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The St. Petersburg’s billionaire about the real estate market future

Alexander Sharapov, president of the Russian Guild of Managers and Developers, gave BN.ru a big interview. In the first part the Russian billionaire talks about his investments, depreciation of money, and real estate, doomed to rise in price.

- Most recently you were elected president of the Russian Guild of Managers and Developers. Then you stated literally the following: "Our society is changing every day, and we are becoming people who have come to digital. We are the only ones who can start making money together. Businesses are no longer competing, now they can grow by helping each other. Let's develop an ecosystem because it's not something that's going to happen tomorrow-it already exists, and we need to develop a digital approach." What does that mean? Are mergers, acquisitions, excess profit, and other Marxist dogma the things of the past? Is capitalism dead if businesses stop competing?

- Marx's teaching works - in the part that talks about the greed of capitalists. And that is what pushes people into business. And money is the measure of success. The second is greed for success, which was present under Marx, and still is because we do some things to change the world and to create. Marx ignored this aspect, but even in his time entrepreneurs did much good for society. We could say they invested in their posthumous memory.

Now let’s talk about competition. Of course, there is still competition, but today it is more between platforms, primarily between digital platforms. Let's say Uber doesn’t compete with drivers. It provides the cheapest and most efficient way to get orders. Drivers make money on Uber, and it makes money on them. And if Uber offers bad conditions, there are always competing systems (Get, Yandex, and others) where drivers go. Yandex has won in Russia, for which I congratulate you.

The same thing is happening in the real estate business. More and more digital platforms are being created. Companies in the housing market continue to compete, acquisitions and mergers have not gone away either, but it is becoming more and more important to be able to make money together, to cooperate, to have synergy. This, it should be said, is not a new phenomenon - it was highlighted back in 1996 by James Moore. He noted that nature is an ecosystem in which the green leaves feed the antelope, the lion feeds on it, and when it dies, it already feeds the green leaves. And if the lion eats all the antelopes, he will starve to death. So, nature is an unregulated ecosystem.

But the system can also be regulated – like a garden. And for business the gardener should be the government. It seems to me that our government doesn't understand it very well. But if we remember another economist, Adam Smith, it is obvious: the more we all earn, the bigger the social pie will be. When people are at war, they are destroying, engaged in redistribution of wealth. Businesses, on the other hand, make more money from cooperation.

Today the St. Petersburg’s government limits the number of buildings for developers by agreeing on the figure of 3 million square meters of housing per year with the Ministry of Construction of Russia. Developers see that they are slowly being approved for new projects, that limits the developments opportunities. It is believed that this measure will limit the number of migrants. But it does not take into account the fact that St. Petersburg is assimilating very quickly. And if today 4 million square meters are sold, then let us have at least such a bar. And even better - 5 million, as originally planned by the Ministry of Construction. Because an artificial reduction in the volume of inputs pushes up another bar, the price one. And the same Petersburgers, about whom the authorities care, have children, and they want to live in new apartments, but they cannot buy them at such prices.

- When developers address the city government with such statements, this is certainly an example of that very synergy.

- Of course, in this case we don’t compete, but we want to help each other. Digital platforms are even more important in this regard. I remember when some realtors once tried to fight “Real Estate Bulletin”. In fact, it did not lead to anything good, and it is very good that the confrontation was replaced by dialogue and the development of common rules of the game.

Today our Guild includes not only managing directors and developers, but also consultants, property owners and investors - there are 400 companies in Russia. And we are learning to come to an agreement for the common good.

- Is it possible that there may be several ecosystems in your field, and the competition will already be on this level?

- Of course, this would be the right thing to do, and it would be good. My main task as president of the Russian Guild of Managers and Developers is the following: the executive board cannot work for its members, but it can give access to the authorities in St. Petersburg, Moscow, and Russia, and represent the business community as a whole. This also applies to digital platforms, such as Booking.com, with which owners of apartment hotels can negotiate not one at a time, but on some collective discounts through a corresponding committee of the Guild. There's an idea to create another committee - for small shopping centers. This is especially relevant for small towns where things are just developing. I'm all for it - let's lobby it on behalf of the Guild, the governments are ready to go to towns with a population of 25-100 thousand. Representatives of IT and law companies - all can be negotiated with and make money together.

The main message for the new members is not just to join the Guild and expect it to do something for you, but to start promoting your ideas in the Guild. Take responsibility, don't be afraid to make mistakes. Business today is evolving so much that it's no longer "Measure seven times, cut once". And we provide access to our Bitrix-based platform. After all, an ecosystem is a platform.

- Okay, transcript is accepted. It is known that you are actively promoting new formats in the real estate market: apart-hotels, co-working spaces, co-livings. But this is all commercial real estate. Has the classical residential market become less interesting to you, not interesting at all, or is it just an expansion of horizons?

- I am a supporter of new real estate formats, proven in the West or the East. Of course, we, Russians are special people, we have a special soul. But when we are talking about property formats, if they have taken roots in China, Japan, India, Europe, and the USA, then they work for us too.

Once in 1998, I was one of the first to make a business center: it was "Becar". Then "Nobel" came along. I still own both. But then I was very wrong to rush into the next stages: in particular, I bought a collective farm instead of developing high-quality office real estate: today it would be a chain like the "Senator's". It is important to invest where the trend is and where the earnings are.

- What happened to the collective farm, by the way?

- Everything is fine, I bought 120 hectares in Peterhof. I invested a million dollars, then successfully sold part of the site, returned the money. Then my land went through the Ring Road, which brought in another million dollars. Today I still own 30 hectares, there is interest from low-rise developers, little by little trying to make changes to the master plan to the transfer of the "industrial" in the land suitable for residential construction. That is, everything has worked out successfully.

So why am I doing something new? Out of greed. There's more money to be made in the new market. And if I see that it works in the West, the question immediately arises: how big is the segment? Because you don’t want to make the mistake of youth, when after building two business centers, you switched to land. When I’m done with the land, I switch to the Vyborg Side Development Agency. It took more than two years, but it did not work out: the authorities did not dare to give more powers to private initiatives and enforced the requirements for industrial enterprises to emit pollutants into the environment.

That’s why it is very important to understand how big the market capacity is and whether it can be implemented in Russia. We have been investing in America since 2010, now we are opening the co-living in Dubai. And we want to not only build ourselves, but also develop the ideology of franchise schemes.

- Real estate remains almost the only instrument to save or invest money for most Russian citizens. Do you agree with this point of view?

- Absolutely. And especially the retirement one-room apartment. Because either my children or my friends rented such housing. And when I buy such a place, I clearly understand how to rent it out.

- "Retirement one-room apartment" – is it a professional slang?

- It is simply difficult to save for a pension in Russia any other way and pensions themselves are low. And, by the way, not only in Russia: this instrument is popular in China, India, and Brazil, where both stock markets and life insurance are underdeveloped - everything is the same: an apartment is bought to save up and somehow ensure your old age.

If one is lucky enough to have already bought five one-room apartments, it provides full employment for his spouse, the next step is to think about street retail, for example office space. The closest thing to one-room apartment is a hotel room, but there are still concerns, and what if the management company doesn't do a good job. In any case, it's a transition to more profitable segments. The prospect is when you could buy not a unit, but a share in a closed mutual fund. It's all going to happen, but now we're scared.

- Price growth in the housing market has stopped, so the statistics say. There was a fairly long period of active growth, which is usually followed by a pullback.

- I believe that in St. Petersburg and across Russia prices will continue to rise. There are several reasons for this, including mortgage subsidies and land banks reduction.

- But in Moscow and St. Petersburg preferential mortgages have ended.

- Right. And it only emerged in Russia. And real estate prices are rising around the world: in Europe by 6%, in the U.S. by 17%, in our country over the past year and a half, probably by 50%. In fact, in addition to preferential mortgages, there are two other reasons why real estate prices are growing. Around the world, a lot of money was printed, and they keep printing it. Inflation is a creepy thing that's with us all the time, we just don't pay attention to it. For example, of the dollar of a hundred years ago, only seven cents remain. In Russia, it's even more interesting: over the past 30 years, the ruble has depreciated 44 thousand times! And real estate protects us from inflation, it grows at a rate outpacing 2-3% - naturally, in the long run, there are ups and downs.

Therefore, I do not expect any “rolling back prices” in Russia. Unless the Central Bank continues to raise its key rate and hikes it above 10% - then rolling back prices is possible. The central bank is working against inflation, and for a while it can reduce inflation and real estate prices. And then there will be another surge upward. Because the refinancing rate will have to be lowered for the development of the economy, and real estate will become more expensive.

- We've already discussed that you're a supporter of promoting new real estate formats, tell us more about one of them – about co-livings.

- Co-livings came from change in lifestyle. When I graduated, I was already married and had a child. Nowadays it's not common to have children before the age of 35. Most guys not only don't get married, but when they do so, they live apart. And that period now lasts from the age of 20 and sometimes even up to 40. And these young people have a special aspiration for professional development, a desire for a career. They rarely cook food at home at all, and they don't want to spend time on any domestic trifles, laundry, cleaning, and so on. They are more interested in going downstairs and chatting with other people at the bar. And of these creative young people of this age, about 15-20% live this lifestyle. And if in market units (not in square meters), it's already about 30%. They don't want to live with their parents - they need a separate living space, or a unit.

The need for the number of new housing units has skyrocketed - not because of population growth, but because of the growth of those who want to live separately. And it turns out that when you create projects like We&I, where we're talking to you, you're focused on the demand of the next few decades. I mean, I would miss if people started getting married again at 20 and immediately having kids, but it doesn't seem like that's going to happen. Because both East and West live differently already, and we are already comfortable with that.

- Continuing the theme of the co-livings. There were Soviet constructivist projects, there were also dormitories. They didn't really flourish. What is the novelty of today's forms?

- In fact, the post-revolutionary ideas of the 1920s are very popular in the West. And kitchen factories, and nurseries, and the emancipation of women - all these things were attractive there and then. Today these ideas are being transformed, all this is not being imposed, but given a chance. The reason why it didn't catch on then is pretty easy to understand. If someone suggests creating a search engine on the Internet and the Internet itself does not yet exist, it will not work. If the Internet is there, but it's very weak, it's also too early. So, if we talk about the Soviet experiments with cohabitation, not only few people wanted it, but there was no such a need. Because first it is necessary to meet the basic needs of man. And besides, there was no choice.

- Let's return to the present day. What is the legal status of the co-livings?

- Everything depends on what land plot it is built. It can be a plot for residential use or for a hotel. Most of the world builds on hotel plots. Co-livings, like the Internet, are developing rapidly, and they have not yet been specifically regulated. There are co-livings in condominium format, which is usually the case when you don't have enough institutional investors: we built We&I in St. Petersburg and the project in Dubai. But I will not sell co-livings in England to retailers (a possibility is being considered now): it's just not profitable. It is better to sell it to a fund, and the fund will attract private individuals who want to make money from real estate.

- And finally, what is the fundamental difference between a co-living and an apart-hotel?

- There are two main aspects. Firstly, apart-hotel properties often have very few common areas, and the unit area is quite large. Whereas an apart-hotel starts at 22 sq.m., in a co-living, most rooms are 15 sq.m. It's essentially your bedroom. But the modern man wants to live like Professor Preobrazhensky, given the time, of course. It means that you have not only your own dining room, but also a cinema, a gym - in general, various activities in specialized rooms. Since primitive times, the cave is the place where we sleep. And psychologically we feel better when every place has its purpose. But if you're not a professor and you don't have a lot of money, you can share these spaces. And the sharing-economy in co-livings is fully realized. You spend the night in your room, and everything else - work, entertainment, leisure - is elsewhere.

- Speaking about work: can a co-living be combined with a co-working space in the same building?

- Yes, and the first big co-living with 650 rooms in London has a co-working inside. We went the other way: when you check in for a month or more, the price includes access to the co-working space, which is a ten-minute walk away. This is even good: you leave the house, take a walk, work, return home, and spend time with your friends. But in the new project on Ordzhonikidze Street areas for co-working are planned.

- How has the covid situation affected the new formats?

- In co-livings the occupancy rate first decreased due to the outflow of those who rented a room for a short period of time. And then it increased sharply because sitting on self-isolation in a rented studio is boring, and there is an opportunity to socialize. It's not a public space after all, but part of your home.

Co-working spaces lost, but now they are recovering. And not only the occupancy rate of the old ones is growing, but new ones are opening, including ones in build-to-suit format, when co-workings are ordered by large companies for their own needs.

- What is your attitude to apart-hotels, which are in fact pseudo-housing rather than hotels, so they are used for permanent residence?

- Yes, there are many so-called apart-hotels with room area of 100 or 200 meters, they are presidential suites. And the fact that the Russian authorities are still unable to regulate them surprises me greatly. This is a completely manageable story. Let's say there are apartment hotels in the West, and nobody wants to turn them into pseudo-housing. Firstly, the requirement for a single management company. Secondly, the availability of common areas, which are absent in all pseudo-apartments. Thirdly, the set of services. Fourthly, the requirements to the engineering infrastructure, in particular the fire suppression system, including in the rooms. And if all the standards related to hotels are comprehensively fulfilled, then it will simply be unprofitable to build pseudo-housing.

Our government chose another way: they propose to recognize as residential real estate everything that is supposedly built as hotels, and to demand social responsibility from such new facilities. Hilton came to St. Petersburg and was told that it, too, would be burdened with social obligations. What an amazing situation! Instead of making minor amendments to the legislation so that residential property becomes residential property, and the hotel becomes a hotel, they make up a separate law.

Americans have this proverb: "you say it's not a duck. But if it walks on two legs, looks like a duck, quacks like a duck, it's a duck - no matter what you say." The essence of the law must be respected, not the letter. We've had housing built and called it a hotel, and no one somehow cared. But then they came to their senses and realized that people were living here, with children, and they needed schools. What were you thinking when you coordinated the projects? No, first they added up a bunch of problems, and then they tried to solve them by a single law. But there is no such thing as a single pill that helps cure all diseases. And the Guild of Managers and Developers will appeal to the authorities once again, that we need a series of measures that will gradually lead to the situation, which will stop the construction of pseudo-housing. What to do with the already built ones is a complicated question, I'm not ready to answer it. But now the government shouldn't pass a law which could lead to a situation where hotels would stop being built altogether.

Source 1: https://www.bn.ru/gazeta/articles/266893/.
Source 2: https://www.bn.ru/gazeta/articles/266948/.