CEO of ESTA Holding: If TsUM were not situated in the centre of the city, we could put it freeze
06.08.2015Source: Interfax-Ukraine
Exclusive interview of Maksim Gromadtsov, CEO of ESTA Holding, to Interfax-Ukraine
Question: Tell about the operating results of ESTA Holding in 2014.
Answer: The financial results are not very bright, as well as throughout the country. Our operating income at the facilities in operation declined by 30 to 40%. In any case, it is better than the market average, as we have quite a conservative approach to the selection of projects. There is another part of the financial results associated with the specific nature of real estate business ‑ this is the portfolio revaluation which has come down by almost fifty percent. This is due to the fact that at the moment almost half of our projects are situated in the territories which are not controlled by Ukraine. The cost of these projects is estimated at about zero, maybe a little more. In fact, no one knows how to determine their cost, whether they have some value or not. As we use the conservatism concept in the financial statements, we accepted the assessment close to zero for these projects.
Question: What strategy did ESTA Holding chose as for property management in Donbas after the armed hostilities were initiated? Do you have access to these projects?
Answer: Now in Donetsk we have two types of projects, these are office properties and hotels. Our office suits, Pushkinskiy business centre and The Seventh Line office centre are closed at the moment. That is, we maintain their support systems in minimum, but they have not been functioning for a year. Two hotels however are still in operation. To a certain extent it is thanks to the fact that our projects are quite difficulty-controlled (they are equipped with up-to-date self-contained support systems) and thus they are not of great interest for different groups in the territories which are not controlled by Ukraine. For example, Pushkinskiy business centre is a very high-tech building, and unauthorized persons having no specialized training hardly could start even air conditioners in the building. If the building were not so sophisticated, we would have fewer chances to keep control of it.
Actually only one of five ESTA Holding buildings in Donetsk is out of our control. This is the building that we rented to Donbas TV company. This building was seized about a year ago.
Question: How do you manage to maintain the hotels in Donetsk?
Answer: The hotels are in operation for several reasons. First, they are situated in the centre of the city and thus they did not suffer from the armed hostilities. Second and the key reason, strange as it may seem, there is quite a large group of people who regularly arrive in Donetsk and they need to stay somewhere and it should a safe place. These are mainly journalists of international TV channels, UN, OSCE and Red Cross representatives. Taking into account the experience of military conflicts, for example, in Africa and the Middle East, although it is very sad to compare our country with those ones, international brand hotels that are usually situated in the major cities, remain to be ‘safety islands’. There are always two parties to a conflict, and there are international observers and journalists who need to stay somewhere to cover the events. We could say that we have luck to some extent, as these groups chose our hotels to stay. On the one hand, it allows us not to close the hotels, on the other hand, we break even. Not always, of course. In some months we have to pay in, in some months the hotels break even, but in any case we do not earn money. At the same time, the hotels could at least maintain themselves.
Question: What is the load in these hotels?
Answer: The load of Donbas Palace is less than 10%. But at the moment we have different level of expenses. We have far fewer staff and thus sometimes it helps us to break even.
Question: How are you going to set the strategy of the Group in future? What cities do you consider to be promising in terms of asset portfolio development?
Answer: Today we are concentrated in Kyiv. TsUM is the main project that we are developing. Now we apply all our efforts to compete this project. It will become the base, which together with other assets in Kyiv, such as Leonardo business centre and Opera Hotel, will allow us further development. Of course, we monitor the market. On the one hand, we have a lot of various non-core assets which we sell more or less successfully since 2008. Even though the situation in the country, we still have buyers and thus make small deals. On the other hand, we monitor the market with understanding that in any crisis situation there should appear some opportunities. Unfortunately, I cannot say that some interesting opportunities take place at the moment. Either the price is wrong, or the project itself is not interesting. But we monitor the market with great care. I suppose, in this situation we hardly could buy something by ourselves as we used to do. But we have partners, both Ukrainian and international, who stay with us because of the image that we have earned over the past few years. And even in this situation they are ready to invest. It all depends on whether we could find projects being attractive enough to buy. If there is something interesting, we together with our partners will try to expand the portfolio.
Question: What projects do you consider to be potentially attractive, hotels or offices?
Answer: Well, it is a very difficult situation with hotels now. It will be long before this market in Ukraine comes to senses. That’s why the attention is mainly focused on office and retail segment. We have, on the one hand, quite a simple, and on the other hand, quite a complex strategy. We consider the top-quality objects situated in the best locations, and the choice of these objects is quite limited. We consider a purchase either of facilities in operation or projects that are close to the completion and thus can be brought to an operation regime within a period of six months up to a year. That is, we do not consider land plots. Everybody said there are no more land plots in Kyiv, but in a crisis situation it appears that there are still a lot of plots. I don't know whether the land plots have some value now, it seems to be an extra load as you regularly have to pay to the city and to the state for using these plots.
Question: At the moment there is a tendency of moving offices to Lviv. Do you consider this city?
Answer: We consider Lviv and Odesa. Following Kyiv these are probably two the most interesting cities. Lviv is probably one of the few cities in Ukraine where we are looking at the hotel property as there is quite large tourist traffic here.
Question: Do you look into construction of projects as well?
Answer: Yes. Before the crisis we had negotiated on several land plots for construction of hotels. We did not get the result for commercial reasons. Today there are no so many completed commercial properties in Lviv. That is why we do consider construction of projects. Well, now we are monitoring carefully, because the construction as it means high risks, which are longer investments. We are monitoring very carefully, and I think, some time we will come to Lviv.
Question: Do you hold any negotiations in active phase at the moment?
Answer: We are negotiating at the moment, but we are not involved in active phases. For one simple reason, that is we understand that there are a dozen of projects in Ukraine that may be interesting for us. And all negotiations are that after some time we call the owners and ask them, "Well, what is the price today?" That is, they sell, of course, but their understanding of the price does not coincide with our understanding. If some time the owners, for whatever reason, change their mind and cut the price to a level we could accept, we will start an active phase. But up to now we have just regular telephone calls.
Question: What is your opinion, do we have reasonable prices for real estate with respect to the market situation?
Answer: No. And the situation is not a new one. The same we had in 2008. The reason is, on the one hand, in the peculiarities of the real estate market, on the other hand, in general in the country. This is a shared problem as our legislation is not developed enough. Neither legal, nor juridical system is well developed; the same for banking legislation. In any country a simple situation takes place in the crisis: the projects which are pledged in bank loans cannot service the loans. Putting of these projects to the market by the bank is the main source of interesting deals. For several reasons we do not have the same. The banks do not take these projects or take them and don't want to put out. First of all, it is because very often the owners of the bank and of the real estate are the same entities. Also, to some extent, it may be due to the fact that in our legal system it is difficult for banks to try to take something from the owners. In reality the bank is to spend many years and tons of money to do it. Usually it is more profitable for them to restructure the loan. It takes place an odd situation. Around Ukraine, as around any country in crisis, there are large numbers of international funds which are ready to take risks, even risks of armed hostilities, and which earn money in such crisis situations. That is, they are ready to invest, but there is nothing to invest to. Revenues have fallen by half, prices should have fallen at least the same, but in fact the discounts at crisis prices are 10 to 20%. Thus, it is not reasonable at all. That is why we do not see any deals. Not only because of lack of money. Strange as it may seem, the money is available but nobody wants to give the assets at the prices people are ready to buy.
Question: When are the prices going to come down, if at all?
Answer: If, God forbid, the crisis lasts for two to five years, then at a certain point this bubble will burst. People will start selling real estate to buy something else. The only problem is that at that moment there may be no buyers at all. Unfortunately, there is such an endless circle. A simple example: there was a deep crisis in 2008, and, in fact, the country never overcame it; but we cannot say that there were great deals resulting from the crisis, there were only a few of them. Such a paradox: the economy comes down, GDP comes down but no one goes bankrupt, companies stay afloat, and only banks, namely small banks, withdraw from the market. But there is a question rather to the quality of banking system.
Question: The opening of TsUM was rescheduled from March to August 2016. ESTA Holding announced that it would be more suitable for the tenants. Previously you reported that TsUM would be covered by the cupola at the end of the autumn and in March it would be put into operation. Was it technically possible to complete finishing work in such a project for four months?
Answer: We will put the cupola in November. That is, according to the plan there were five months: November through March, on average it is one and a half floors per month. Technically it is possible, but of course there are certain risks here. But, in any case, these risks made two up to three weeks, maybe a month, and not the time period for which we have rescheduled the opening. Another question is that retail is a very specific sector. If TsUM were opened at the end of March, it would be more or less suitable for the retailers. But if we were late for two or three weeks, this would be a problem for them. First, they would not have time for selling the summer collection, and second, it would be discount season and they really wouldn’t have earned anything. And, thus, we would get off on the wrong foot. They asked us to do them a service and to give an opportunity of opening their shops with autumn collection in the season without discounts, the so-called ‘back to school’ season when people come back from their holidays and the sales are quite different. For us it is a difficult decision, as, of course, we lose money. Almost a completed building will not be functioning for several months. Maybe if there were another market environment, we would be more persistent, but in this situation we understand that we have to be more profitable partners. Retailers take on a risk by signing agreements with us and giving us an opportunity to fill the building. Accordingly, as for us, we have to assure them comfort and arrange for them to earn.
Question: Thus the construction work is not going to be spread till August, is it?
Answer: We plan to complete earlier, but there will be some works to finish. When opening in August, we will have more time to test all systems of the building and to eliminate defects. The building is large and complex, and there always may be some construction defects. And in such a way we will be able to come to the opening more comfortably.
Question: Did you revise the amount of investment due to the rescheduling of putting into operation?
Answer: We did not revise the amount of investment but we hope to spend less. It is clear that there took place depreciation of the national currency, and the investment, we initially measured in foreign currency, will be less. But if we talk about hryvnia, then we will spend more. Unfortunately, neither engineering equipment of appropriate level, nor finishing materials are produced in Ukraine, and the majority of materials we need are such ones. Thus, roughly speaking, everything except the salaries of construction workers, are denominated in hard currency, and therefore, the hryvnia costs will increase. But in any case, there are no other reasons for revision of the amount of investment in addition to the depreciation.
Question: As of today, how much have you invested in the reconstruction of TsUM?
Answer: As of today, we have invested in the construction about USD 50 million. It does not include the purchase, it's just the construction. By the end of the construction it will be invested as much again.
Question: How the rescheduling of putting into operation will influence the amount of costs?
Answer: Taking into account the lost profit, it will cost USD several million for sure.
Question: What brands will be presented in TsUM? Who have already signed the lease agreements?
Answer: We try to cover as maximum brands as possible TsUM to stay as it used to be – a department store for all Kyiv residents. On the other hand, we understand that this is a store in the main street of the city, and this is the image of the city. Accordingly, the scope of the brands will be quite broad ‑ from medium price range to premium. At the same time, there is not going to be luxury goods there, except for accessories. As of today we have signed preliminary agreements for approx. 6 thousand sq. m. This is, roughly speaking, a little more than 25% of the total area. We are negotiating on almost the entire area. In the fashion segment, we have agreed with Asthik company which will provide 15 to 20 premium brands for women in the second floor and luxury and premium accessories in the first floor. Cult company will operate the greater part of the women's shoes department. LB Group will present Lancel premium accessories (for the first time in Kyiv) and Coccinelle. Citi Moda opens corners for Max&Co, Marina Rinaldi, and Marc Cain. Also in the second floor (women’s floor) we have reached agreements with Patricia Pepe, Escada, M Missoni, Philosophy, #21 and Msgm. In the cosmetics department we agreed on participation of all major brands (Chanel, Dior, Lancôme, Givenchi, Estée Lauder, etc.) and on opening of several brand corners for the first time in the country ‑ this is, for example, Jo Malone, Kielhs and another three or four brands. In the children's department it will be the first in Kyiv brand corner for Jacadi.
In almost every category we have attracted key brands. In the medium+ segment we agreed on participation of the leaders in this segment, these are, for example, MTI, MD Group, BNS Trade and several more companies, and their brand portfolio is well-known. Now we are trying to agree commercial terms.
If now you review the signed brands, it may seem that there will be only premium ones, but it is not so. This ‘starter’ suit is as it due the fact that premium brands are the first to enter and be ready to sign agreements and take risks. As they are much less flexible. To open a shop they need much more time and a permit from the brand. They invest for a long time period. If a premium shop opens, it will work for five or six years, it will not be closed in a year. We are negotiating with medium brands. We agree places and conditions, but they take time to sign agreements as they are afraid that the economic situation may change. A retailer of medium price segment begins to press the panic bottom and roll back its development plans as soon as hryvnia begins to fall. At the moment the situation is more or less steady. At the moment we are close to signing a large number of agreements with medium brands.
Question: Was the decision on rescheduling of putting TsUM into operation adopted on insistence of 25% of the retailers who have already signed the agreements, or those who are still being negotiated?
Answer: Rather those with whom we are still negotiating. As for them it is more crucial. This is one of the reasons why they were afraid to sign agreements. We needed to find mechanisms how to reduce these risks for them. This was, in fact, the reason for the rescheduling.
Question: And are the existing 25% of tenants ready to wait for six months more?
Answer: They took it in good spirit. It is comfortable for them. For retailers the time period before September is the best time in the year, as they get into the season when people come back from their summer holidays and start buying something, these is New Year, these are holydays, and this is the ‘very golden time’.
Question: How do you think, in how many years TsUM will be repaid?
Answer: This is a very difficult question. Of course, I would like to have it repaid as quickly as possible. Today I can give one answer, but if tomorrow hryvnia fall by 10%, then this answer will be different. It will take not a year or two, or even five years. For us it is more reputational project than a business one. We understand that this building is situated in the very heart of Kyiv, in Khreshchatyk Street, close to the City Administration. If this project were not situated in the city centre, maybe we could put it freeze for a while. But now we understand that we have to complete it. And perhaps, when everything is good in Ukraine, and the economy starts growing, we will be able to earn more than other shopping malls, and thus will be able to return a part of money. But till now it is very difficult to talk about effective time periods for repayment.
Question: There is one more your project in the centre of Kyiv, in Andriivskyi Uzviz. When do you plan to start construction work there? In what stage is the project now?
Answer: After certain events took place, we realized that our decision to build an office centre having not consulted and agreed this with the public was wrong. Then we gave three promises: that there will never be an office centre, that we will pass a part of the project in one form or another to the public (either a part of the land plot, or a part of the money, or a part of the buildings), and that we will help with the development of Andriivskyi Uzviz.
The construction work is actually not carried out at the moment. There are some minimal activities but the project is almost put freeze. If we ever build something, it will be housing real estate, that is what we agreed on with our Community Council. But today we are not ready to start construction from the ground up. We are already fulfilling the second part of the promise, but in a little different way: the headquarters of the ‘Volunteer sotnia (hundred)’, which helps internally displaced persons from the East of the country, is located in the plot. A year ago we provided them for use a building of about 300 square meters, and we pay all utility costs. Today they occupy a half of the site and their number is constantly growing.
As for the development of Andriivskyi Uzviz, a year and a half ago we renovated the stairs to Zamkova Hora, developed a navigation system for Andriivskyi Uzviz which, unfortunately, has not been yet demanded neither by the authorities, no by the public. But if the authorities are ready to deal with it, we will be ready to finance it. And the project, that we are currently financing and have almost completed, is the installation of bollards in Andriivskiy Uzviz. The cost of this project was about UAH 2.5 million. I hope that by the end of summer we could already set it up. We had a problem with dispatching control of the bollards; we were not sure to whom to delegate control in order not to be accused of wanting to benefit from restricting the traffic. We agreed with Podolska Administration that they allocate resources and provide dispatchers for remote control of the bollards. Our condition was that these people to stay remotely to eliminate the possibility of corruption ‘on-site’. Once we finish the project and settle all the formalities, we will deliver all this to the city as a gift.
Question: Maybe it is reasonable to improve the plot in Andriivskyi Uzviz as construction work is not planned so far?
Answer: The plot is quite complex. We thought about creation of a square, but this is a plot with a large height difference. The difference between the upper and the lower part of the plot makes three to four floors. The lower part of the plot is now fully occupied by ‘Volunteer sotnia’, and they are gradually approaching to the upper part. But it is quite narrow, three to four meters, and thus it is hardly possible to arrange something here. Moreover, it is still a construction site. As for improving, it is, roughly speaking, such a large project that we would better do something else for this money.
Question: What is happening to the land plots owned by ESTA Holding? Are you going to sell them?
Answer: There are two land plots. The first one is a large plot on Moskovska Square, former Kyiv brewery. Today the remains of the brewery are rearranged into the warehouses. We will develop this plot by ourselves; this is a very interesting and rapidly growing part of the city. I am sure that in 10 years Moskovska Square will have a new look. It has already changed; just remember what it was five years ago. And in 10 years it may be different, but now there is no economy and thus there is no reason to develop it. Therefore, this plot is self-repaid from the warehouses.
The second large plot is a plot of 46 hectares in a suburb of Kyiv, in Pliuty village. This is the plot we are starting to develop at the moment. We divided it into small plots, and also made connections to all supply lines. There are about 226 plots, and they are for sale now. This is a unique project in the market of suburb real estate because we managed to connect it to central wastewater disposal system and to gas line.
Question: You are not going to carry out real estate development there, are you?
Answer: Frankly speaking, we have never planned to carry out real estate development there. There are a lot of cottage settlements in the suburbs of Kyiv, and the sales are weak. At the moment it is quite a large investment to buy a land plot with a house. Thus, we look at a different market segment, these are people who understand that someday they would like to live in a suburb of Kyiv but now they are not ready to invest in a finished house, because of limited financial resources, but they could start construction step-by-step.
Question: Have you made sales already?
Answer: We have signed several preliminary agreements so far. I hope that we are going to make the first sale before this interview is published. We launched the project just a month ago.
Question: Did the company carry out the staff reduction?
Answer: The Company did not reduce the staff, but now we have fewer employees than before. But it is rather because some of the employees moved from Donetsk, some of them we brought to Kyiv, and someone, mostly hotel staff, went far abroad. They were kindly employed in the hotels of Dubai and the Emirates. A part of our employees moved to neighboring cities and towns or to Russia. We did not fire anyone, and we brought a large number of people here, to Kyiv, those for whom we could find their jobs. It is a difficult decision, but we are trying to rearrange our business in such a way that having jobs by these people would be justified and they could bring some benefit to the Company.
Question: How do you see the development strategy of ESTA Holding for 2015-2016? What are your forecasts?
Answer: It is clear that the major task is to survive. For us it means not only to keep the staff as it is, but, first of all, to complete TsUM. I'm sure we will do it in about a year. In a situation when all the constructions are nearly put freeze, it will be at least some positive emotions to the residents and guests of the capital. But we really hope that the economy is going to start growing and we as well. The real estate business is fully tied to the economy.