An integrated approach as the keystone of construction project quality
Integrated area development projects currently represent one of the most popular trends in the construction industry. An investor in such a project considers the development proposal, prepares planning documentation, develops engineering infrastructure facilities (such as roads, driveways and utilities (see Real Estate Gazette (Issue 16, 2014) for a series of articles highlighting important issues on infrastructure generally)), and constructs the chief structures, etc.
Previously, the term “integrated area development” had restricted application in Russian law—it was used exclusively in relation to residential construction projects. However in the summer of 2014 significant amendments were made to the law governing construction and land matters. From 1 March 2015, when the amendments will take effect, integrated area development projects will include both residential construction projects and projects for the development of social, engineering and transport infrastructure and other facilities. It is expected that integrated development of all area components will result in the creation of new residential districts, business districts and industrial parks.
The rules of integrated development
The current Russian law regulates the institution of integrated area development in respect to public and municipal land.Thus, under the law, an investor wishing to initiate a project of integrated development on a piece of public or municipal land will be required to submit an offer for the land and will be selected on the basis of auction results. An authorized entity will sign a land plot lease agreement with the auction winner, which specifies, in addition to the lease terms, the entire range of the developer’s obligations for area development. In particular, the investor must undertake land improvement activities, including landscaping; obtain planning documentation; and carry out the necessary surveys and plot sub division. In addition, the investor is required to transfer the engineering infrastructure facilities erected on the development site to public or municipal ownership. However, from 1 March 2015 this requirement will no longer apply, and the integrated area development agreement may (but is not required to) specify the developer’s obligation to submit certain municipal, transport or social infrastructure facilities which it erects (for instance, driveways, electricity substations, boiler houses, etc.) as public or municipal property.
Further, from March 2015, two separate agreements—an integrated area development agreement and a land plot lease agreement—will be signed by the investor (who will still be selected by an auction procedure).
The lease term of the initial land plot provided for integrated development depends on complexity of the project to be implemented. Under the new law, that term will be between three and five years.
The investor, on obtaining planning permission for the initial development site in accordance with the prescribed procedure, will carry out the works to divide it into several separate plots of land (according to the terms of the planning documentation), where further construction work will be undertaken.The investor is entitled to register a title or a leasehold (at his own discretion) in respect to such newly formed plots without having to submit a further tender.
Following the completion of integrated area development projects, the investor’s profits come from the sale of the facilities constructed (residential, transport, social, etc.) and the individual plots, excluding those facilities and plots which have been transferred to public/ municipal ownership.
Today in Moscow and St. Petersburg the most important integrated development projects are those that are implemented on land that is located on the fringes of the existing cities. Such a location is necessitated, first, by the lack of land suitable for integrated development without moving industrial enterprises out of the city, which is a complex task, and second, on the saleability of the buildings constructed—the cost per sq m of building in the outskirts of a city is lower, which makes it possible for the investor to sell such property more quickly. In addition, planning legislation that is formulated in less detail (many regions still do not have extensive regulation on land usage and development) also attracts investors into that region, since they expect there to be fewer limitations on construction. However, it should be noted that integrated development projects implemented in these areas involve some difficulty, mainly caused by the necessity of taking into account the different laws of both levels of local/regional government in the Russian Federation—the city and the region.
Integrated development for construction of lower cost housing
Quite significant amendments have been made recently to the Russian town planning and land legislation, which has also affected regulation of integrated area development projects. Specific regulations apply to projects aimed at the construction of lower cost residential properties.These amendments indicate the relevance and significance of such projects.The objective of the legislative amendments was to support the construction of such housing by introducing measures such as enhanced cooperation between public entities and developers, a simplified procedure for making land available, increased government support, as well as a reduction in construction time.
Lower cost housing may now be constructed on the basis of integrated area development agreements for the construction of such housing, which are entered into following an auction process.The plot of land for construction is provided to the winner of that auction for the lease without an additional tender.The lease agreement affecting the development site is to be signed simultaneously with the integrated area development agreement.
The auction of the right to implement a lower cost housing integrated area development project has certain distinctive features: unlike other integrated development projects, where the winner is the bidder who proposed the highest price for the site (or the price of the right to enter into the relevant lease agreement), in affordable housing construction projects the winner is the bidder who proposes the lowest price per sq m for the total area of residential premises in the housing project to be constructed.These legislative amendments may be of fundamental importance in lowering the cost of such projects and their investment appeal.
Developer to decide
As a general rule, integrated urban planning development currently requires more from an investor than other development projects.The mere fact that integrated development projects tend to take longer to complete means that the developer bears higher risks associated with changes in the economic situation.
However, integrated area development projects are exactly the ones that help to develop united and comprehensively planned micro-districts and areas, in which the necessary social and engineering infrastructure facilities are planned and designed in accordance with population needs. By implementing such projects, the developer creates a comfortable urban environment which appeals to city residents both for the quality of life it offers, and also because the cost may be considerably less when the project is situated on the outskirts of the major cities.
Taking into account all the advantages and difficulties involved in the implementation of integrated development projects, it is clear that it is up to the investor whether or not to participate. However, on current trends of urban planning policy and legal developments, the number of integrated area developments looks set to rise.