Investors going for gold

As the Olympic flame burns in Beijing, the Russians are already looking ahead to their own Winter Olympics 
6 years from now in the resort of Sochi. Gold medals are what they are aiming to win, but raising the profile of the Black Sea resort 
– accompanied by 
a surge in local property values – will be the real prize

Emil Górecki

A substantial sum of around RUB 300 bln nearly USD 13 bln) has been pledged by the Russian public sector for investment in the 2014 Winter Olympics. The entire amount is to be injected into Sochi, with a population of 330,000, and the relatively small Krasnodar Krai region, with more than 5 mln inhabitants and Russia’s third most densely populated province. Shortly after he learned that his country had beaten Austria and South Korea to host the event, deputy-prime minister Alexander Zhukov announced that his government would provide generous funding for the Games. But even so, experts estimate that the event will cost much more than that. Two thirds of the amount is to be put on the table by the federal authorities, but local government will also have to open their wallets. Fifty nine projects are to be carried out by private companies – and these are usually controlled by oligarch friends of the Kremlin, who are able to cash in on the future profits generated by such facilities, which often contain shopping and entertainment centres. Another method is to play tit-for-tat with local government, e.g. constructing a bobsleigh track in exchange for land for development. But the overwhelming majority of the planned developments will be the exclusive property of private companies. Vladimir Ponomariov, vice-president of the Association of Russian Builders – an industrial organization made up of 730 construction and development companies operating in Russia – is of the firm opinion that: “The money will generate profits many times greater than what is invested. Property prices in the Sochi region have risen dramatically over the past year. But the resort is still run down and needs investment. The Olympic Games will raise its profile and cement its reputation throughout the world as an excellent spot for winter recreation.” Ponomariov adds that land prices have risen to such an extent that thought is also being given to the possibility of constructing an artificial island near Sochi, similar to the one in Dubai. When you bear in mind that the town stretches as much as 145 km along the coast, then naturally there will be many excellent sites suitable for development available. The fact remains, however, that the resort desperately requires investment. He goes on to remark that: “I visited Black Sea locations in the 1990s with several major investment firms that were planning to develop recreation complexes there. They eventually decided against it since the entire infrastructure of the area would have to be reconstructed at a cost estimated at the time of 
USD 12 bln. But 20 years down the line, companies are no longer daunted by such huge challenges.”

Avoiding empty talk

There are more than 3,000 projects planned of a variety of types, but 243 of these are ranked as the most important: 20 are sports-related, 48 trans- port-related, 59 infrastructural projects and 33 ho-
tel developments. An estimated 180,000 people will be employed as a result of all this investment. A small town to accommodate around 29,000 tourists is to be built, as well as a substantial amount of winter sports infrastructure. Gazprom, the national energy giant, is providing USD 180 mln for the Games – which will make it the largest sponsor of the 2014 Olympics. Oleg Deripaska, the international aluminium tycoon, intends to invest EUR 620 mln in the construction of the Olympic village and a number of sports facilities. The local airport will be reconstructed and enlarged by one of his companies. Another oligarch, Vladimir Potanin – the owner of the Interros investment company 
– has promised that his company will invest another USD 500 mln int the Olympics, with the purpose of creating a modern skiing resort in the Caucasus. Such foreign companies as Deutsche Bank also believe in the profitability of Olympic investments. The head of the German bank has declared he will be putting several billion US dollars into the Games, in co-operation with the Russian Sberbank. According to Vladimir Ponomariov: “A year has passed since Sochi was awarded the right to stage the 2014 Olympics, and the price of land has shot up – even by as much as one hundred times in certain places. Land along the length of the coast has become very expensive, although a flood of both Russian and foreign companies are still grabbing all the plots they can get their hands on.”

The reasons why the Russians are so eager to put their money into Sochi are obvious: its excellent mountain and seaside location, its developing infrastructure – although still insufficient for such a major event – and the wholehearted commitment of the local and central government to the Games. Experts feel sure that the infrastructure of the city and the whole region will greatly improve as a result of the Olympics, removing what has been a major obstacle to its development so far. There will be new roads, bridges, hotels, technical systems, sewage plants, and not forgetting facilities of a strictly sporting nature. Maria Dvoretskaya, senior consultant at the Moscow branch of Jones Lang LaSalle, is of the opinion that: “Although Sochi is not a large city, the question of whether we will succeed on time or not simply does not arise. We simply have to get everything ready on time.” Vladimir Ponomariov has no worries about deadlines being met, describing how the process works: “We have what is called ‘indicative democracy’ in Russia: the government defines the Olympics as a national priority and designates substantial finance to implement it. Russians are a disciplined people, which means no possibility exists for something not to succeed.”

Completely piste

Between 200,000 and 300,000 winter sports fans are expected by the Sochi Olympics. The resort attracts 3 million tourists every year, but there will be more than twice that number after 2014, which means accommodation and entertainment will have to be laid on for them. One of the most interesting and important sports facilities to be constructed for these Olympics is the Roza Khutor mountain resort in the Krasnoi Polana (‘delightful glade’) region, which will occupy more than 550-ha. After modernization it will have more than 60 km of pistes between 1,000 and 2,200 metres above sea level, on which several of the major events will be contested. The principal investor is Interros, which will put around USD 500 mln into the project, and is expected to eventually commit USD 1.5 bln to the region. Natalia Kudriasa of Roza Khutor, the company developing the mountain resort of the same name and which is owned by Interros, goes into more detail: “The entire project has belonged to our company since we won the tender in 2003 for the development of the centre. Roza Khutor will be one of Russia’s finest resorts, boasting excellent infrastructure, ski slopes and lifts. It is here that some of the most important Olympic competitions will be contested. All the facilities should be ready as early as the 2010/2011 season.”

Sochi may be Russia’s largest and best known winter sports resort, but the number of hotel beds is limited. The Cushman & Wakefield / Stiles & Riabokobylko consulting agency estimates that the number of hotel rooms is around 94,000, with another 30,000 to be found 50-100 km from the airport. 196,000 rooms will have to be brought into existence by 2014 – in both the resort and the surrounding area. The largest planned hotel projects are the Solnechny Gorod with 4,400 rooms (3, 4 and 5-star), Novy Bereg with 4,450 rooms (4 and 5-star), Maly Akhun Complex with 3,400 rooms (4 and 5-star) and the Hotel Imeritinskaya complex with 8,000 rooms. All in all, there will be 50 hotels offering 5-star accommodation. The number of lower-standard hotels available will depend on the enthusiasm of investors, which – at least for the moment – is enormous. Old hotels are to undergo extensive renovation, one of which – the small boutique Rodina hotel – has already been restored by Oleg Deripaska. The aluminium mogul, who grew up in Krasnodar Krai, has reserved all 40 rooms for his own personal use during the Olympics.

Sport pulls a whole industry with it

Although the winter Olympics is a sports and tourist happening, it also influences the shopping centre and housing sector. At present there are no shopping centres in the region and only a few retail chains, with outdoor markets still being highly popular. But several companies are announcing plans for this sector, including the Market company, which is transforming the present town market place into a shopping and office centre with a total area of 14,000 sqm. IKEA of Sweden is to invest between USD 130 and 150 mln on a Mega Family Centre. Bosco di Ciliegi, a company acting on behalf of several well-known clothing brands, is to develop another retail centre – and these are only a few examples of the retail development planned for the area.

According to research by Cushman & Wakefield/Stiles & Riabokobylko, the prices of homes rose on average by 55 to 60 pct throughout 2006. A year later, when the Olympic Committee had made 
its decision, prices surged by as much as even 
100 pct, and today, substantially exceed even those in Moscow. And investors seem to pay little if any attention to the fact that the great majority of residential buildings were constructed according to Soviet technical and architectural standards.

But not everything is going according to plan. Until recently, all the development plans were drafted without consulting environmental groups and agencies – even though Sochi is situated next to a national park. This situation changed only after a recent visit by Olympic Committee inspectors. In addition, prime minister Vladimir Putin has criticized the delays in implementing a number of projects. While he was still Russian president he started monthly progress inspections in Sochi, thanks to which most irregularities have now been laid bare. Maria Dvoretskaya stresses that: “The most important task at present is the construction of the transport infrastructure, as this will substantially streamline the implementation of all the other projects. The Sochi Olympics is being treated as a long-term investment. Krasnodar Krai as a whole offers huge possibilities. Investor interest is mounting, the tourist infrastructure will grow, and at the same time the town will be extensively promoted all over the world.” ν