Frequently Asked Questions about MIRAX GROUP and the Real Estate Market
The statements and commentary in this section represent the official policies of MIRAX GROUP and may be quoted in the press, provided reference is made to MIRAX GROUP and the www.mirax.ru website.
Q.: Why did MIRAX GROUP reorganize?
A:. Times change, and management practices must be updated to stay relevant. Our new corporate structure is a powerful tool for growth.
Our corporation is expanding, and so is its scope of interests. We want to make bold steps forward and explore new markets. Our new, global challenges require a clear, coherent understanding of strategic and tactical management responsibilities. Our new corporate structure reflects the western management standards required for clear and transparent cooperation between MIRAX GROUP our international partners and investors.
At the same time, our restructuring has enabled us to promote many of our great employees, who are dedicated to MIRAX GROUP and have worked hard for the corporation for many years. This is our way of showing them know how much we trust and value them, and giving them opportunities for continued professional advancement and career growth.
Sergei Polonsky,
Chairman of the Board of Directors of MIRAX GROUP
Q.: Is it difficult to secure new development sites in Moscow? What commitments are expected from the company in return?
A:. It is impossible to get a site in Moscow by any means, except buy it either from the Moscow Government, or from an investor who had purchased the land plot earlier at an auction or directly from Moscow City Hall.
When an investor buys from the municipal government, the investor is required to pay what is called the “City’s Share,” which must be paid in cash on the spot. The “City’s Share” is calculated on a case by case basis by the Economic Policy Department. In Moscow’s Central District, the amount can be as much as $2,000 USD per square meter.
Another major cost item is the connection fee for getting hooked up to Moscow’s energy grids. In the Central District, this can cost the investor another $1,000 USD per sq. m without the costs of cabling and wiring. Then add the costs of other utility connections – $200 to $500 USD per sq. m. All piping and wiring must be built by the developer independently. Eventually, all these costs will be passed on to the buyer.
When the project involves large-scale construction in excess of 200,000 sq. m, the developer is required to plan for a prescribed number of kindergartens and schools. The scope of construction for such facilities will be assessed using Moscow’s existing standards. MIRAX GROUP has committed to building kindergartens and schools in a number of our projects. We accept such commitments wholeheartedly because we know our future tenants will need those facilities.
Maksim Temnikov,
Chairman, MIRAX GROUP Managing Board
Q.: What is the MIRAX GROUP’s external financing strategy?
A:. MIRAX GROUP believes in the philosophy of portfolio diversification. For our new construction projects, our financing solutions often include:
1. Bank loans.
2. Funds raised through co-investment.
3. Market instruments supported by:
• Russian bonds.
• Credit Linked Notes.
• Unit investment trusts.
These diversified instruments are all undertaken with MIRAX GROUP’s commitment to financial transparency and informational openness.
In today’s international market arena, financial transparency is absolutely critical to a company’s investor appeal. The investor must have a clear idea where his investment money is going, and how the business processes work in the company that will be managing the investment money. This is only natural: investors always want to invest with minimal risk.
These days, no development project will work without substantial external investment. We are talking multimillion dollar investments with a substantially long payback. In this context, conventional investment solutions such as co-investment agreements, mostly sealed with private investors, are no longer an option. That is why MIRAX GROUP has stepped up activities in the debt instruments market and, to this end, we have switched to US GAAP in our financial reporting.
Thanks to these efforts and our overall corporate soundness, MIRAX GROUP and its securities have won an “A” credit rating.
Dmitry Lutsenko,
Chairman, MIRAX GROUP Managing Board
Q.: Why are real estate prices rising?
A:. In 2005, I predicted a 30% growth of prices. I was a bit wide of the mark: prices grew by a whopping 50%. It happened to a large extent due to Law No. 214 FZ: “On Participation in Partnership Building of Apartment Blocks.” I think, however, it would be more correct to describe the current situation not as a spike of prices but as bringing previously undervalued property up to its real price. For example, 5 years ago an apartment in Moscow cost the same as a Mercedes car. This is not a normal situation.
Among the causes of price growth one can identify the following:
1) The growth of solvent demand against the background of diminishing supply.
2) Increased cost of hooking up to external networks: power and water supply, sewage (the cost of hookup to network is at present about 500$ per 1 sq m).
3) A sharp rise of the cost of the building materials: a ton of cement in Moscow today costs $130 USD compared with $100 USD in France. We have long been buying metal and façade structures here at world prices. All this naturally tells on the cost of one square meter of space.
Sergei Polonsky,
Chairman of the Board of Directors of MIRAX GROUP
Q.: What changes can we expect in real estate prices in the near future?
A:. Moscow real estate in prefab buildings has already peaked at $4,000 per sq. m. In the near future prices are expected to be stable in that segment of the market.
Apartments in business-class houses should cost 3-4 times more than in prefab buildings. The ceiling in that segment has not yet been reached and prices will continue to grow. In that respect, we can expect Moscow’s costs to catch up with London, Paris, Hong-Kong, New York and other world capitals.
As for office space, the saturation of the Moscow market will occur when the amount of office space available reaches 13-14 million square meters. At present, the capital has only 3 million square meters of commercial space so the developers in that segment have their job cut out for the next 10 years. The cost of renting class A office space should remain around $900 per sq m a year.
Prices of housing in the regions will not exceed $1500-2000 per sq m.
Sergei Polonsky,
Chairman of the Board of Directors of MIRAX GROUP
Q.: Can the cost of housing in Moscow be brought down?
A:. Yes, it can if the Moscow Government awards land free of charge and the cost of hooking up to infrastructure networks is minimal. It is no secret that the share of the Moscow Government in some projects is as high as 50%. Prices can also be minimized through the building of more prefab houses. It is impossible if houses are not prefabricated.
Maksim Temnikov, Vice President, MIRAX GROUP
Q.: Why has MIRAX GROUP corporation shut down its regional activities?
A:. Our corporate future is increasingly focused on business-class buildings with original architecture, modern materials, sophisticated infrastructure and total environmental planning. In our analysis the regional real estate markets do not offer a fruitful market for these pursuits. In addition, the myriad of regulatory differences from region to region and the difficulty in leasing modern building equipment and hiring skilled specialists make it almost impossible to achieve the quality of design and construction to which we are committed.
Sergei Polonsky,
Chairman of the Board of Directors of MIRAX GROUP
Q:. How did MIRAX GROUP corporation achieve such prominence in such a short time?
A:. We developed our business model and corporate capabilities in the proving ground of St. Petersburg. When we expanded our operations to Moscow, we committed ourselves to carving out a new niche in the Capital’s real estate market: We made it our goal not simply to build houses, but to create lifestyles.
We began by creating a strong team of professionals capable of meeting the toughest challenges. For them “sky is the limit.” And instead of trying to compete against the large, traditional construction companies for their established market niches, we entered the Moscow real estate market offering a totally new product: business-class residential houses. Unique in design and offering a luxurious total living environment, we emerged as a full-fledged developer’s company offering full cycle housing construction starting with site selection and attracting investments and ending with the maintenance of the completed building.
Among other resources which helped us to become a leading building corporation in Moscow, our competitive advantages include:
• A stable team of young professionals capable of solving any tasks and of working vigorously, quickly, creatively and imaginatively.
• Constant all-round effort at self-improvement and progress.
• Commitment to professional and social responsibility to make higher living standards possible.
• Financial transparency and information openness.
• Diversification of business in creating and developing new market niches.
• Use of professional market analysis and rising to its demands and trends.
• State-of-the-art construction procedures using the latest technologies and materials, with strict control of work quality.
• Innovative effectiveness in the implementation of projects.
• Steady and effective activities in professional and citizens organizations, including the Russian Builders’ Association.
Sergei Polonsky,
Chairman of the Board of Directors of MIRAX GROUP
Q:. Is Moscow running out of space for new construction?
A:. There are very few vacant undeveloped plots left in Moscow, but creative thinking leads to opportunity. One of our strategies is to buy land in the secondary market, including outmoded factories and enterprises, and build new houses in their place. An example of this strategy is the project to redevelop the Kievsky Line of the Moscow Railway and the adjacent territories.
There is an aggressive program under way in Moscow to move industries outside the city limits, which enables us to build truly unique facilities on the sites thus vacated.
Sergei Polonsky,
Chairman of the Board of Directors of MIRAX GROUP