'Wake-up call for a dormitory district': Economics of urban renewal in Golovinsky District
The Moscow Committee for Architecture and Urban Planning has published the projects submitted by participants in the competition for rights to work on five pilot projects for renewal of the city's housing stock. PROSPECTA offers a summary of the investment analysis of a project for Golovinsky District, prepared by the consortium of PROSPECTA, Asadov Architects Bureau and ENGEX
The consortium's concept, entitled 'Wake-up call for a dormitory district', identified two key objectives:

1. High-quality urban living standards in the maximum long term

2. Development of the district's economy

We selected three main vectors for project development:

1. 'Business-class' infrastructure: a new standard for Moscow
Creating business-class infrastructure for all future residents: for current residents who will be rehoused in comfort-class apartments as part of the renewal, and for new arrivals (who will purchase business-class apartments at market prices).
2. Incentive platforms for micro businesses and for social and charitable projects
Our concept proposes allocating 100,000 sq m of floor space in commercial property for rent at special rates to micro businesses and to social and charitable projects. This will foster a positive social climate in the district and reduce daily commuting by residents to other parts of the city.
3. Architectural solutions: high quality standards
We propose the creation of car-free spaces between buildings, construction of buildings of varied height (avoiding 'walled-in' spaces), and use of high-quality and durable materials. A separate section of the concept is devoted to the design of building facades to ensure an eye-catching and diverse built environment.
Investment analysis: pay-back scenarios
Investment analysis: pay-back scenarios PROSPECTA consultants calculated 32 financial models for the project. Classic financial models for project pay-back were used. In every scenario, the key drivers of investment return were commercial space for lease and business class apartments for sale (priced 230-250.000 RUB per sq m).

For private investors the renewal project becomes cost-effective at build density of 22,000 sq m floor space/ha and above. But we believe that it would be a mistake to make investment decisions based solely on cost-efficiency.

Classic models cannot measure social effects from additional investments, increase in the tax base and cost savings on city infrastructure.
Golovinsky District renewal plan
Creating long-term value for the city
We decided to concentrate on aspects that are under-developed in dormitory districts, such as support for micro-businesses and charity initiatives, community development, creation of business-class infrastructure and public spaces.

These investments have direct impact on quality of life and the social sphere and they promote the business climate and economy of the whole city in the long term.

We propose four renewal scenarios starting from positive investment ratios, and then calculating ratios with lower build density.

Investment scenarios for renewal of Golovinsky District © PROSPECTA
Scenario 1. Dense construction
Build density: 23,000 sq m/ha
Investment performance: CAPEX = 98 bln RUB, IRR = 21.7%, NPV = 4.1 bln RUB, payback period = 15 years.

This project reaches breakeven point in the medium term but requires analysis of impact on infrastructure due to increase by several times of build density.

Scenario 2. Breakeven point
Build density: 22,000 sq m/ha
Investment performance: CAPEX = 88 bln RUB, IRR = 18.7%, NPV = 630 mln RUB, payback period = 17 years.

This scenario represents the threshold for project payback and is not the most effective in terms of return on investments.


Scenario 3. Finding a balance
Build density: 20,000 sq m/ha
Investment performance: CAPEX = 77 bln RUB, IRR = 14.6%, NPV = -3 bln RUB, payback period = 19 years.

A balanced scenario with reduced density. Preference is given to apartments for sale, which improves financial performance (though still not positive), but entails shortage of commercial areas.


Scenario 4. Minimal density
Build density: 18,000 sq m/ha
Investment performance: CAPEX = 65 bln RUB, IRR = 8.9%, NPV = -7.7 bln RUB, payback period = 19.5 years.

The scenario is close to Frunzenskaya Embankment in terms of density. It creates a comfortable environment with moderate building height and increase in the number of district residents by only 25%. The downside of low density is reduction of apartments for sale, resulting in less attractive investment ratios.

Impact of special tax regimes
We also analyzed impact from possible introduction of a special tax regime: taxes may be cancelled if the city authorities implement the project on their own. At present, the resulting increase of project capitalization could be as great as 2 bln RUB.

The main task of the renewal program is to find a balance between long-term investments for a better-quality urban environment and payback in the medium term. A comprehensive investment analysis of the whole renewal program will be needed in order to obtain more detailed and meaningful results.

November 29, 2017
Photo © Asadov Architects Bureau
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OLGA FAZULLINA
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