20 March 2006
Article in Vedomostion the international competition to select a developer for New Holland Island case

Логотип для миниатюрных форм

Money-growing: Robinsons Exploring New Holland

By Anastasia Yasinskaya

ST. PETERSBURG — The international competition to select a developer for New Holland Island in central St. Petersburg has proved that the city property market has entered a qualitatively different stage.

Three international bidders, having enlisted the services of world famous architects, vied for the right to commit over $300 million to an extremely complicated redevelopment project with vague payback prospects. What's more, the outcome was known in advance. The intrigue was maintained till the very last moment with each of the bidders, it seemed, being firmly convinced they would win.

“At that moment when preparations for the competition began, raising hundreds of millions for New Holland seemed an impossible dream,” says Alexander Olkhovsky, deputy CEO at VTB Capital. “Nonetheless, many companies showed interest in the project, although not all of them took part in the bidding due to various reasons. That proves that investors are ready to commit considerable sums of money to St. Petersburg and eager to switch from individual projects to comprehensive development of large sites. But only professional operators are capable of implementing such projects.”

Island Stripped Bare

For many centuries New Holland was shrouded in mystery. The artificial triangular island formed between the Moika River, the Admiralteisky and Kryukov canals, near the famed Mariinsky Theater, occupies a territory of 7.6 hectares. It was built on the orders of Peter the Great to serve as Russia's first naval base.

In the 1730s, wooden warehouses for ship timber were erected on the island. Several decades later they were replaced with stone buildings. The brickwork storage facility for drying ship timber that stretches along the perimeter of the island was designed by the famous baroque architect Savva Chevakinsky. The facades were designed by Classicism architect Jean-Baptiste Vallin de la Mothe, who also designed the landmark arch over the channel that links the Kovsh inland pond on the island with Moika.

The rotunda-shaped naval prison and a brickwork smithy were built on the island in the 19th century. Since both properties enjoy federal government protection the developer has no right to change the appearance of the dilapidated buildings, nor change the internal layouts.

“As far back as 1848, architect Pasypkin wrote that along its perimeter New Holland ‘is an utter deformity'. And so it remained up to the present day,” says Vera Dementieva, head of the St. Petersburg Committee for State Control, Use and Protection of Monuments (KGIOP).

Developers have turned their attention to the island more than once over the past hundred years. In 1914, it was suggested that the area be divided into smaller plots and redeveloped, but war upset those plans. During the Soviet era the island remained a closed zone occupied by the military. New Holland housed the storage facilities of the Leningrad naval quarters, a military uniform tailoring establishment, etc.

The recent proposals to redevelop New Holland into a cultural center date back to the 1970s. In 1990, the French firm CBC took an interest in a project by architect Veniamin Fabritsky who suggested vacating a site in the northern part of the island for commercial development and restoring the Vallin de la Mothe complex to house an expansion of the Mariinsky Theater and the Bolshoi Drama Theater, as well as art studios, and to redevelop the central part of the island into a site for festivals and carnivals. The cost of the project was estimated to be worth $350-400 million.

The project was never implemented because Russia failed to comply with a condition set by the French who insisted on the withdrawal of the military base from the island. Fabritsky's ideas, however, were taken into consideration by the city government when elaborating the terms and conditions of the recent tender.

In 1997, Valery Gergiyev, the artistic director of Mariinsky, urged Boris Yeltsin to have New Holland included in the large-scale plan for the redevelopment of his theater. Gergiyev even commissioned U.S. architect Eric Moss to design the parts of the theater's expansion that would incorporate areas of New Holland. The plan was never fulfilled.

In 2003, the city government finally came to terms with the military and persuaded them to move out; in December 2004 Governor Valentina Matviyenko was handed the symbolic key to the island by the military. Preparations for the tender then began. In October 2005, the St. Petersburg Property Fund began to invite bids from consortiums comprising investors, designers and developers.

The applicants vied for the right to redevelop a 7.2-hectare site occupied by 26 buildings (68,000sqm), both federally- or municipally-owned. Only the Soviet-era buildings could be pulled down. The authors of the interim town-planning program decided that it was possible to develop as much as 220,000 square meters of the commercial properties on the island. The height of any future developments must not exceed 23.5 meters.

The island currently lacks the engineering facilities necessary for the implementation of the project. There is scarcely any place for parking; therefore, a car park will have to be built underground. The island will be linked to the mainland by a number of new pedestrian bridges.

In line with the terms and conditions of the tender, the participants are required to spend at least $300 million on the project, to be fulfilled within seven years, and develop the Palace of Festivals on the island, measuring at least 10,000sqm, and worth at least $29.3 million. The right to sign the investment deal and rental costs are estimated at $41.8 million in total.

After the project is completed the winner will be entitled to a freehold to the new developments and a 99-year lease to the historical buildings placed under federal protection as well as the Palace of Festivals. The city government is ready to reimburse the cost of laying the engineering lines, while the federal authorities will cover the construction costs of the palace.

Trio of Competitors

On Jan. 31 the organizers opened the envelopes and named the three bidders who had not begrudged the $0.5 million deposit and presented their projects to the jury. No St. Petersburg firms submitted any bids, although earlier it was reported that local developers LSR Group and LenSpetsSMU had expressed an interest in New Holland.

The bids were submitted by consortiums established by international and Moscow-based companies. One of the bidders was ST New Holland, set up by the Moscow-based ST Group controlled by Shalva Chigirinsky who had invited the prominent architect Norman Forster and pledged to spend $320 million on the project (VAT excl.)

The second bidder — NHI Group — was founded by Ruric AB, the company established earlier by Swedish investment companies (Robur Pension Fund, Oman and others) to oversee their projects in Russia and St. Petersburg, in particular. Ruric AB has already acquired a number of centrally located buildings in the city, in urgent need of reconstruction and is set to redevelop them into class A office centers.

NHI presented a project designed by the Dutch EEA design bureau (Erick van Egeraat Associated Architects), estimated to be worth $483 million with a payback period of 10 to 11 years. The bidder risked offering the jury an extraordinary design solution by Erick van Egeraat stipulating the development of a 42-meter-high hotel building that would dominate the landscape, having virtually nothing in common with the forms of Classicism.

“Reviving the island is possible only at considerable expense. It needs colorful architecture. The most terrible thing happens where a project calls forth no emotions, neither positive nor negative, where a project is done solely for the sake of a good track record. In New Holland's case such an approach is inadmissible,” says Alexander Dymov, NHI Group's general director.

The third bidder — Stroikholding — remained in the background and shunned any media attention. The partners in the consortium were the German firms SBP International, KSP Engel and Zimmerman and Bayerische Baubetreungs. The team pledged to spend $558 million on the project, to be raised through loans.

The bids were judged on a number of criteria that included the applicants' expertise in construction of multifunctional complexes, financial guarantees, etc. In additional to the cultural complexes, the government hoped to see hotels, offices and retail properties on the island, but no residential estates as such.

The international realty services company Knight Frank acted as an independent consultant, in charge of analyzing the investment proposals. Knight Frank won that right at a tender held by the property fund.

The head of Knight Frank's St. Petersburg, Yelena Tabala, says: “Our task was not to choose the best proposal, nor to evaluate the design solutions. We were to examine the financial side of each of the projects and reach conclusions regarding their feasibility. What made our task more complicated is that over a short period of time we had to go through heaps of papers submitted by the bidders. I should say that the proposals made by all the three teams were quite realistic and conformed to the terms of the tender.

“Each proposal had strong and weak points. NHI Group's plan, for example, offered more financial stability. The share of their own capital in the total investment was to reach 47%; besides, the group planned to finance the early stages of the project on its own and only resort to borrowing at the final stages. ST New Holland offered a solution we believed to be more advantageous, successfully combining cultural and commercial features. The correlation between their own funds and loans — 30 to 70 — is considered classic for development. Stroikholding presented a very modern and feasible concept but its scale, in our opinion, exceeded the potential of the site. So many commercial properties could easily remain redundant. These were the conclusions that we presented to the ‘grand jury'. Later we learned that the decision was passed unanimously.”

Flying the Union Jack

The 15-strong jury was headed by Valentina Matviyenko, chairman of the Russian Property Fund Valery Nazarov and Valery Gergiyev. When assessing the bids, the tender commission attached special importance to the developers' solicitude for the 18th century architectural monuments and the likelihood of filling the island, until recently closed to city residents, with new social functions.

On St. Valentine's Day, after praising all the bidders and expressing regret that it was not possible to incorporate all the successful proposals into a single plan the jury declared their love for Lord Norman Foster and ST New Holland. Thus, Shalva Chigirinsky has added to his portfolio yet another ambitious project, comparable to the dismantling of the Rossiya Hotel in Moscow or the development of what is to become the world's highest skyscraper within Moskva City.

Other companies involved in the project are Mercury Group, the Moscow Development Company and St. Petersburg-based Stroiinvest. Igor Kesayev, president of Mercury Group that runs a joint oil venture with Shalva Chigirinsky, anticipates no problems as regards the financing of the unique project. Established in 1999, Stroiinvest has been involved in five residential development projects in the city. Two of those have already been completed.

“We have accrued sufficient experience in real estate development but could not afford major projects and were looking for a strategic partner,” says Danat Bulavko, general director at Stroiinvest. “We have managed to get Shalva Chigirinsky interested in our market. Even more so as he had already tried to launch business operations here in the 1990s. However, in those days his plans remained on the drawing board, probably because of the lack of local partners. Of course, ST Group would have hardly taken much interest in standard housing construction. That prompted us to submit our proposals for large-scale city projects, New Holland included, even before the tender was announced. It has to be noted that Shalva Pavlovich [Chigirinsky] responded immediately. There was no need to convince him of the commercial appeal of that area. Stroiinvest, jointly with the Yegorov, Puginsky, Afanasiev & Partners law firm, worked on the bid. Now we are in the process of building a team with a view to optimizing the management of the project.”

ST New Holland's founders are set to spend $90 million of their own funds on the project. The group has already held talks with domestic and foreign banks on raising loans to finance the redevelopment. For the time being, Chigirinsky refuses to say exactly how soon he expects the project to pay back but quite optimistically puts it at 5-7 years. The design work is due to take approximately 12 months and the construction stage 30 months.

Norman Foster’s plan will integrate the site’s disparate elements around a roofed amphitheater enclosing a pond. A gleaming cupola will top the star-shaped structure, which will function as a year-round facility for aquatic events and open-air performances. The arena will be complemented by a 2,000-seat concert hall, three hotels, a two-tier parking lot, gallery space, and retail and office spaces. Foster enlisted St. Petersburg architectural firm Studio-44 as consultants for the venture.

The redeveloped island will feature 40,673sqm of retail properties, a 5-star hotel and 2 four-star hotels (56,850sqm in total), a two-level underground car park (1,100 spaces), 60 apartments, etc. The total of 180,146sqm will be redeveloped or built. Eight new bridges will be added across the canals surrounding the island (a single bridge exists today). Shalva Chigirinsky puts the projected annual profit at no less than $100 million.

For the time being, there are still those who doubt the viability of the project. “The risks arising from the project are quite high while calculating the cost of construction and future attendance is quite difficult,” says Alexander Olkhovsky.

The project is extremely complicated in terms of engineering; the investors will have to abide by the rigid terms set by KGIOP, hold talks with monopoly suppliers, etc. Nikita Yavein believes that the project's success will largely hinge on the choice of the general designer who will face the challenge of adjusting Foster's ideas to local building rules and regulations. Danat Bulavko says that the team has yet to select the candidate for the role, but, he says, it will be a Russian firm.