Headquarters with Living Quarters

The multifunctional complex, Pokrovskie Vorota, is situated in the historical center of Moscow at #40 Pokrovka. It includes 24 thousand sqm of commercial real estate space serving two radically different functions and operated autonomously by separate organizations. The French hospitality network, MaMaison of the ORCO Property Group, is responsible for the apartment-hotel component of the project while the high-end office center is the headquarters of the Trubnaya Metallurgical Company. In April of 2007, the project and its developer, Sistema-Gals, a daughter company of AFK Sistema, were awarded the Commercial Real Estate Award for multifunctional real estate.

The History of the Property

Ulitsa Pokrovka begins in the very center of the citry, at Maroseika, not far from the metro station, Kitai-Gorod, crosses the Bulvarnoe Koltso and extends all the way to Sadavoe, after which it changes into Staraya Basmannaya. At one time, this street connected the two royal residences: the Kremlin and the palace outside the city. This royal road was also the site of the old stone hotel, the Ural, at Pokrovskie Borota. There is also a fascinating architectural collection here representative of the first half of the 19th century.

Today, Pokrovka is an area of the elite, filled with the offices of famous companies, banks, administrative and educational institutions, expensive cafes, boutiques, and restaurants. The historical and cultural heritage sites of the city are in close proximity: the Kremlin and the Bolshoi Theatre, Red Square and Manezhnaya, the State Duma and Ulitsa Tverskaya, the Cathedral of Christ the Savior, and the Pushkin Museum of Graphic Arts.

This all lends itself beautifully to the design concepts and business plan of the Pokrovskie Borota project, harmoniously blending in with the historical construction surrounding. “This area has one of the greatest concentrations of class A and B business centers. Unquestionably, the hotel segment of the complex will also be hotly sought after,” notes vice president of consulting for GVA Sawyer, Evelina Ishmetova.

The property is situated in a second row of houses, in place of the now relocated Ural. The old structure, surrounded by deep courtyards, was too easy to miss in the grand surroundings, which was a great disadvantage for the hotel, but should not negatively affect the new apartment hotel that will replace it. “The originality of our design decision is in large part based on the structure’s isolation from the surrounding elements of construction,” comments executive director of the project, Teymuraz Shengeliya. “The seven story facades will be dominated by the hotel’s grand entrance, leading straight from Pokrovka.” The general director for Hotel Consulting and Development Group (HCD,) Alexander Lesnik, confirms that, “The quasi-hotel format of the lot doesn’t really require a position in the first line of houses, but it should be in the center of the city. Of course, a apartment hotel is better to build in these business areas, but only as long as there are no transport restrictions.”

In the 1930s, the Ural was constructed as a typical Soviet structure on the spot where the new complex stands. Naturally, by the time the decision was made to actually demolish the building, the premises had already dilapidated considerably and there was even fear of a collapse, making any reconstruction out of the question.

The lot itself covers 0.9 ha and was operated at one point by Gostnitsa-Korona-Inturist, which had signed a 25 year lease for the property on November 5th, 1998 (#01-012905.) In 2002, city authorities decided to demolish the Ural, and in its place construct a modern office complex (Moscow City Ordinance #639 PP of August 13th, 2002, “On the construction of hotel-office complex at #40 Pokrovka.) Sistema-Gals was selected as the developer for the project.

“The fact that the location is in fact the old location of the Ural already speaks for itself about the excellent positioning of the complex – in the time of the USSR, the positioning of hotels was a very serious and high-minded question,” points out Alexander Lesnik. “This is a serious plus as far as the proprietor’s ultimate strategy is concerned. The only minus is the traditional traffic that has plagued the central regions of the city and, accordingly, the presence of pollution, as well as the low visibility of the beautiful surrounding architecture – that is, the poor views.” At the same time, Lesnik points out that the design is fairly traditional: a combination of two forms of commercial properties, sharing different revenue structures to create a project with a maximum synergistic effect. Considering the deficit of new office complexes in the center and the absence of free lots close at hand for the development of similar projects during a period of high demand on the market, the success of this project is virtually guaranteed.

Sistema-Gals decided to sell the Pokrovskie Vorota during the construction phase. “We considered the bids made by a number of companies,” explains Shengeliya. “But eventually made our decision based not only on the prices offered by the bidders, but on their reputations. We wanted this project to speak particularly well of Sistema-Gals. Our decision was made largely with a focus on prestige.” The question of managing the property would be decided by the new proprietors.

The profits reported by Sistema-Gals in 2006 were $56 million. In comparison with the previous year, the revenues of Sistema-Gals grew by 204% to reach $283 million. The consolidated OIBDA grew by 522% in that same year, reaching $90 million in 2006, in comparison with only $14 million in 2005. Such significant growth is explainable by the company’s acquisition of profits from a host of development projects, among which the office-hospitality complex on Pokrovka is a prominent new achievement. As of January 1st, 2007, Cushman & Wakefield valued the assets of Sistema-Gals at $2 billion.

A Two-Sided Question

The decision to divide the real estate between a hotel (40% by area) and an office (60% by area) was a part of the original plan. The hotel portion is situated along the Pokrovka, while the offices are on the opposite side. The courtyard space in the center of the structure will be used as an entrance area for visitors drawn to the hotel’s restaurant. Besides the profitable location, one of the most advantageous characteristics of the project, according to developers, is the functional division: two buildings with alternating floors of hotel and office properties, united by a fire wall and by shared utilities systems as well as by entrances and underground areas. The excellent parking zone beneath the facilities is surrounded by pine trees and pedestrian walkways at the entrances between the main facades.

“The current multi-floor design was achieved beautifully on the lot, allowing the maximum access to the useful area. The necessity of demolishing the old structure certainly increased the cost of such a project by 10% or 12% of total capital investment. However, as far as I know, almost no specific construction problems were encountered by the investors,” says Lesnik.

“The complex consists of two buildings, united by a firewall. The constructive division of the two functionally different sections of the property creates a 5 star hotel and a class A office complex, providing individual entrances, shared utilities systems, and underground areas in which the parking lots are positioned with a separate entrance and exist,” says Shengeliya. “The inner courtyard has an above ground guest parking lot belonging to the office complex. Access to the underground parking lot is enabled by lifts. Orco Property Group and Trubnaya Metallurgical were required to make some adjustments to the project. Specifically, the hotel areas were adapted according to the apartment hotel’s specific requirements. Certain walls were demolished to widen the areas offered in a number of the hotel rooms.”

According to Alexander Lesnik, the most pleasant moment during the execution of the Pokrovskie Vorota project was the timely completion of its sale. “Apartment-hotels generally require additional common areas, which is how the developer would finally make the property profitable. Principally, the multifunctional complex is a rapidly developing format in Moscow today: apartment complexes are being reconstructed in the hotel, Moskva, as well as in the Federation Tower by Moskva-City, in the Kremlevski project on Red Square, and in the multifunctional complex which has replaced the old Rossiya Hotel.

Apartments for Management

The Orco Property Group became the first of the Western operators to professionally manage an apartment-hotel in Russia. Orco is not only the manager of every one of its properties, but prefers to be the principle investor as well. Before Orco, none of the foreigners had wholly purchased a hotel in Moscow for long-term management – usually, they all either entered the market through a franchise or as part of a joint stock capitalization of the hotel. This deal is a landmark moment, according to CB Richard Ellis Noble Gibbons, in that the Luxembourg developer used loans from a Western bank. According to certain data, Orco is currently examining a number of properties with the intent to expand the scope of its network in the capital. The operator is currently operating nearly 1.3 billion euros in assets.

The total area of the multifunctional complex, Pokrovskie Vorota, is more than 24 thousand sqm, of which 9 thousand is used by the hotel. As with every hotel in the network, it has something of a unique design. Its infrastructure contains a spa center from the French company, Algotherm, as well as a fitness club with a large pool, a range of 24-hour business services, an underground parking lot, and a restaurant – Tsifry, by Doucet X.O. “One advantage of working in an office center presented in tandem with an apartment hotel is the opportunity to provide guests and business partners from out of town with nearby accommodations,” comments Evelina Ishmetova. “For TMK, there will be no need to waste time and money shuttling guests back and forth from their hotels. Arrangements in a single complex also enable the coordinated sharing of existing infrastructure.”

The hotel’s 86 rooms, including its 360 sqm presidential suite, were completed before the summer of 2007, and can accommodate more than 200 people at any given time. Jestico+Whiles performed the redesign and remodeling work on the interior. The elegant and unique design solutions, executed using the most modern technology, give visitors the sense that they are guests at a private villa. Openness and abundance of light are emphasized with unusual forms and pastel tones, with the floor and furniture done up in a homey, welcoming style, creating an impression of cozy luxury. Each apartment is equipped with a small kitchenette, a shower area, a Jacuzzi, and a guest toilet. A night’s stay may cost from 500 to 600 euros, with breakfast costing approximately 30 euros.

“In Moscow there are similar projects currently under constructions, but their areas are significantly greater than the area of Pokrovskie Vorota,” notes Evelina Ishmetova. “For example, the office-hotel complex by the TEN Group at #3 Pyazanskii Prospekt will have an area of 120 thousand sqm. The office complex will be accompanied by a 200 room hotel built on four floors. Another example is the office-hotel complex being developed by Vedis Group in the center, in the region of the Paveletskaya business zone on 2.52 ha of the old Moscow furniture factory. The declared area of the project is 110 thousand sqm, 15 thousand sqm of which will accommodate 4 offices built in an 11 story structure, with the rest of the area being zoned for the 360 room hotel. An underground parking lot is also planned. The project will be completed in 2008 and will most likely become one of the largest business centers in the center. The property will distinguish itself with its advantageous location near the Paveletskii railroad stat ion, with the situation only improving after office buildings begin to show up in Moskva City.”

According to Colliers International, in the absence of a distinct classification system for real estate in the capital, there are at least two basic formats for apartment-hotels: the ‘official apartment-hotel’ which operates like a hotel and rents out rooms on a daily basis, and the ‘serviced apartment building,’ which is a single complex which rents out rooms for more than three months at a time for a monthly rate based on the size of the apartment and the services offered. There is a common reception area, room service, and trustworthy personnel responsible for security and safety. Thanks to the number of apartments under long-term lease, the risks of operating a hotel during the off-seasons are neutralized.

Developers in the capital are making concerted attempts to construct apartment hotels, but market experts prefer to equate these properties to business class hotels. The area of a room in an apartment hotel is closer to that of a room in a four star hotel, while the presence of kitchens and elegant design nullify the need for other furnishings of four star quality. Accordingly, the furnishing costs for these projects have been significantly lower. Though apartment hotels are simpler to manage than genuine hotels, the period of cost recovery is significantly longer, with an average of 15 years, as opposed to 8 years for an ordinary hotel. An ordinary hotel has considerably higher revenues, while an apartment hotel generally may generate $3,000 per month. Construction costs incurred during apartment projects may vary from $2.5 thousand to $9 thousand, depending on the location, number, and quantity of rooms, and sometimes run even higher. According to experts, a certain synergy may be achieved through the merging of an apartment hotel with a classic hotel design.

Hotel-office projects comparable to Pokrovskie Vorota in terms of area and function are not present anywhere in Moscow. “But based on the actively growing demand for hotel areas, it can be presumed that the next 5 to 7 years will see a victory for Sistema-Gals, and that this format will become more popular for investors,” says Ishmetova. The apartments at the old hotel, Moskva, are planned for similar reconstruction, as well as at the Federation Tower, under the direction of Hyatt in Moskva City, and at the Kremlevskii complex on Red Square. Last fall, a number of other new projects were also publicized, including a joint effort by the Russo-Asiatic Investment Company, RAInKo, in conjunction with BEL Development and Nikita Mikhalkov’s Trite Studio, to construct apartment hotels with areas greater than 8 thousand sqm in Malyi Kozikhniskii Pereulok.