Entrepreneurial project Individual Project

Though a number of real estate market players is by the moment a considerable one and there constantly appear new entrants, the local (and even Russian on a whole) real estate market is an emerging one where the major working principles are just being established (which is explained by such a market absence in the former USSR, and its formation start after the USSR disintegration). The most developed part of this market is at present moment office and trading space lease market.

As far as industrial real estate lease is concerned, it may be identified as a completely new product (service) to the local market. The grounds of this phenomenon may be described as follows:

1. till the USSR disintegration there existed mostly huge industrial governmental enterprises in the country;

2. right after the disintegration until recently the establishing local companies were mainly occupied in services industry and trade industry, since the profit margins were high in those sectors of the country economy;

3. nowadays the economic situation has shifted, due to change in peopleтАЩs consciousness, to a larger number of small industrial enterprises establishment and their successful work at local and even international markets. But small and medium-sized enterprises lack appropriate production facilities ready for lease, and very often the production is organized in premises not intended for those purposes.

All the enumerated factors prove the mature necessity for local industrial parks establishment. Such institutions are common to European countries, e.g. in Germany there exist 53 industrial parks in the chemical industry only, but in Russia these are only emerging and pure innovative.

The challenge of the project consists of several aspects:

1. The industrial site neglected тАЬsorry stateтА?

2. Absence of regional experience in managing industrial property, since till recently there was no necessity to professionally develop and manage the industrial property and, moreover, there were no property complexes, assigned for more than one client, to manage.

Industrial parks are new phenomena to Russian market and we are going to make the best of the opportunity. A company capable of establishing a working pattern of an industrial park in Russia has all the probability to become leader to the market, gaining a substantial measure of control in the market place; attaining pioneer status; blocking competitors and achieving above average sales/profit growth.

The investment needed for site redevelopment (utilities reconstruction and new construction of 600 thousand sq.m industrial and 150 thousand sq.m office premises amounts to $390 mln., including $15 mln. of front-end investment. The project payback period constitutes 7 years.

We expect, that by the 10^th year of project realization over 250 companies with 10 000 total number of workers will work within industrial park territory.

According to Jones Lang LaSalle Survey тАЬMoscow City ProfileтА? dated September 2006, тАЬthe commercial real estate market in Russia has become more transparent for global investors. The market has entered a new tier in the Jones Lang LaSalle Global Transparency Index, placing it in the same league as Israel, South Korea and Thailand. Market entry of large scale Western European banks and lending institutions suggests that this positive trend will continue over the medium termтА?a href="#_ftn1" name="_ftnref1" title="">[1]
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Generally, investment in real estate assets market in RussiaтАЩs regions dominates the regional investment market. The growing demand for rental spaces is a major force driving rental spaces growth. The Moscow and St.Petersburg markets are close to saturation, and rental premises boom has started in the regions. Kazan belongs to 13 RussiaтАЩs cities with a population over a million people. So the trends of MoscowтАЩs and St.PetersburgтАЩs office markets find quick response at the Kazan market as well.

Nowadays high rental level, constantly increasing number of companies rivalling for rental spaces make Kazan real estate market an attractive industry to act in.

A brief analysis of the Russian real estate market under the PorterтАЩs diamond model:

Firm strategy, Structure and Rivalry. Being a developing market, the Russian real estate market possesses one not a positive characteristic, consisting in absence of strategy of the first entrants to the real estate market and market analysis. Nowadays, however, the companies turn to development according to the all-over-the-world established rules. Nevertheless, local companies are hardly capable of competing with international market players.

Demand conditions. The customers on the local real estate market are becoming more and more scrupulous and demanding. But globally, demand in Russian real estate market continues to exceed supply, leaving opportunity to compete.

Factor conditions. The Russian real estate market is characterized by lack of professional specialists (тАЬskilled labourтА?; lack of infrastructure, caused by mainly adaptation of existing old buildings, instead of building new ones according to the international standards; and a growing amount of capital invested in real estate development.

Related and supporting industries. This factor is also uncultivated within Russian real estate market framework. E.g. there exist only 3-4 facility management companies in Kazan city, which is obviously scanty for a city with a population over 1 000 000 people. Real estate consultants and real estate agencies are till present moment also rare in the market. In two words, the Russian real estate market lack of development seems to prevent the country market players from entering international market for at least 10 years more.

3.1. Market Segmentation

The limitation of тАЬHimgradтА?Industrial Park target customers to small and medium-sized companies occupied in chemical and petrochemical industries is made in order to single the project out of other industrial real estate complexes. The petrochemical utilities infrastructure present on the site territory allows increasing the efficiency of the mentioned companies business. The chart defining the target companies more precisely is presented at Graph 1.

Graph 1

The hatched segments of Graph 1 represent the тАЬHimgradтА?Industrial Park target customers. The reason for excluding big local companies is in their possessing own production facilities on the Republic of Tatarstan territory and, accordingly, enough space for further expansion. As for small foreign companies, they are not interested in global expansion or, to be more exact, have not sufficient financial resources to perform such an expansion. Big foreign companiesтА?inclusion in our target customers may seem to be in contradiction with our strategic goals. Moreover, the site space of 131 hectares is not suitable for huge companiesтА?location. But here we primarily have in mind the location of small and medium-sized production facilities of such companies, which is usually the starting point of global expansion of an industrial company. Nevertheless, to make the location of such production facilities possible, we should address the mentioned companiesтА?headquarters.

To sum up, the project has two categories of target customers:

1. local small and medium-sized companies, processing certain types of polymers, produced on the Republic of Tatarstan territory, including the newly-established companies;

2. foreign medium-sized and big companies, processing certain types of polymers, produced on the Republic of Tatarstan territory.

3.2. Competitors and Competitive Advantages

The target customers have two-sided choice, deciding on their possible location.

First, they may locate within industrial premises of Kazan city. According to the market research[2]
, by the end of 2007 Kazan real estate market comprises office, trade and industrial stocks in the proportions, presented at Graph 2:

Graph 2

Kazan industrial stock comprises over 57% of all real estate premises available for lease, but only third part out of these 1 200 thousand sq.m is professionally developed (due to the above described reasons). But the site state prevents the immediate lease of all premises available. Hence, there exist opportunity for growth.

But the target customers may also choose some other industrial park out of those developing in Russia (see Fig 1).

Fig 1

Main competitors group in Moscow and St.Petersburg regions. Tatarstan is beneficially located in Russia, on the boundary of European and Asian parts of the country, being the logistics juncture of those. So, the location of our industrial park in Kazan forms one of its competitive advantages, especially taking into account the chosen industrial park profile connected with the republican economy peculiarities.

The location of тАЬHimgradтА?Industrial Park in Tatarstan тА?one of the leading Russian regions in chemicals producing and processing, automatically makes it close to Russian largest producers of polymers: Kazanorgsintez plant; Nizhnekamskneftekhim plant; Kazan Synthetic Rubber plant; Karpov Chemical plant; Nizhnekamsk Oil Processing plant; Nizhnekamskshina, etc. (see Fig 2)

Fig 2

Such a location forms an additional advantage for companies occupied in the target industries, since they tend to locate their production facilities close to processed raw materials producers, and the main raw materials processed by chemical and petrochemical companies comprise certain types of polymers (polyethylene, polypropylene, polystyrene, polycarbonate and some others).

Furthermore, the site logistics is perfect (see Fig 3). The industrial park is situated in the north-west part of the city, within close proximity to Kazan major traffic routes (highways and railway station (incl. railway lines within site territory). The site has convenient access approaches. The Kazan international airport is just 30 minutes away by car.

Fig 3

The last circumstance is of benefit in comparison with both local industrial property complexes and with other industrial parks in Russia (since not every industrial park or building has such a convenient location inside the industrial part of the city).

3.3. Target Market Segment Strategy

According to the real estate consultants data, residents usually chose the premises of any type to lease (office, industrial or warehouses) according to the тАЬclassicalтА?model of consumer choice process. The real estate choice presupposes high customer involvement and rational evaluation of all the factors (тАЬthinkingтА?rather than тАЬfeelingтА?. Little emotionality is possible while choosing the premises for the companyтАЩs headquarters or back offices, since these belong to the keystones of its future success and profit. The factor, intensifying the rationalist approach of the customer under analyzed circumstances to property choice, is the mentioned novelty of the product (service). A new buying situation (see Graph 3) here presupposes the customerтАЩs substantial search for the information on the project by means of any available sources.

Graph 3

In order to be a success, a developer ought to create an extremely attractive value proposition for the target customer, which should be based on the objective evidence (the site obvious advantages in comparison to other possible locations). Some of the тАЬHimgradтА?Industrial Park surface benefits include lower than the city average rents level, tax remissions, low utilities prices, etc.

Another peculiar feature of chemical and petrochemical industries is that during the companyтАЩs location decision making process a huge number of technical details should be taken into consideration.

The situation is easier if we deal with small companies, since the Decision Making Unit there may be limited to one person or few ones. In case of medium-sized and large companies, the Decision Making Unit consists of different people, or even companiesтА?departments, performing different roles in decision making process.

Thus, the location or relocation decision is generally initiated by the companyтАЩs top management (which is mostly influenced by public relations media and is driven by brand and prestige); the deciders are commonly engineers and other technical specialists (which are driven by reason); the decision may be influenced by the company marketing or supplying department, which may assess the proximity to the companyтАЩs partners for the most, etc.

Besides, there exist two time gaps in decision making process:

1. a gap between the point when the company realizes the requirement for location, relocation or further expansion and the point when the location decision is made by the company;

2. a gap between the point when the location decision is made by the company and the point when the location itself takes place.

The second gap is conditioned by the technical complexity of the industriesтА?production facilities. As for the first one, the developerтАЩs task is to prevent the customerтАЩs withdrawal from the site, having taken decision in favour of some other location. And this becomes a challenging task, since the time gap may cover several months or even years sometimes. So, to make a bargain, the project developer ought to be able to answer the all departmentsтА?specialistsтА?questions and satisfy all their needs and requirements.

Moreover, the decision making process here takes much more time, and becomes a step-by-step procedure, when the developer has to conduct a successive series of negotiations with different specialist.

When speaking about the second group of our target customers тА?foreign and international companies, we should bear in mind the necessity of keeping the services level to the international standards. Compared to local companies, having no choice of industrial parks in Russia, this group of customers is free to choose from other global locations тА?that is European, Chinese and American industrial parks and technoparks, having industrial premises. The competition on the global market is of a comparatively higher order than at the local one.

Besides, there is another intangible benefit тА?the brand name, the company reputation and some other points of prestige. E.g. the global company presence at the site to a great extent increases its attractiveness for other potential residents. The authority, prestige and influence of the first site resident set the project general tone. At present moment the negotiations with some leading world polymers processors are held and actually their entrance to the site is one of our main aims at the moment, able to increase the further promotional efforts.

The neglected state of the territory presupposes our obvious inability to attract the residents at the moment of the projectтАЩs initiation. Hence, at the initial stages of the project development the site could not be developed according to тАЬbuild-to-suitтА?concept, when the developer holds preliminary negotiations with potential residents, signs binding lease agreements with them and develops the land plots or buildings according to these very residentsтА?requirements; it could rather be тАЬspec buildingтА? when no binding lease agreements are signed, and the developer improves the site state at his own expense.

3.4. Market Trends and Growth

To formulate a prospective business plan, we should assess the target market development trends. Russian economy today experiences rapid growth, the number of investment projects grows from years to year, and the corresponding investment amount increases as well. Thus, investment growth in 2007 exceeds 17.4% comparing to the previous year.

The тАЬHimgradтА?Industrial Park prospects depends on both real estate and petrochemical markets development trends.

Russia's commercial real estate sector is currently the fastest growing in the world and will retain the direction to further extensive and intensive growth. The first one is connected with the increase in premises total square, the forecast of which is presented at Graph 4. The intensive growth comprises the premises quality improvement and their compliance with internationally excepted standards.

Graph 4

As for the chemical industry, in which work our target customers, it also experiences considerable growth at present time. So, the investment in chemical products is 2.6% of total investment in Russia in 2007.

The annual production volume in Russian chemical industry in 2007 amounts to $34.7 bln. (growth rate is 10% compared to year 2006). The corresponding number for the Republic of Tatarstan chemical industry is $3,8 bln. with growth rate at 16% level. According to the analystsтА?estimates[3]
, the specified trend will extend for the following five-seven years. So, the growth in chemical industry will provide the growth of our target customers, occupied in chemical business.

The project developer aims at creating new for the region establishment тА?an institution, providing a juncture of production and service facilities, which intensify the site residents development.

The purpose is to be achieved by means of reconceptualization, reconstruction and redeveloping to meet the state-of-the-art economic conditions requirements.

A suggested positioning statement may be formulated as follows: тАЬHimgradтА?Industrial Park is one of the best possible locations for both small and medium-sized companies, providing a comprehensive services range along the entire customer value chain at comparatively low pricesтА?/b>.

So, the residents of the industrial park will get a complex product consisting of:

1. premises for lease; and

2. a range of services provided to residents as an essential and integral part of it.

Generally, the range of services provided to industrial parks residents is much wider than a usual scope of services for other types of leased property. If we speak about the comprehensive range of services, the concept of the тАЬHimgradтА?Industrial Park is focused on providing core (directly connected with the residentsтА?manufacturing process, such as property management and complex energy supply) and additional services along the whole customer supply chain (see Fig 4).

Our mission is to provide companies in the industrial park with the infrastructure and customer-centric industrial services they need to focus fully on their core business. This circumstance enables to boost the competitiveness of both the industrial park and the tenant companies. We aim at creating favourable conditions (including e.g. tax remissions) for regional petrochemical industry development, by means of combining within one territory research and development, production, marketing & sales and logistics facilities providing a comprehensive range of services along the whole value chain for site residents

Fig 4

The complete technological infrastructure of the industrial park will serve the needs of the resident companies. The technological infrastructure (see Fig 5) comprises refrigerating stations, freight terminal, railway network, capacity park, electric power substation, machining process centre, gas-distributing post, pilot plants park, high-end technology park, corporate university, water treatment station, sewage disposal plants, compressor stations, fire station, aid post, heat and steam distribution point etc.

Fig 5

Our company aims at creating a unique business environment, assisting the residents in their efficient development. The effect is achieved via providing a number of intangible benefits to the residents. That is the compliance of our strategy to residentsтА?development strategies, aiming at creating possible synergy from residentsтА?interaction (the chance of finding future business partners and contractors increases, when, like in our industrial park, there exist both developing and mature companies), and employing authoritative resource, which becomes possible due to our active and close interaction with the Republic of Tatarstan government.