SVITLAND UKRAINE: A UKRAINIAN DEVELOPER with ISRAELI ROOTS
We had a talk about the activities Svitland Ukraine, a Ukrainian subsidiary of a major Israeli holding company, Fishman Holding, with Eddie Prilepsky, Svitland Development Managing Director, Yulia Basarab, Marketing and Sales Director, and Anna Chubotina, Head of Retail Department of Jones Land LaSalle in Ukraine acting as Silver Breeze floor-space marketing and leasing agent in Kiev.
Eddie Prilepsky: The holding company’s interests are represented in the Russian market by Mirland Development Corporation set up in 2002. For the two years of its operations, the company has entered into a number of projects in Moscow and completed two of them. During the pre-crisis period, Mirland Development Corporation completed its IPO on the London Stock Exchange and raised about $300 million. After this successful series, a decision was made to expand to the CIS, in particular, to Ukraine, Belarus and Lithuania. As a result, Svitland Development has been established. Since 2007, the company has joined 10 real estate projects in Ukraine and two projects in Belarus to invest a total of approximately $100 million. However, in the years of crisis, like the majority of developers, we have revised our strategy to subsequently withdraw out of one project in Belarus and two Ukrainian projects. Today, the Svitland Development portfolio includes two small-space projects implemented in Lugansk and Lisichansk. However our focal points and highest expectations are associated with two new projects, Silver Breeze Retail and Office Centre in Ukraine and High-Tech Park in Belarus. The holding company operates in the Ukrainian market through its subsidiary, Svitland Ukraine.
Does the development business scheme adopted by Svitland Ukraine provide for the involvement of local partners in the projects?
E. P.: Initially, the company’s strategy rested on implementing projects in cooperation with local partners who had to manage the project, whereas Svitland Ukraine was to act as an investor. It became clear over time that this scheme would fail, especially amid the crisis. Therefore, we conducted extensive restructuring of our relations with partners, many of whom have become unable to participate in the projects since the start of the crisis. Thus, so far Svitland remains virtually a 100 percent owner of all projects. The only project in which partner relationships have been preserved is a Silver Breeze Retail and Office Centre, which is currently under construction in Kiev. A special relationship has developed between us and UIEC, our partner in this project, as that company is not only an investment partner but also the general contractor. Contradictions do occur between us, but on the whole our cooperation is effective and high quality.
What architecture bureaus and consulting companies do you cooperate with in Ukraine?
E. P.: We involve both western and local architects who subsequently adapt projects to the Ukrainian construction standards. However, there are exceptions. For example, the Silver Breeze project had been entirely developed by a Ukrainian architect Sergey Babushkin; thereafter our architect made some alterations in the project. As regards our relationships with consulting companies, we are bound to cooperate with the best ones, as it is so required by our investors. Thus, our company’s auditors are Ernst&Young and Baker Tilly, and our brokers are the leading international companies, such as Jones Lang LaSalle and CBRE. As regards technical consulting, we have successful partner relationships with Aecom, an international company.
Yulia Basarab: Our involving foreign architects, designers and consultants can be primarily explained by the fact that the Ukrainian market cannot ensure the level of experience of western experts in the commercial real estate design and construction. Western consultants have a more profound knowledge of challenges often facing commercial or business centres. For example, there are problems with air conditioning in many commercial centres in Ukraine: in winter it is very hot indoors, and in summer it is cold. There are no longer such problems abroad.
E. P.: We involve the experts who, having participated in dozens of similar projects, always know what you should focus on. For example, you should always be careful in considering engineering issues: power supply, ventilation, and air conditioning, and pay attention to other issues, such as equipping the facility with elevators which must first of all comply with the current requirements.
Will you please tell us more about the Svitland Development project portfolio?
E. P.: So far, the company’s portfolio includes two active projects: Silver Breeze ROC in Kiev (total area of 75,715 m2) and High-Tech Park in Minsk (Belarus) with a total area of 90,000 m2.
The plan is to create high technology areas where resident companies will be engaged exclusively in software development. Today, there are about 120 registered Park residents, of which 60 are foreign companies, and another 60 are, respectively, local. The High-Tech Park project will consist of two office and five residential buildings, a small commercial centre and a fitness centre, which will be most likely operated by a well-known company in the Ukrainian market. We started construction of the Park about 8 months ago. Currently, office buildings are under construction. The first building of 16,000 m2 will be completed in December 2012. Total investment in the High-Tech Park is estimated at $100 million.
Taking into account your company’s experience, which country is easier for a foreign investor to do business, Ukraine and Belarus?
E. P.: В In Belarus, a scheme of work for foreign investors a little bit differs because non-residents cannot register the private land ownership in this country. This is one of the factors frightening potential foreign investors, who always want to know to what extent their rights are protected. Foreign investors, brave enough to enter the Belarusian market, are working mostly under investment agreements with the Republic, its interests being represented by the Council of Ministers of the Republic of Belarus or city executive committees. One of the biggest shortcomings of investment agreements and these types of relationships is that one has to deal directly with government officials until the commissioning. Another big disadvantage of doing business in Belarus is its planned economy. The government requires that certain deadlines should be complied with. If the government signed an investment agreement for the construction of 100,000 m2 by 2013, and the project has not been implemented before the deadline, the investment agreement may be rescinded. This is undoubtedly the wrong business strategy. The investor’s focus is always on such important factors as supply and demand; in its turn, this situation brings white elephants, i. e. vacant buildings that are of no interest to tenants. And this issue is not the only one in the list.
The dispute on the High-Tech Park area lasted for about two years. As a result, initially planned volume of construction amounting to 500,000 m2 has been reduced to 90,000 m2. We insisted that we were not prepared to implement the terms and conditions of the investment agreement in a complex economic environment. Eventually, we signed anew the previously concluded agreement on other terms that are more favourable to us. The project has become smaller but more effective, in our opinion.
What will be new in the Silver Breeze Project for the Ukrainian market as a whole and tenants in particular?
Yu. B.: The Silver Breeze is located in a densely populated Kiev district, which is not oversaturated with professional retail and office real estate. A project of any format, be it constructed here, might be popular. But we offer a different approach; we would like to introduce to the market a new, successful project that will work and will be popular not only now but in the coming 8-13 years. That is why, to implement the project, we are involving top specialists available on the market today.
E. P.: It is important for us to provide quality in critical aspects of this project, such as engineering, infrastructure, etc. For example, in Europe, parking areas in large office and retail centres are completely automated, and we are trying to bring this experience to all of our projects, including Silver Breeze.
Yu. B.: The project construction began in 2010. Basic and very labour-consuming portion of the work (two levels of the underground parking garage) has been completed. As regards the commissioning, we schedule it for September-October 2012. At the moment, we do our best to implement the project as scheduled, and so far we are on schedule.
Anna Chubotina: As of October 2011, construction of the retail portion, i. e. 16,000 m2 rentable retail space, is completed and work began to construct the fourth floor of the building (the first floor of the office portion consisting of two buildings). Retail and office centre Silver Breeze is a high-quality project that will be constructed in the core of the densely populated district. Its population catchment is at least 300,000 people.
As far as the retail component is concerned, this ROC will provide the entire range of everyday goods and services, which will meet the demand of the district residents. The centre will host retail chain brands of clothing, including new ones for the Ukrainian market. So far, about 75% of the commercial portion of the centre is rented.
Silver Breeze Retail and Office Centre, Kiev
Location: the intersection of Dneprovskaya Embankment and D. Serafimovich Street and P. Tychina Street, Dneprovsky District, Kiev, Ukraine
Developer: Svitland Ukraine
Total area: 75,715 m2
Office floor-space:31,332 m2
Class of the office component as stated by the developer: В+
Retail floor-space: 23 016 m2
Parking area floor-space: 21 367 m2
Number of parking spaces: 550
Commencement of construction: 2010 год
Commissioning: Autumn 2012
Total investment: about $100 million.
What operators have already signed preliminary lease agreements?
A. Ch.: So far we have signed lease agreements with Silpo, Milavitsa, BROCARD, Collins, Yves Rocher, Lerros, Respect, Polaroid, Aroma, etc. In January and February next year, we will be able to name the chain operators who will rent a total floor space of more than 4,000 m2.
Yu. B.: As for the office component, we are of the opinion that the Left Bank location has its advantages. Firstly, today, there is no high-quality office space on the Left Bank of Kiev. Secondly, there are a large number of companies which do not consider the location in the centre of Kiev to be a critical issue, while the competitive price and quality are considered of importance. Thirdly, as is commonly known, in the morning all traffic flows to the Right Bank, and in the evening it turns in the opposite direction. Accordingly, our tenants will be able to reach the facility without hindrance, which will be an essential advantage.
Will you tell us about the company development plans for the near future, about the projects it plans to develop in Ukraine? Which regions and cities are a priority for the company development?
E. P.: Among the 20 countries where Fishman Holding operates today, special attention is paid to Ukraine. We intend to take the company Svitland Ukraine to the level achieved by Mirland Development Corporation in Russia. We have really big plans: the strategy of Svitland Ukraine suggests expanding the company’s portfolio to approximately 200,000 m2 over two years. It is quite possible that we will launch additional real estate projects. The fact that Fishman Group, as distinct from other developers operating in the Ukrainian market, has an opportunity to raise cheap financing, mainly from Israeli financial institutions, contributed to the decision made. In addition, we are cooperating with the European Bank for Reconstruction and Development (EBRD) which is involved in almost all our projects in Russia, except for Moscow. In particular, EBRD is financing our Belarusian project. The Bank is prepared to join our projects in Ukraine. We are also signing agreements with foreign banks, though under the privacy terms I cannot disclose their names.
Interests of Svitland Ukraine are mainly related to Kiev, where there are good opportunities for the development of retail property projects. It is quite possible that we will start implementing residential property projects: the revival of the residential property market in the capital city is beginning, and our company has a number of suitable land plots. Besides Kiev, we have plans to actively develop in Kharkov, where we have two land plots. Negotiations are underway with the city authorities on the concept of facilities which can be constructed on these plots. In the post-implementation period we plan to independently manage the projects.
Do you plan to expand other Fishman Holding businesses into Ukraine?
E. P.: We would like to expand our Home Centre chain in the DIY format into Ukraine. However, we have no intention of competing with existing retail chains Novaya Liniya (New Line) and Epitsentr (Epicentre). Our idea consisted in creating, jointly with a strong local retailer partner, a store chain which will be a unique format for the Ukrainian market: floor space ranging from 1,000 m2 to 2,000 m2 of the "medium+" level with a focus on homeware, which will be located in retail centres along with traditional anchor tenants, i. e. grocery supermarkets, home appliances and electronics supermarkets. In Europe, this format is fairly successful. We have been negotiating on signing an agreement, but our partner has halted the process because of the crisis.
Fishman Holding is one of the biggest investment holding companies in Israel. The company was founded by Eliezer Fishman in 1970 and started as a real estate business. Today, the Fishman Holding interests focus on all real estate segments, i.e. commercial, industrial and residential. The company is represented worldwide in 20 countries, including 16 countries where the company has already implemented property projects. On the whole, the holding company owns and manages more than 5 million m2 of real estate.
In addition to real estate, Fishman Holding business interests are concentrated in the fields of media, telecommunications and retail. In particular, in Israel the company is developing about 15 retail chains specialising in toys (Toys "R" Us), household appliances and electronics (Big Box), clothing and accessories (Celio), etc. The company is also developing Home Centre retail chain in the Do It Yourself segment. These chain stores are available, in particular, in Russia, Serbia, Cyprus, etc.
Svitland Ukraine LLCSvitland Ukraine is a Ukrainian developer having a diversified portfolio of investment and construction projects in Ukraine. The company was founded in 2006 with a view to expand Fishman Holding to the CIS countries.