. But in the end, we talk for more than 70 minutes.

MN: How did you get started in the real estate business?

Starodoubtsev: I'm actually a geographer. There was no business education when I went to university, so geography was actually a good background. You learn a little bit of everything, including economics. My first job was marketing, and I did very well there. But then I thought real estate would be more exciting. I saw that there was a lot of demand for high-quality service that wasn't being met. So with two friends I founded a company called PMC - Property Marketing Company.

MN: Tell me about your first real estate deal, how did that happen?

Starodoubtsev: I knew a man who had just renovated an old dormitory - a Khrushchevka. Fortunately, it was a brick building. So he completely removed all the partitions from the inside, made the facade nicer, and turned it into a basic office building.

Even by the standards of the time, it wasn't a very good building, but I knew there was a lot of demand from foreign companies. So I suggested him an exclusive deal and he agreed to it - a bit surprising, maybe, but he knew me and knew I wouldn't let him down. The funny thing is, I didn't know that many Russian companies - through my marketing business I knew far more foreign ones. So the landlord suddenly found his building filled with seven top-class international blue-chip companies. That was a very nice surprise for him and a really good start for our company.

MN: Why did you get involved with Knight Frank?

Starodoubtsev: Remember, none of us actually had a business education; we had to learn everything ourselves. Eventually, we needed more expertise and know-how, and so we began to look for an experienced international partner. There were quite a few options, but many of them were not compatible with what we needed.

Finally, we found the right partner in Knight Frank. They are an equity partnership, which means that if you want to leave the company, you sell your share. Our company was structured very similarly. Most importantly, Knight Frank was able to make decisions much quicker than many of the other potential partners we were looking at. Eventually Knight Frank bought a 25 percent stake in our company.

Within two years, we became one of the leading companies on the Moscow real estate market. Three years ago we opened an office in St. Petersburg, and just last September, we went to Kiev as well. We are also planning to open eight or 10 branch offices in a number of regional capitals.

Right now, we have six partners, with Knight Frank UK as the corporate partner. Not long ago, we decided to have some of our top managers acquire shares as well.

MN: How has your business changed over time?

Starodoubtsev: Originally, we did a lot in warehousing and logistics - some people still think of us as a warehouse broker, but that's not correct. We are among the leaders in every sector of the market. Warehouses and logistics make up only 15 percent of our business; the rest is residential, land, offices, retail and leisure. Our customers are not just companies and developers, but wealthy individuals as well. We do the whole range of support services: tenant representation, property management, consulting, valuation, investment support, marketing, research.

MN: In your kind of business, human resources are very important. What's the human resource situation like for Knight Frank?

Starodoubtsev: Unemployment rates in Moscow are currently around 0.5 percent, but in the real estate sector, they are practically at zero. It's not easy to find experienced people. To find staff, we work with several recruitment agencies, and we do some recruitment ourselves. Salaries in real estate are growing dramatically, and we have to follow the trend.

We do all sorts of training for our employees. Some of it is in-house, that is, in Moscow and London, but we also outsource some of our training, starting from sales and presentation skills to specialized professional courses.

MN: You are part of an international group - do you have any expats working for you?

Starodoubtsev: Currently, we have 12 expats working for us, that's 3 percent of our staff, but we are definitely looking for more - there are lots of open positions for expats in our company.

MN: How did the crisis of 1998 affect your business?

Starodoubtsev: It was actually very good for us. After the crash, a lot of companies moved from large Class A buildings to smallish Class B offices. Since we did a lot of that moving, it wasn't terrible for us at all. There was one bad thing, though: a rather substantial check had been deposited in a bank for us just before the crash, and when it arrived, the money had basically disappeared. But, apart from that, we did well.

MN: The crash was good for you?

Starodoubtsev: Yes.

MN: Do you want another one?

Starodoubtsev: No, of course not! Afterwards, the market wasn't doing so well - but at least for us, business didn't stop altogether.

MN: Did you take advantage of the lower property prices after that?

Starodoubtsev: No - that's not our side of the business. We don't own property. It's just not something we do.

MN: When did business really pick up again for you?

Starodoubtsev: In 2000. It really went booming last year, I think. It had been getting better previously, of course, but it's last year that we have seen a radical change. There's a lot of foreign investment coming in, and a lot of companies need office space.

MN: What kind of companies?

Starodoubtsev: All kinds of companies. The big drivers right now are Russian companies. Not just oil and gas, but pretty much every sector of the economy - financial, natural resources, business-to-business, retail, advertising. Demand is huge, and there simply isn't enough space.

MN: There's lots of talk about the Moscow market being a bubble - what do you think about that?

Starodoubtsev: Right now, I don't see residential market as a bubble. Mortgages account for about 10 percent of all deals right now, and banks finance at most 80-85 percent of the sale price. Mortgages are going up, though, and I expect that in about five years, 80 percent of all sales will be paid for by mortgages. Banks may begin to give mortgages in the amount equal to the real value, and that will drive prices up - and eventually create a bubble.

MN: What advice would you give to a foreigner interested in doing business in Russia? What risks are there?

Starodoubtsev: Institutional investors who have to be on the safe side should go for office, retail, and industrial properties. Private investors who are willing to take some risks should probably go to the south of Russia, like the Sochi area. But real estate in most parts of Russia is probably a good bet right now.

The risks in Russia are no different from those in most other countries. Make sure you get legal advice for everything, that you understand the rules and regulations. There is no threat to private property.

MN: Speaking about personal matters, tell me a little about yourself. Do you have family?

Starodoubtsev: I do - and I have a little baby boy. He just celebrated his birthday - his first month!

MN: Congratulations!