A new high-rise building has been erected in the city center of Tallinn, in the so-called financial district. One of the main tenants of the 26-storey Skyon building is Coop Bank whose name can be seen on the roof of the skyscraper, next to the name of the new building. The two highest floors are occupied by Capital Mill Company, the owner of Skyon. DW interviewed a co-owner of Capital Mill Igor Mölder.
The peak of construction work coincided with the beginning of the pandemic, which caused a 3-month delay. However, according to the co-owner and, until recently, the manager of Capital Mill Igor Mölder , this was not the biggest challenge. The entire construction sector is having a hard time, which may suspend already launched projects.
Mölder also talked about the cost of new building and its pay-off period, trends in the commercial real estate, and revealed the company’s plans at the exchange.
The pandemic burst when Skyon was under construction. To what extent did it change your plans?
The effect of pandemic was significant enough. The building was commissioned 3 month later than it was scheduled. In the beginning of the pandemic, the list of potential tenants was reduced almost to zero as many of them postponed their decision-making. However, by that moment we had already signed a number of contracts, including the contract with Coop Bank, which diminished the stress. In the autumn 2020, we already resumed negotiations with our potential clients.
Today the building is fully rented out. And this is a perfect result, considering the circumstances.
However, the biggest issue that could not be predicted is the situation of rising in prices in the construction sector. In addition, the sector is also experiencing the lack of work force and materials.
We had signed a contract with a general contractor (Ehitustrust is the general contractor to construct the Skyon building – DW) who had to deal with most of these issues; however, we have been very active in this project ourselves and met the challenges together. But when the price for construction materials is rising by 40, 50, 100%, it implies serious difficulties.
One of the other troubles is the work force – there is serious lack of it. It causes a Deja vie: In 2008, any professional builder was in high demand as well.
Do you mean 2008 before the crisis?
Yes. And the story repeats itself. Builders are becoming less responsible as they know that their bosses have no choice. The issue must be quickly resolved at the government level. Too many builders from Ukraine and Belarus left and never returned.
The issue of lack of work force in the construction sector shall be resolved by the government.
I.e. what the state must do is only open the borders?
Open the borders and increase the work force entry quotes.
To what extent has the project budget changed?
The budget obviously increased but I would dare to say the exact numbers. The building brought no profit to the general subcontractor. On the other hand, this is a high-status project for all of us.
If I take it correctly, it was the general contractor who had to take a hit of „by-effects“ of the pandemic?
Surely, they faced a significant challenge. However, we were collaborating and looking for solutions. We believe that tight interaction with a general subcontractor eventually provides a better result than meticulous following the contract clauses.
How much does it cost to build up such building in the center of Tallinn?
More than 25 million euro.
What is, according to your estimation, the pay-off period?
I think, 7-8 years.
But you should remember that this is a developer project. We took the budget & engineering risks and the risks associated with tenants. This is what conditions the market-risk premium. However, there cannot be very high margin, considering the cost price of the building’s construction and its market value. We are not of that kind of developers who build to sell.
There are players of different types in our market. If a building is to be sold then the expenses are reduced to minimum and a buyer will have to deal with problems afterwards. When we are involved into construction we do it for ourselves and will have to deal with that building ourselves. If the construction quality is high, then the utility expenses will be low and no additional item for CAPEX will pop-up (capital expenditures – DW); the tenants will be satisfied. It is crucial for us: better to invest some more than some less.
Even obtaining the LEED platinum certificate is an incredibly complex process. Experts have been working together with us since the beginning of the project and until the completion stage; they examine the concept, the engineering solutions, the choice of material, the interior furnishing and green zones, the parking conditions… You have to gain 85 – 90 points out of 100. The certificate is very valuable for both owners and tenants. For instance, companies like Microsoft, Google would not consider a non-certified building.
The certificate is something new for us, and we are still in the work process. Now we are even considering a potential analysis of our portfolio to obtain as many such certificates as possible for our buildings.
Does it enable you to advance the rental fee?
It is not always a matter of rental fee. The certificate directly affects the liquidity of the building as today the investment funds highly appreciate such certificates.
Has Skyon been fully built for Capital Mill’s funds?
Yes. This is our brainchild, our history. In recent years, we became self-sufficient and now we have our own projects.
25 million or even more was spent by Capital Mill to construct the 26-storey building in the centre of Tallinn.
Two exchange companies – EfTEN and Baltic Horizon – work in the same sector but their share prices show the opposite trends. Partially, it is conditioned by their portfolios. What is your trend?
We are lucky not to have segments in our portfolio sensitive to the pandemic – such as hotels, restaurants, large shopping centres. We are engaged in logistics which today is highly demanded; we have shops in a walking distance, office buildings and production facilities. This helped us face the pandemic: the rental fees dropped only by 3–4%.
As to EfTEN and Baltic Horizon – these are two different players with different styles and approaches. This is why they show different results.
I.e. it is not a coincidence that the share prices show opposite trends.
Anyway, as to the segments. Considering the new trends and opportunities, today many processes can be easily managed remotely. What, in your opinion, will happen to office spaces?
These trends of working from home were very popular at the moment of pandemic. I cannot support such approach. I thing that a human is a social creature and needs to communicate, to participate in discussions and express himself / herself.
I’ve got wonderful conditions to work at home but I cannot concentrate when I am there, in a relaxing atmosphere. Which means that my efficiency drops enormously. It is hard to measure but I feel so. Although I’ve got some colleagues who like working at home and are fine with that, but there are only 10–15% of such workers. We can see now that mainly people have returned to offices.
I don’t mean it that remote work is something bad. Companies should trust their employees, however, people can be different and some of them may abuse the situation. When I cannot see a person I feel anxious – I cannot understand what the employees are doing and where we are now in terms of working process.
I.e. will there still be the demand for office spaces?
The demand for the commercial real estate will be preserved but there is a number of factors. The trend of redistribution of existing resources will continue, which means that companies will start looking for better conditions for the same money. This is the example of Skyon: we were offering our clients to move to a smaller space and to increase efficiency of the use of square meters per person. Often the total expenditures of a client did not change or increased insignificantly.
Then it is a matter of choice for a manager: whether to stay in an old building with their 20–30 square meters per person or to move to a new high-quality space with 12–15 square meters per person but enjoy the fresh air, the good infrastructure and other additional services. Sometimes it seems that the more the better, but in reality you have to pay for it while people’s efficiency remains the same.
Nevertheless, I suppose that many projects will be suspended. Because the construction cost is unacceptable for many. If the construction cost has grown by 30–40%, it must be absorbed somewhere else. Maybe at the expense of profitability, but why should you do it and take the risks?
Anyway, as I may predict, many developer projects will be suspended.
The second option is to rise the rental fee. However, it must be understood that if now we are renting out the spaces in the city centre for 16–20 euro per meter it is highly unlikely that someone will be willing to rent the spaces here for 20–25 euro. I think that the market is not ready for that yet. A certain slowdown will be registered for all segments of the commercial real estate.
It is simpler for the residential segment: you raise the rental fee, and if the market accepts it, you’ve kept your margin.
To a certain extent, you made an analogy with 2008. Can a similar collapse be predicted?
Everyone is still hoping on some price correction. Nevertheless, it is too early to expect that everything will resume its normal course.
Today senior centres are becoming more popular. Have you considered this segment?
We have been thinking of it from the very beginning. The only our concern was the absence of such culture here. Five years ago, it was still unacceptable to send a relative to be cared of by the other people. Although in many European countries, it is pretty normal.
I think the segment is very promising as the culture in society is changing inevitably. The second nuance is that for people from Finland it would be much cheaper to relocate a relative here and pay less for the senior centre services.
We have some groundwork but we are not actively engaged in development of the segment yet.
Recently we learned that you left the position of the head of Capital Mill. Have you decided to withdraw gradually from business?
No. For the last 10–12 years, I was dealing with all the issues, which is very hard. It is not possible to generate ideas, to sell, and to be engaged in operational matters at the same time. Our company must reach a new level in terms of corporate governance. In case we want to build a stable, long-term business we must implement the system into the company’s DNA so that it could start functioning without us. It would be a natural step to hire a person as a CEO. Obviously, there has been an urgent need in that. I have been looking for such person for several years, as this is a sensitive issue for me. And it would let me focus on the things I do best: business generation, agreements, investors, and banks. I think it brings only advantages to the company.
Today it is ultrafashionable to enter the exchange. Do you have similar plans?
No. But we’ve got an idea to enter the exchange.
No. I am not an authorized person to talk of it as my partner is dealing with it. We have been working on it for quite long. You will learn of everything in the near future.
In the near future – approximately when?
In six months.
Is it the local exchange?
Yes, we’ll start with the local one.
Does the idea relate to Capital Mill?
To Capital Group. It is going to be a new brand, a new company, and a new idea. Yet I cannot say any more.