Money-Growing: Built to Order

A Bit of History

The first-ever industrial park - Trafford Park - was built in Great Britain, in the 19th century. In 1896, a Briton by the name of Ernest Hooley purchased 10 hectares of land in Manchester, along the Manchester Ship Canal, and set about developing it as an industrial estate. He built a road network, put in engineering systems and then offered plots for sale and lease to industrial companies.

Remarkably, in 1910, Henry Ford established his first overseas plant in Trafford Park. Ten years later nearly as many as 300 U.S. firms ran offices and production facilities here. Trafford Park is still operating to this very day.

At the beginning of the 20th century, industrial parks mushroomed across the U.S. and Europe, chiefly in the vicinity of major cities, airports, railway hubs and seaports.

Modern industrial parks - like those operating across Western Europe and the United States - are vast developed territories housing office properties, warehouses and production facilities; environmentally friendly workshops of lower energy intensity, such as assembly or packaging plants, Noble Gibbons in association with CB Richard Ellis reports.

A modern industrial park is a combination of warehouses, production halls, mixed-use developments and office properties, to cater for a variety of companies occupying its premises.

A 'technopark' is a technology business park housing hi-tech production facilities, businesses and warehouse facilities, established with a view to ensure a more effective use of modern technologies and the growth of small and medium-sized companies.

The first technopark was built 50 years after Trafford Park opened. The U.S. Stanford University leased out a vacant plot of land to hi-tech production companies. These days there are over 150 technoparks operating in the United States. Europe's first technoparks were started in the early 1970s by the famous British universities Trinity College at the University of Cambridge and Heriot-Watt University in Edinburgh

A decade later technoparks sprang up across Europe and Asia. Nowadays technoparks are widespread in countries developing technology and science-based industries.

Industrial estates and technoparks have a lot in common, differing only in the type of activity those using them engage in. While technology parks are focused on the R&D potential of nearby scientific research institutes and the development of information technologies, industrial parks serve as a venue for all sorts of production facilities, warehouses and the transportation of products.

Alexei Novikov, leading industrial properties expert at Knight Frank, notes that in practice, people often confuse industrial estates and technoparks using the terms erroneously irrespective of their true meanings.

“In all fairness, I have to say that, as a rule, both elements - goods production and high technology production - can be found in any technology park or industrial park. It's quite another matter, though, that each estate is oriented either towards production as such or the development of technologies; the positioning of the estate thus depends on which of those components prevails,” Novikov explains.

The demand for properties within industrial estates and technoparks hinges on the growing competition and deepening specialization of producing companies. Given the practice of timely deliveries typical of a market economy, potential tenants - modern production companies - are not interested in excessive space for production and warehouse facilities.

They are more interested in renting industrial and warehouse properties than in securing the titles to land, developing buildings and paying property tax. Sometimes, small and medium-sized producers also rent equipment and in doing so cut their capital costs leaving it to the landlord to take care of the issues not related to their core activity.

As an option, the developer of an industrial or technology park may build offices or production and warehousing facilities against the long-term lease guarantee of the tenant.

Lease-back schemes are also practiced whereby a client develops a building for their own use within an industrial estate having agreed with the landlord that immediately after the property is commissioned he will sell to the landlord and then obtain a long-term leasehold to the property.

Alexei Averyanov, general director at Vesco Consulting, says that development of industrial and technology parks in the Moscow Region has certain advantages. The concentration of production facilities in individual, self-supporting centers is likely to boost production potential and considerably improve the ecological situation in Moscow.

At the same time, the relocation of production companies to out-of-town industrial parks is likely to bring about problems with retaining skilled staff. “Many experienced employees would hardly be happy at spending hours on the road to work every day which will force the company either to increase their paycheck substantially or look around for a workforce in the Moscow Region,” says Averyanov.

Market analysts believe that industrial and technology parks will become popular given a number of factors shaping the macroeconomic situation in general and the current state of affairs on the industrial property market in particular. They are stable industrial growth and the acute shortage of industrial properties against the background of ever-increasing demand.

Producers are increasingly seeking small production sites with the necessary communication lines and engineering systems in place as well as properties that can be easily redesigned to house different kinds of production.

The withdrawal of industrial facilities from the city is also expected to boost the expansion of industrial and technology parks. Besides, importers are interested in launching car assembly plants in the Moscow Region.

Oksana Tremsina, market analyst at KomStrin, believes that the market of industrial and technology parks is still quite a vacant niche while the demand for such properties is growing. “That is why industrial park projects will develop as an alternative to warehouses,” she says.

The emergence of such properties will create favorable conditions for future tenants and nearby towns, as well as for the developers of those projects, according Noble Gibbons in association with CB Richard Ellis

The key advantages of those projects are: warehouses, production facilities and offices in the same location; less time and lower costs of production; properties built to order; new jobs for local residents; high tax proceeds for local budgets and the development of public amenities in the area.

“The withdrawal of industrial facilities from the capital to custom-built industrial parks is quite natural and both Moscow and the Moscow Region benefit considerably from it,” says Alexei Averyanov. “The Moscow Region gets extra jobs and its industrial potential grows, as well as the taxable base. By the year 2010 the regional government plans to have 12 industrial parks developed on plots of land of 50 to 500 hectares.”

Difficult Conditions

Development of industrial and technology parks becomes possible in areas with a favorable business climate where there are vacant plots of land with convenient approach roads, engineering lines and an available workforce.

“The land factor is of key importance,” says Ruslan Suvorov, warehousing consultant at Colliers International. “Today, given the scarce supply of suitable plots in the areas where industrial or technology parks could be built, the availability of land suitable for industrial development is an important factor, along with the location and investment climate in the area. The suitability depends, first and foremost, on the category of the plot in question and the transportation network and public utilities.”

Lands along key motorways some 20-60 kilometers away from the Moscow outer ring road, or MKAD, are the most attractive in terms of developing industrial estates, says Alexei Averyanov.

“Such locations offer future clients of industrial parks an advantage by using the 'Moscow detour concrete-surfaced road' to solve their transportation problems,” adds Denis Gerasimov, head of office real estate at Leeds Property Group.

But, notes Oksana Tremsina, all large plots of land of over 100 hectares belong to agricultural companies, which means extra spending on the reclassification of arable land as industrial land.

The lack of transparency in land relations is the key problem impeding the development of industrial park markets in Russia, Noble Gibbons experts are convinced. In particular, those difficulties include problems arising when securing freehold titles; a lack of clear-cut rules governing the reclassification of arable land as industrial; the high cost of land; the lack of engineering systems, and red tape. For example, the Domodedovo industrial park initially scheduled to be commissioned in 2006 will not open before early 2007, as a result of problems obtaining a title to the land currently held in perpetual use.

Under the Land Code, the sale of municipally-owned lands to developers is possible only through an auction and only after the zoning regulations are adopted and take force. (Land Code, Articles 30 and 11). Effectively, those restrictions only make the development of industrial or technology parks possible where local authorities are willing to cooperate.

There are available plots suitable for industrial development around Moscow, says Denis Gerasimov. But they must meet certain requirements, such as power supplies and public utilities. It is not always easy to secure government permission for the allocation of additional power supplies where it is technically possible.

The development of large parks of over 100,000 square meters requires a workforce in the local area, as few companies can afford to arrange transportation to the workplace for their administrative staff living in other districts.

Oksana Tremsina believes that the investment climate in the area is of major importance for the development of industrial parks.

The investment climate in the Moscow Region differs from district to district. Some territorial units are better equipped to cooperate with investors - they run special departments, and local governments assist investors by cutting through the red tape. “While in other regions, due to certain reasons, the burden of 'settling issues' rests entirely with the investor. As a result, projects are delayed, costs grow,” she says.

In a move to lower administrative hurdles for potential investors the Moscow Region has adopted a program for the development of industrial districts around the capital.

“That is likely to remove the problems that stall the development of industrial parks, and create the conditions for new parks to appear,” says Vitaly Antonov, deputy general director for business development at Kulon.

“The Kulon-Istra industrial park - the project we are about to launch - is to become a flagship project for the Moscow Region. It will enable us to receive assistance from the authorities by solving important issues. The Istra government's willingness to develop the plot as an industrial estate has played an important role in determining our choice of venue for the project.”

The conditions for the successful operation of industrial and technology parks are:

· Location: 25-45 kilometers outside the MKAD;

· Plot size: 100 hectares and over;

· Proximity to motorways;

· Availability of sufficient office, warehousing and production facilities;

· Full engineering/communication lines

· Developed public amenities

(source: Leeds Property Group).

Industrial Development on the Rise

The development of modern industrial parks is a new business for commercial property developers in the Moscow Region.

“The first project was the industrial and warehousing facility Sheremetievo,” says Alexei Averyanov. “Its total space is some 19,000 square meters. The tenants are Akzo Nobel, Caterpillar, Ingersoll Rand - ABG, Cummins, Toyota and York. Most of the production facilities are environmentally friendly. The proximity to the Sheremetievo (airport) cargo terminal is the reason for the high demand for the properties within that warehouse and production complex.”

With nearly all the required permits secured, Kulon is about to launch the development of the 34-hectare industrial park Kulon-Istra, near the town of Istra, 40 km from MKAD, on Novorizhskoye Shosse.

Yelena Veselova, deputy marketing director at Kulon, says the new development will be divided into warehousing, production, administrative and technical maintenance sectors with a single network of communication and engineering lines, and a uniform architectural style.

The development site of some 170,000 square meters will house a 100,000-square-meter production and logistics zone, a 50,000-square-meter production zone and a 20,000-square-meter office zone that will include public amenities and a technical maintenance center.

“So far, there are no such properties in Moscow or the Moscow Region,” Veselova says. The strong points of the project are the convenient location and the size of the plot; in the future, the estate will offer a wide range of services, modern engineering systems and the possibility of warehouse and production facilities in the same location.

Kulon plans to hold a tender for the selection of general contractor in early 2006. The company has already received about 70 bids, Vitaly Antonov says. Construction is to be completed in 2008. The company plans to raise built-to-order production modules offering tenants the option of expanding their rentable space. Warehouse facilities will be offered for long-term lease.

The Domodedovo industrial park is under construction on a 10-hectare plot within the Domodedovo industrial zone, 14 kilometers from the MKAD and 10 kilometers from the airport, not far from the Domodedovo railway station. The 50,000-square-meter park will house 35,000 square meters of production and warehousing facilities and 7,500 square meters of office space.

Another development worthy of mentioning is the Na Istre (On the Istra River) industrial park (construction launched in 2004). The 30-hectare park will house offices, warehouses and production facilities. The largest tenants are Toyota and the ventilation equipment producer York.

Three industrial zones - Korystovo, Lidy and Aladyino - are to be developed in the Kashira District of the Moscow Region. The multifunctional 90-hectare Korystovo Park, housing a logistics center, terminals, warehouses and hotel facilities, will emerge at the intersection of the Moscow-Don and Moscow-Caspian motorways.

The 50-hectare Lidy industrial park, to be developed in the vicinity of Lidy village, will cater for the food and agricultural produce processing industries. The 65-hectare Aladyino project is to host firms manufacturing home appliances.

Chinese investors, too, have showed interest in developing an industrial park near Moscow. They plan to build approximately 10,000 square meters of industrial properties in the region. The Moscow Region government is expected to announce the results of ongoing talks with the Chinese party this fall.

Techno Style

Andrei Patrushev, public relations chief at Knight Frank, says the Moscow Region still has no full-fledged technology parks. The Zelenograd technopark lies within the territory of Moscow. The park was established on the basis of local electrical engineering enterprises and occupies a 4-storied block comprising 10,000 square meters of production facilities and 1,500 square meters of offices.

The company specializes in new technology including semi-conductor and electric vacuum engineering, microelectronics, software development and telecom engineering, optic and laser technology, monitoring and medical equipment production, and so on. The technopark tenants are offered R&D services at preferential rates.

The largest technology park currently under construction in Russia is the Chekhov-Technopark project by Stroiindustria, an affiliate company of BAMO Group. The 740-hectare building plot is situated in the Chekhov District of the Moscow Region, 45 kilometers outside the MKAD on the Simferopol Motorway near the town of Chekhov.

The first stage of the estate is to be commissioned in late 2006. The developer plans to sell production and warehousing facilities on the plots of land ranging from 5 to 15 hectares to interested buyers. The future technopark will house office properties, a research and design bureau, a garage, logistics facilities, wood-processing enterprises, metal workshops, concrete components plants, companies producing sandwich panels, warehouse shelving, fireproof doors and gates and aluminum frames, and an asphalt plant.

Financial Factor

The development of industrial and technology parks requires huge investments. Until recently, investors took much more interest in the development of residential properties, office centers and shopping malls. “The payback period on industrial parks and technoparks amounts to 10-15 years on average, which is unacceptable for the capital where a retail center pays off in about five years,” says Andrei Patrushev.

However, the growing demand for industrial and warehousing facilities has prompted investors to revise their policies and take up projects they would never have ventured into before. For example, according to expert estimates, the development of Chekhov Technopark will cost Stroiindustria at least $150 million. The company has already spent over $30 million on the project, which was launched in early 2004.

The total projected investment in the Kulon-Istra project amounts to some $70 million, says Vitaly Antonov. The company plans to spend its own cash, investment funds, and a loan to be extended by the European Bank for Reconstruction and Development. The Domodedovo park is estimated to be worth approximately $25 million.

The exact rental rates for the properties within the industrial and technology parks are yet to be set. Kulon plans to charge tenants around $140 per square meter per year for warehouse properties; the Domodedovo properties are to be rented out at about $160 per square meter.

Prospects

“The demand for production facilities is not as thoroughly researched as warehouse properties,” notes Ruslan Suvorov. “As the economy grows it is logical to assume that the trend for a growth in consumption will become stronger in the future with both Russian and international firms showing more interest in production sites of their own on the territory of the Moscow Region.

“In the near future the supply will be affected by a shortage of suitable building plots and lack of communication lines. One should expect new built-to-order projects. In the longer term, hopefully, an effective program governing distribution of new industrial parks and facilities across the region will be adopted which will improve the investment climate and bring about the development of new industrial zones.”

Andrei Patrushev expects professional technoparks to appear in the remote districts of the region and on the Moscow Region's borders with other provinces where the cost of land is acceptable, educational institutions are strong and skilled workers are available.

“The development of industrial parks is impeded largely as a result of the problems of securing plots,” says Vitaly Antonov. “We have grounds to assume that the situation will change radically within the next five years, and the authorities will play an important role in settling land issues.”

The market volume and growth rates will depend not only on location, quality of construction, etc., but also on political factors, the financial expectations of developers, and the financial and physical capabilities of production firms, Denis Gerasimov notes. “Time and the initial efforts will show how that format will adapt to Russia, whether the production companies, including those being moved out of central Moscow take an interest in industrial parks, and whether developers and potential tenants succeed in achieving mutual understanding,” he adds.