The real estate development that consign Moscow's Soviet-era factories to history

A dozen faded portraits are still visible on a panel standing amid the ruins of Moscow’s giant ZiL car factory. A few remaining Cyrillic letters explain how it was once a memorial to the hardest workers: “Honour and glory to the top performing labourers.”

The panel is the only remnant of the ZiL factory, which used to produce the limousines that transported the Communist elite around Russia in the Soviet Union era. Now, despite past glories, it goes almost unnoticed by the hundreds of construction workers hurrying to pull down the last warehouses and lay the foundations of a new neighbourhood designed to turn the page on the area’s industrial past.

The panel itself will soon be relocated in a museum, and the ambitions of Moscow’s rising middle class will replace the memory of those long-gone work heroes for good.  

Flagship development

Developed by Moscow- and London-traded developer LSR Group, ZilArt is the flagship project of an ongoing regeneration of Moscow’s numerous industrial areas, most of which have fallen out of sync with the city’s recent development. Sergey Sobyanin, Moscow’s mayor, is behind the project and private developers are rubbing their hands with glee.

“It’s a great business,” says LSR CEO Andrey Molchanov. “We have a lot of grey [industrial] areas in the city. It’s a big opportunity for us to develop [them].”

There are as many as 209 industrial zones scattered all around Moscow, according to research by the Moscow-based Higher School of Economics (HSE). Their heyday can be traced back to the Soviet years, when they employed hundred of thousands of workers, mostly coming in from dormitory neighbourhoods. The collapse of the Soviet Union dragged them underwater, sparking mass layoffs and forcing people to look elsewhere for employment, mostly in the central administrative district.

Today, the few industrial zones still active are generating losses and creating few jobs – HSE research shows the job density in these production zones is 13 times less than in Moscow's central administrative district. Thousands of people are forced to commute every day to the city centre, causing traffic congestion and compromising the city’s overall quality of life.

A 2013 study by Centre for Liveable Cities showed that among high-density cities, only Dhaka in Bangladesh and Lagos in Nigeria had worse liveability than Moscow.

Job distribution 

The regeneration of the industrial zones has emerged as a key part of the city government’s vision to redistribute jobs and residential space more evenly across Moscow's urban area and fix the city’s imbalances. 

“We need new jobs behind the city centre and new homes in the centre,” says Tatyana Polidi, executive director at the Institute of Urban Economics, a Russian not-governmental organisation. “Unused territory within old industrial zones makes up about 20% of Moscow’s territory. Besides this, we have big deficiencies of land plots for new construction. These are the main elements for emphasising the redevelopment of these zones.”

LSR’s ZilArt mixed-use development aims to take a step in this direction. LSR expects some 55,000 residents to live in the new riverside neighbourhood once the redevelopment is completed in 2026. Another 30,000 people will be working in the planned 435,000 square metres of office space. Cultural facilities, such as a Moscow branch of the Hermitage Museum designed by internationally renowned architect Hani Rashid, will complete the development.

The ZiL factory is not the only industrial area of Moscow currently under redevelopment. Between 2011 and 2015, 47 projects were approved, with 20 now in the construction phase. Yet this represents only a “negligible” number, says Ms Polidi, as until now ownership issues have hampered redevelopment.

“In the past, we had no mechanism for encouraging the private owner to develop his own property, [meaning] that these zones stood ‘dead’ waiting to be recognised as residential space,” said Marat Khusnullin, the city’s deputy mayor for construction and urban development, at the Moscow Urban Forum in late June this year.

Change in law

The issue has been addressed at a national level, with a new law passed in early 2016 to permit expropriation by municipal authorities whenever a disused industrial zone stands idle without being redeveloped. “I believe that this new law will allow us to create more workplaces and increase our tax base,” says Mr Khusnullin.

While Russian companies have the contacts and the knowledge to navigate these expensive redevelopments, foreign investors can participate in the project finance or invest directly in the final real estate product.

The Russian market remains both volatile and unpredictable, and even more so with oil prices below $50 and Western sanctions in place. However, the country seems to be gradually mending fences with the West after the Ukraine crisis.

A time to buy

Local authorities believe this recovering geopolitical stability, combined with relatively low asset prices following the ruble collapse (the Russian currency has depreciated by 64% against the dollar in the past two years), may be a recipe for success for foreign investors.

“Today is the best time to invest in Moscow,” says Mr Khusnullin. “There has never been a time since the 1990s when residential real estate cost less than $1200 per square metre. All that has been expensive in the past years has become cheap now with the [depreciation] of the ruble.”

This applies in ZilArt, which targets the medium- to upper-class market, and is now selling floor space at a big discount. Back in 2012, LSR planned to sell at about 210,000 rubles per square metre (or $7000, using the conversion rate of the time). Today, the first deliveries due in 2017 are being pre-sold at 180,000 rubles, or $2800.

Some foreign investors are already taking steps to make the most of the current situation. “We like to invest when people are still thinking about it and haven’t made a decision yet,” says Lee Timmins, CEO for the Eurasia region of US-based real estate investment firm Hines. “From that perspective, we are investors [in Moscow] now and we like to invest before the crowd comes back. So yes, it is a good time [to invest].”

The recovery of the market, and the participation of foreign investors, is key to making redevelopments such as ZilArt financially sustainable and successful. “It’s the time to come [to invest],” says LSR’s Mr Molchanov. “Of course, it’s a little risky – but no risk, no champagne.”

There was no champagne to be found at ZiL back in the days when vodka was the preferred drink of its blue-collar workers. Neither was there much risk, as everything was organised by the central government. Those times are gone, and risk and champagne will now mark the area's future success or failure.