Thawing under pressure

 It is not easy to sell a commercial object and it is expensive to keep it on the balance sheet. The revival of the market brought about a mass “thawing-out” of projects that were stopped during the crisis.

A matter of meters
According to the reports on the cadastral appraisal of the real estate, the results of which were affirmed in Petersburg on the 15th of January 2013, the city has 1228 objects of uncompleted construction. Mostly, although, in the suburban horticultural communities. A considerable part is accounted for by industrial and research and production objects, the erection of which had started as early as at the end of 1980-s – the beginning of 1990-s, naturally, without considering the requirements of the market to any degree.

In the segment of the commercial real estate there are about 300 uncompleted (or incompletely reconstructed) objects.

According to the data from the Auction House of the Russian Federation, less than a dozen out of 60 stand-alone buildings put up for sale by the beginning of 2013 can be classed among the uncompleted.

“There aren’t that many uncompleted objects as such,” says Andrey Musatov, the deputy head of the department for property of private owners at the Auction House of the Russian Federation. “However, sometimes they also include in this category plots with developed and agreed construction documents and dangerous structures requiring urgent reconstruction. Judging by our practice, incomplete construction in the broad sense accounts for about 20 % of the total supply, and approximately 10 % per se”.

Demolition at a profit
The investment attractiveness of many uncompleted industrial buildings is zero or even negative. The only exceptions are well-located property complexes, for example, on Vasilievsky Island: they have a chance of conversion and further construction. The destiny of the industrial buildings in dormitory districts is more complicated. 20 uncompleted industrial objects in the 3rd Konnaya Lakhta Street, 80 constitute an exception to the rules. They are located on a plot with the total area of 12.3 hectares. Degree of completion is about 50 %. In April 2012, the Residential Construction Development Fund registered its ownership of the buildings and the land. In June 2013 the formed property complex will be placed on auction. The starting price at the auction has been determined as 144 million rubles. The buildings are to be demolished.   

 “The best part of the uncompleted construction put up for sale is located in Primorsky district,” says Lilia Soboleva, the manager of the department of industrial real estate and the plots of  the Praktis company. “They are large buildings with an area of 10 000-12 000 sq.m. and a construction preparedness of about 60%. Deals involving these buildings do happen, although not very often. Usually, buyers are planning to convert the object into a shopping or an office center. If the Land Use and Development Rules allow it, then erection of residential buildings is also possible”.

For example, AHR has put up for sale an uncompleted industrial complex with the total area of 6404.7 sq.m. on a land plot with an area of 4200 sq.m. (Moiseenko St., 22). It is the former property of the Bebel plant, and then – OOO “Parus”. The owner was recognized as a bankrupt in February 2012, the building together with the land plot are pledged to OAO “Bank "Sankt-Peterburg”. The pledged assets was put up for sale in 2012 for 169 million rubles. At the beginning of 2013 it was already 99 million.

 “The objects dating back to the Soviet Era are difficult to adapt to modern needs,” Andrey Musatov says. “Demolition in itself is a completely different and expensive project. For example, the demolition of the abandoned pavilion of the Medical Academy of Postgraduate Education on Prospekt Prosveshcheniya was only possible as part of the project of an enormous residential block. The uncompleted production facility of LOMO (Leningrad Optical Mechanical Association) on Polyustrovsky prospect has proven impossible to sell. The expenses on site clearing are too great for manufacturing and storage projects ”.


Discount in the absence of demand
The majority of uncompleted objects of commercial real estate are the result of the “crisis freezing”. According to the estimate of the Iola company, at the height of the crisis the area of uncompleted commercial objects amounted to 1.2-1.5 million sq.m. However, a mass unloading of uncompleted construction on to the market never happened. Few objects are put up for sale, mostly they are pledges realized by banks.

 “At the moment one can count a few dozen “frozen” commercial construction sites in Petersburg,” says Pavel Pikalev, the general director of Penny Lane Realty Saint Petersburg Company. “Some of them are major IFCs with a considerable office constituent. The office segment took a long time to rally after the crisis. Also, large scale projects are under the greatest pressure from creditors, and influenced by the changes in legislation and the general market condition”.

 “We have consulting and brokerage contracts on about a dozen abandoned projects of trading and office centers. Half of them, we hope, will enter the market either this year or in 2014,” says Georgy Rykov, the general director of the Best. Kommercheskaya Nedvizhimost’ Company. “After the crisis, the market condition has changed fundamentally. Objects of uncompleted construction or buildings for development are extremely difficult to sell”.

 “Property is put up for sale only when the owner is in a desperate situation,” says Andrey Boyko, the deputy general director of the Avers valuing center. “Mostly, the objects become the property of banks that are not willing to sell them cheaply”.

According to Iola Company analysts, it is mainly uncompleted buildings of low marketability that get on to the open listings. They remain on offer for over one or two years. The discount level at the moment of sale is usually low – 10-20%. However, during the first year of exposition the object usually goes down in price by 40-60%.

 “During the crisis considerable discounts could be obtained due to financing difficulties and high rates when owners were looking for ways out of projects,” Pavel Pikalev comments. “Now the total discount in the sale of an uncompleted object can amount to 40%”.

For example, NAI Becar is ready to sell an uncompleted object on Moskovsky prospect, 73, lit. A. It can be converted into a business center or residential quarters. The degree of preparedness is 71 %. In 2010 a square meter there cost  $2500, today it is $1383.

Task work
The conditions on the uncompleted construction market are dictated by buyers. “More or less attractive are the objects with a high degree of preparedness, with correctly executed documents for development, ready for the connection of the utility systems, with the right concept, and adequate location,”  Andrey Musatov says. “Such objects stand a chance of finding their buyer, even when they are a bit overpriced, as it is possible to forecast the risks, the budget and the period of further construction with relative accuracy. It plays a positive role if the owner possesses a registered ownership of the building and the land plot and an agreed project for the replanning of the territory”.

In 2012 a deal was closed for the sale of an uncompleted shopping center (a grocery and general merchandise market according to the documentation) on Khoshimina Street, 14, lit.A, that belonged to OOO “BASK”.

There is no information on the price in the open sources. The new cadastral value of the object with the land plot, close, in the opinion of the appraisers, to the market value, amounts to 250 million rubles.

In the IV quarter of the last year an uncompleted business center on Krestovsky prospect, 11, lit. A was realized. The total area of the object is 7307 sq.m., the total area of the land it stands on is 1665 sq.m. In November 2012 the project of replanning of the territory was approved. The sum of the deal is not publicized.

In the opinion of the Jones Lang LaSalle Company consultant, this transaction is rather an exception. However, some experts believe that the sale of uncompleted business centers is a trend and it is going to get stronger in the future. 

It is difficult to convert uncompleted constructions, the degree of preparedness of which is 70-80%, from the architectural, technical and juridical point of view. However, new investors rarely buy the concept of the object together with the object itself, preferring to develop a concept of their own. Especially that it is precisely a weak concept that leads to the appearance of uncompleted buildings in the first place.

 “Concepts quickly lose their market actuality and need to be seriously upgraded,” Andrey Boyko notes. “It is cheaper to design new ones. And good concepts are still hard to come by on St Petersburg market”.

The majority of deals with uncompleted constructions are closed by final users. “Given the current cost of money, the existing level of lease rates does not provide profitability acceptable to investors,” Georgy Rykov explains the situation. “For example, our clients have a project of a shopping center which can potentially yield 12% per year, but the interest rate of the building credit is14%”.

 “A more or less realistic option is a company that is big enough to have their head office in a separate building,” Andrey Musatov notes. “They are ready to pay, for example, for ambitious places in the historical center, presupposing both the high price of the object itself and an expensive reconstruction in the future”.

Change of destiny
It is not hard to sell uncompleted constructions but it is expensive to maintain them, so the owners started to actively “thaw out” the projects – with the conversion or without it. According to AHR experts, 75-85% of the construction sites have been brought back to life.

 “Everything that was abandoned at the very beginning of the crisis is now under construction again,” Sergey Igonin, the managing partner of the holding company IBGroup, comments. “Although many of these objects have been transformed completely. It would be wrong to say that they have been depreserved, because their functional purpose has been changed. One can mention as examples “Electric-City” on Medikov prospekt  (a project of the LSR Group) and “RGS Nedvizhimost’” on Chernaya Rechka Embankment, that have been turned into residential construction projects”.

 “In the majority of cases the owner tries to bring the construction to a close,” Pavel Pikalev says. “It is much more profitable to sell a finished object. Only an emergency can make the owner pull out of an uncompleted project. For example, if financing is stopped or some legal problems arise, as happened to the assets of the “Makromir” Company that was pledged to Sberbank”.

Cases when investors sell their portion in a commercial real estate project in order to attract additional financing are also very rare. According to Mr. Boyko, even the owners of mixed-use complexes with a retail and entertainment component that are under construction prefer to see hypermarkets and multiplexes as their anchor tenants and not their co-investors.

The Structure of the Market of the Objects of Uncompleted Construction in St Petersburg, in terms of volume, % 

Market Offer for Uncompleted Buildings for Sale in St Petersburg

Functional purpose of the object


Area, sq.m.

Degree of preparedness, %

Price, million rubles.

Price for 1 sq.m., rubles.

Industrial complex

Ul. Moiseenko, 22

6 404.7



15 457

Business center

Pr. Metallistov, 7

19 148.0


1 000

52 225


Moskovsky pr., 73, lit. А

8 679.0



41 479


Ul. Barmaleeva, 6

4 475.0



98 547

Shopping center

Iskrovsky pr.

28 000.0



45 000

Business center

17-th line of Vasilievsky Island/Maly pr.

3 850.0



64 935

According to data of the Iola Company