On any night out with expats in Moscow, you are bound to meet somebody who is working in, or is involved with fit out, construction or project management. This sector has been, and most likely will continue to be, a place where professionals can really make a difference. In this interview, Mark Smith the Managing Director of the Sunbury Heights Group, tells us why expats do so well in this sector, and for those us who arenât in the club; what exactly fit out and project management (PM) actually mean.
What exactly is fit out?
Fit out is a term that is almost universally employed to mean the completion of an office space, which is leased on an incomplete basis. In Russia, most office spaces are leased at shell and core stage, which is basically when there are simply concrete slabs on the floors and ceilings, no heating or air conditioning, no internal walls, no electrical services, no low voltage wiring or switch work, or anything like that. So fit out means all the work that brings the office up to its final completed stage. The focus in the fit out industry here has been on offices, because the clients are generally corporations which generally speaking know what they want, and it is relatively easy to work with them. Residential fit out, especially high end, is also a significant but more difficult segment of the market, because the clients tend to be more picky, more temperamental, more likely to change their minds about the colours of the walls, the type of materials etc.
When did the fit out market start in Moscow?
As long as buildings have been built there has always been a fit out market, because they have always needed to be completed. In terms of the modern office market, I think it is more interesting to ask, when did the modern office market begin? In terms of how we think of modern offices in Russia, the categorisation into class A, B and C sectors; that started only in the early 1990s when the large international real estate agents began to work here. Iâm thinking about companies like Stiles and Riabokobylko, then Cushman and Wakefield, Jones Lang LaSalle, CBRE and Noble Gibbons. They all brought international standards with them, and the market really took off.
In your estimation, how many companies are there working on the market. What sort of size are they?
There are too many companies working on the market frankly speaking, for the amount of business that exists. If you look at the office fit out sector, itâs split into different sub sectors. You get the designers, the architects, the engineers, and you get a lot of international architects based here. There are also project management firms, which are another subsector of the fit out market. Project managers were and are almost universally foreign companies, and probably 90% of those were British. Now thereâs a question: why were most project managers here British when we are in the Russian capital? I think partially the answer to that question is that we were in the right place at the right time, many of us started our companies at the same time, and partially because the Brits are known for having a sense of fair play I suppose.
Who are the major players on the market now, and why have they remained the major players now?
In the architectural sector, you have still got a lot of very strong foreign architects here: companies such as Aukett Swanke or TP Bennett, or foreign-led firms that established here, such as GDS. The architectural market is exposed to more local competition though, than many of the other sub-sectors. If you move to engineering and design, you will find that foreign companies dominate. Many of the people who created engineering design companies here which are dominant in this field, all worked for the giant of engineering design companies in the world, which is Ove Arup. Francois Raulier founded RBTT and he used to be the deputy director of Arup here, MEP Engineering, another British owned company, is owned by Adrian Salter a former employee of Arup, and so on.
In the fit out and construction sector, my own company has been the largest project management company by volume of work for three of the past four years, but there are other strong companies as well; there is a German company Drees and Sommer, other western companies such as Turner and Townsend and Mott McDonald and the foreign real estate agents which have all moved into project management as well. There are very few home-grown project management companies and we could all speculate on the reasons for that. The global leaders in PM such as Mace and E.C. Harris are here, but are not the leaders here. Local companies are the strongest within the general contractor sub section, however you still have a lot of foreign companies. The first foreign general contractor company with a real focus on fit-out was Mercury Construction. Mercury, a billion dollar Irish company, has large operations here and continues to be very successful. Then there are a host of Turkish companies; such as Altaca and Fudes, which do a relatively large amount of work here, and they are competing with a large number of local fit out companies led by Gint-M and KMT.
Letâs move on to the Moscow Construction and Fit Out Association. Did you found it?
I did, the Moscow Construction and Fit Out Association started on LinkedIn. It grew extremely quickly, to about a thousand members. Because of the obvious interest I got together a steering committee of prominent local industry players. Everybody had their own ideas about ways in which the Moscow fit out and construction market could be made more professional, and standards could be raised. Subsequent to that, the steering committee decided to form an official non-profit association here, which wasnât easy to do. Now the association has about 2,500 members online. We organise events ranging from networking events which generally take place monthly, to debates on subjects of industry interest which take place once every two or three months, to a large awards ceremony, the first of which was held in November (see pages 56-57 in this issue) to recognise excellence in our industry. There are many other initiatives, such as a rates table for architects and engineers that we are creating, so that there is some standard fee system which can be used by architects and engineers when they bid for projects. We are organising a standard form of contract, because the contractual form here is very fluid. Also, significantly, we are just about to produce a book called Guide To Fit Out, which will be published next year. This takes the client through the steps that they would go through if they are just about to expand and open a new office. It tells them what they need to do first, what the key risks are, how much can they expect to spend, all of these good points and many more. So the Moscow Construction and Fit Out Association really has got some momentum at the moment, and we have many of the industryâs leaders involved in it.
Statements that we make are listened to, we issue an annual database of projects on the market, where every single fit out project is listed, and which company worked on each one. This allows us to assess market leaders, and assess our own market penetration. It also allows us to extrapolate a lot of useful information, such as that no company has more than 10% of the market. It is quite sobering to compare this kind of fragmentation of the market with what is happening in London, where ISG alone have nearly 30% of the office fit-out market. One of the issues that I have been discussing with our members is why there has not been a process of consolidation here as the market has declined?
Is there a feeling of collaboration between members?
Yes, I think there is. The fit out and construction community understands that we are all dealing with the same problems. We are battling with a construction code which doesnât stay static, and which is partially self-contradictory. It puts huge influence in the hands of the individual inspectors, which is an unusual thing. Of course we compete but at the end of the day, we understand that we are in the same market. We have one key competitor that I lunch with when one of us wins a tender, with the winner paying the bill. So we are fairly close, especially in the expat construction market.
How long have you been in Moscow, and what brought you here?
Iâve been in Moscow since 1987. I came here as a journalist, I was a stringer for the New Statesman magazine, after that I worked for TASS news agency for two years. Then I retrained in the United States and opened my own PM company. So I have been here most of my adult life. I still think Moscow is a tremendously exciting place to be. I think despite the current environment, it has huge potential. But itâs challenging, more challenging than many other developed markets and working day to day here gives you a level of adrenalin which is almost addictive, which is something you feel if you relocate to quieter cities.
What does your company Sunbury Heights do?
We are a company of professional project managers. We are international now, but I formed the company in Moscow about 16 years ago. The idea was that I would assist companies; primarily foreign companies then, to assist them manage the construction of their projects â whether it be a fit out, or a new building. Because we were one of the first few such companies, all British I have to say, that started out here, we rapidly became one of the more dominant companies, and eventually became the dominant company in fit out. When we started most of our clients were foreign companies, they at least understood what project management was. Now most local companies understand that employing a project management company is a no-brainer, it will save money. Over the past four years we have done four projects on a non-fee basis, where we collect 50% of the savings that the company would have spent without our help, and we have made more money on those projects than we did from projects that we charge a fee from.
How do you see the market in the next 1-2 years and then the next 3-6 years?
I think the market over the next two years is going to be really tough. It is tough now, a lot of the smaller players are going to disappear. This is inevitable, as there isnât enough work to sustain everybody. People ask me if this is wholly due to the Ukraine situation and that answer is not adequate. There are international trends that Russia is not immune from, and in general offices are becoming smaller. People are adopting the idea of mobile working far more, so they are reducing the size of their offices. Both these factors have had an effect of increasing the vacancy rate of class A office space in Moscow. Now, as we are speaking, about 20% of class A office space in Moscow lies vacant, and this is before the completion of Moscow City. But in 4-6 years I think the market will see an upturn, I am very confident about this market; itâs large and sophisticated, with an educated workforce and a fundamentally secure raw materials base. I think that companies that are here for the long term and focus on the market as it is, not how they would like it to be, will prevail.