AAA Financing In Real Estate

In the Moscow market for telecommunications services for commercial real estate competition is steep. In today’s market with a sharp shortfall in high quality office areas it is generally tenants who are losing out in the balance between developers, operators and tenants. However, market experts are convinced that the key future trend will be an improvement in the situation for tenants.

The entire history of the telecommunications business in Russia totals less than 25 years and the classical business model for telecommunications for real estate has just only now started successfully functioning.

Services

“Today in Moscow there are about 700 operators with licenses to offer telecommunications services,” said Evgeny Solomatin, Director for Business Development at Cominfo Consulting. “Of these no more than 30 work in Class A and B business centers and two – Golden Telecom and Comstar UTS control about 70% of the segment.”

In Class C business centers located in renovated administrative buildings on industrial sites there are more than 100 of what are known as “department” operators i.e. companies with 200-300 telephone numbers who only offer telecommunications services to tenants on their own sites. Additional services also include: videoconferencing, payphones, WEB-payphones and Wi-Fi. A complete operator service package can also include telecom-consulting, IT outsourcing and IT management services. “Our marketing specialists use a formula of 1 + 1 + 1 = 7. This stands for three basic services (telephone, data transfer/internet, and video) which when combined form a distinct high quality service along with additional services,” explained Konstantin Kravchenko, First Deupty General Director at OAO Central Telegraph. “For example, data transfer, telephone and video when combined create a video conferencing facility as well as multi-media, and multi-user games; and, networked phones with a data transfer capacity creates IP-telephone services. Moreover, he went on to clarify, “with these overlaps come a large complex of additional services potentially required by clients.” According to Lyubov Yulis, Director for Commercial Real Estate at COMSTAR United Telesystems, “One important trend which should be noted is that of large corporations seeking ways to offer their employees uninterrupted connection and access to the local corporate network even if they are working away from the office. Today we are actively realizing VPN-network projects connecting office networks to employee apartments and out-of-town houses.” Tenants are offered the choice of selecting separate services or an entire service package.

Business Models

Competition in this market is very steep so operators try to establish relationships as early as possible with developers of future projects. There are three main business models for telecoms and building owners. The first model is where the owner takes on the role of organizing the proposed telecom services for tenants along with the installation and maintenance of the internal wiring, construction of terminal boxes and the installation and maintenance of all the necessary equipment. In this model, the building owner is the telecom operator’s direct and sole client. The second model is where the building owner and operator function as co-investors with the operator offering telecom services directly to the tenants. Under this scheme, the operator and owner are in a partnership according to which each side receives a percentage of the profits generated by the telecom services. The third model is one in which the operator takes on complete responsibility for all the construction and commissioning of the building’s telecommunications infrastructure (commonly known as “turn key”). The building owner takes no role in the organization of the telecoms content and just controls the process and receives a share of profits. “Traditionally it is believed that this share is smaller than in the other two models,” commented Mikhail Reshetov, General Director of West Call. “However, strengthening competition in the telecoms market has forced some operators to increase the percentage rates on offer allowing owners to receive the same share of profits as in the first business model but whilst still avoiding operational expenditure.”

Stages of Cooperation

Cooperation between a builder and telecom operator can start at any stage of the building’s development from the planning and development to finishing stage. “We have business models for any including the very earliest stages of development of an office building,” commented Mr. Kravchenko. “When an agreement has been reached we study the project and provide the client with what are called ‘technical specifications for telephonization.’” These technical requirements must be followed by the builder otherwise the appropriate authorities will not commission the building and the operator’s equipment may not function properly. After the completion of the technical requirement the operator as per the jointly developed telecom infrastructure installs the network and all the necessary equipment and internal routing. There is also an alternative option in which the operator joins the project later however this can be fraught with unforeseen problems. For example, the planner can overlook the specialized casing required for telecom lines. Most problematic for the operator and the developer is a situation where the building has already been built and the question of telecommunications is only now being raised. It helps greatly if the planner has factored in the specialized openings and channels required for the cable network. Sometimes, even during the development of a Class A business center telecommunications have been either overlooked or sidelined. In this case, the installment of the telecommunications infrastructure has to take place in short order putting a lot of pressure on the final finishing work.

Ownership

The installation of a telecom network can be undertaken by the operator as well as external organizations – subcontractors hired by developers. “The question of who owns the network depends upon who invested in its construction,” explained Mr. Kravchenko. “However, in my view, logically the site belongs to the organization which uses its.” The property right to a telecom infrastructure, in the majority of cases belongs to the company which built it and put it into operation, agreed Ms. Yulis. However in the majority of cases, at this point the company’s work is done and the completed infrastructure is transferred to the telecom operator who then goes on to offer the telecom services to the end consumer. “Today, generally the operator provides the investment for the construction of the external network, and the installation of equipment and distribution network. Accordingly, prior to this the operator develops a list of services to be offered, purchases the specialized equipment and then installs it.” explained Ms. Yulis going on to point out that it is extremely rare for business center owners to invest funds in the installation of telecom networks – however this practice is more common in the hotel business.

Tenants

When a property is fully developed and the telecom infrastructure is in place arrive the tenants. At this stage there are several possible business arrangements for the tenant, management company and operator. “The concluding of agreements and collection of payments we leave to the operator,” explained Andrei Sinyavin, Building Manager at Sawatzky Property Management. “This is because we don’t possess a license to offer telecom services.” Dmitry Ivanov, Deputy Head of Development at GK Status Real Estate commented that, “If the building already has one operator it’s much harder for a second operator to get a foot in the door. Golden Telecom commented that, “There is a market demand for second operators to act as reserves, for example from tenants in business centers. We are ready to take this on board and in order to best serve the wishes of the client not oppose the introduction of a second operator. You can find many such examples of this.” Any office building which is positioned as premier class must have a reserve operator. “Independent providers are required in order to guarantee service reliability,” confirmed Ms. Yulis. “This is a corporate standard for international companies.”

Alternative Options

Recent years have seen the start of increased activity in the construction and renovation of business centers. Moreover, some companies are now choosing to develop office centers on re-profiled industrial sites. A new breed of young telecom companies are getting involved in these projects. They are less severe in their relations with competitors and can provide cheaper alternatives for installing telecom infrastructures. For example, Class C offices are traditionally preferred by companies looking for smaller areas. The main source of supply of these types of areas is provided by industrial enterprises and former Scientific and Research Institutes. “The telephonization of a large proportion of Scientific and Research Institutes is restricted by the limitations of pre-perestroika Kvant stations,” commented Mikhail Reshetov, General Director of West Call. “With poor quality telecommunications invariably comes losses for the owner. However removing old and installing new telecom networks is not within the budgets of owners of these kinds of buildings.” He went on to confirm that it is possible to simply modernize the existing system by strengthening it with a digital envelope, and if necessary installing an additional digital ATC. “Modernization,” assured Mr. Reshetov, “will produce close to digital quality with expenditure of 10-15% of the cost of entire equipment replacement.”

Conclusion

Today the real estate market is growing at a face pace and market saturation is not anticipated for at least another three years. Despite this some owners and developers already understand that they need to start fighting for clients today. According to market specialists, a strategic plan aimed at simultaneously satisfying the demands of builders and tenants will offer more future opportunities than a strategy just aimed at the development of network services.