Money Growing: On The Eve of The Big Bang

A handful of world class warehouse terminals operating in St. Petersburg have been built by major producers and retail chains for their own use. Meanwhile, the city is clearly short of as much as 2 million square meters of professional warehouse space, according to market analysts.

With competition in office and retail growing, investors are stepping up their activities in the warehouse sector, despite specific difficulties arising during the implementation of such projects. Major logistics operators, too, have been increasingly active over the past 12 months, announcing their ambitious plans to develop new terminals. Not all of those will be implemented, of course, with the set deadlines for their completion being constantly postponed, as per usual.

But even the pessimists agree that the sector is on the threshold of a Big Bang, which is likely to result in considerable expansion of the modern warehouse property market within the next couple of years.

Short of Quality Storage

As of Jan. 1, 2005 St. Petersburg had 4,039 warehouse facilities measuring a total of 5,007,900sqm, the city’s Inventory and Property Valuation Department reports. Built-in storage makes up another 726,900sqm. Thus, the city’s storage capacity accounts for a total of 5,734,800sqm (8.6%) of the total non-residential stock in St. Petersburg.

In terms of volume of warehouse facilities, industrial districts hold the lead: Kirovsky with 668,000sqm, Moskovsky (638,000sqm) and Frunzensky (582,500sqm), where most of the city’s Soviet-era plants and factories are concentrated.

Nearly 50% of all storage (or 2.62 million square meters) caters for foreign trade, Becar Realty’s analysts report. That includes 2 million square meters of port facilities while the rest are internal terminals used for storing goods, re-packaging and customs clearance.

“Altogether, St. Petersburg has over 100 more or less large warehouse facilities offering their clients a range of services matching modern-day requirements,” says Igor Luchkov, head of the valuation and analysis department at Becar Realty. “The number of smaller sites and primitive makeshift storage facilities is beyond all calculation. Virtually every large enterprise has warehouses or properties redesigned as storage facilities on its premises, and available for rent. The titles to approximately 50% of those properties have never been duly registered.”

Approximately 155,000sqm (3% of the total supply) of storage facilities can be rated as class A facilities, Becar reports. Some 206,000sqm account for class B (4%). In comparison: Moscow has a total of 2 million square meters of quality warehouses rated as class A and B. St. Petersburg falls many times – 8 to 20 – behind eastern European capitals, in terms of supply of professional storage space per 1,000 residents.

What makes matters worse is the fact that, according to the estimates of Management Company PSB, out of the city’s 360,000sqm of class A and B storage space, only 100,000sqm is available on the market, while most is being used by their owners for their own commercial operations.

Firms such as Agrotorg (that runs the Pyaterochka retail chain), JFC, Wrigley and others run their own terminals. In the fall of 2005, British American Tobacco Russia launched its logistics terminal of nearly 27,000sqm in the village of Olgino. The projected payback period for the $20 million development – designed to cater for all of the company’s freight in northwestern Russia – is 8 years.

Last year, modern warehouse facilities were also opened by Pepsi Bottling Group, which spent $6.5 million on the development of 7,500 square meters in the Parnas District, as well as the Iskrasoft retail chain (10,000sqm in Kolpino), Foodline (12,000sqm at 254 Ligovsky Prospekt).

A 12,000-square-meter terminal, worth $7 million, is slated to be commissioned in 2006, by Sunway, a major fruit importer. The facility is being raised on a 3-hectare plot of land in Shushary. Moscow-based ice cream producer Ramzai plans to enter the local market with its own distribution centers. The Mikoyan meat firm is also set to build a terminal in Shushary.

“Retail and logistics firms are forced to take on the role of developers and draw funds out of their core business. That shows that the warehouse market is underdeveloped,” says Nikolai Pashkov, head of marketing at St. Petersburg Real Estate Corporation.

Meanwhile, rental rates in the sector have been growing since 2000, Becar analysts report. Although the times are gone when rates grew rapidly (in 2002 they rocketed by nearly 50%) the tendency remains. In the year 2005, rentals grew by 10-15%. Colliers International St. Petersburg report lower figures – 5-8% over the past year. Colliers’ analysts expect the growth to continue at approximately the same rate.

Rental rates charged for storage in satisfactory conditions range from $5 to $7 per square meter per month. Specialized, well-equipped warehouses with excellent interiors are rented at $9 to $14 per square meter. The highest demand is for properties measuring 1,500 to 2,000sqm, Becar reports. They are rented mostly by medium-size and major producers and retail chains. Considerable demand exists for properties of 500 to 1,000sqm.

Colliers International reports that the cost of secure storage services at prime warehouse facilities stands at $0.30 to $0.40 per pallet per day, the cost of cargo handling services excluded.

Sale prices in the sector range from $350 to $700 per square meter. Newly built quality storage facilities can be put up for sale at $700 to $1,000 per square meter.

Ambitious Storage Keepers

As many as 50,000 to 75,000 square meters of modern warehouse properties were commissioned in St. Petersburg in 2005, according to estimates by various realty consultants. Their forecasts regarding the future of warehouse development differ even more considerably.

Becar expects some 500,000sqm of new and redeveloped facilities to be launched into operation before the end of 2006.

Analysts at St. Petersburg Real Estate are far more cautious in their conclusions, their forecast being only 275,000sqm. According to their reports, in early 2006, 27 warehouse developments were either on the drawing board or under construction, while another eight were at the stage of survey work. Developers of three more projects were still in the process of negotiating their plans with the authorities.

Investors intend to build 897,000sqm of warehouse facilities, on 320 hectares of land. But so far it is still too early to speak of an exact completion date or their precise characteristics.

“Developers of warehouse terminals usually opt for plots outside densely populated urban areas, in proximity to the outer ring road (KAD), major motorways and their intersections. That means, they will most likely have to be prepared to work on a site with no engineering or communication lines in place. Quite often, investors are not sure whether they will be able to secure water supplies, sewage disposal facilities, and, most importantly, electric power capacity. With no infrastructure available, the future of the project may be put in doubt or become unpredictable in terms of costs and timing. Another problem that often arises is the lack of title deeds, the need to reclassify arable land, etc.,” says Nikolai Pashkov.

Most warehouse facilities slated to be commissioned in the near future are situated in the districts of Vyborgsky, Krasnogvardeisky, Moskovsky and Pushkinsky. In Vyborgsky, new projects are concentrated chiefly at Parnas – a non-residential area formed in the 1970s and 1980s, with a developed infrastructure, but virtually no vacant sites available.

Investors are also showing an interest in the area at the intersection of Vyborgskoye Shosse and the KAD. The Ruchyi industrial estate is growing in the eastern Krasnogvardeisky District. In the Moskovsky District (southwest) storage facilities are concentrated within the Predportovaya non-residential zone; Pushkinsky (south) in the zone of Shushary. Incidentally, Pushkinsky is the absolute leader in terms of the scale of projects being developed there (as many as 156 hectares have already been reserved in the area for warehouse development).

“Areas in the south are the most popular with investors, given the proximity to the port and strategically important transport links to Moscow. Besides, Shushary formerly belonged to collective farms, and there are plenty of plots available for development in the area,” Igor Luchkov explains.

In line with the newly adopted general plan for city development, Shushary-2, Predportovaya-3, Neudorf in Strelnya, as well as Metallostroi-2 and Konnaya Lakhta, are included in the priority list of areas slated for industrial development. Recently the Yugo-Zapadnaya zone has also been increasingly mentioned in this category. In 2005, the city allocated 260 million rubles for the development of those territories.

Special attention is being attached to Shushary where a 220-hectare plot has been chosen by Toyota as a site for its factory in Russia. The city government has assumed the obligations to build roads and put in engineering lines, which will require up to $100 million. The city officials have pledged to ensure comprehensive development of the area, providing for the needs of prospective developers, as well as present-day consumers. Besides, Moskovskaya Tovarnaya train station will be moved from the city center to Shushary-3, to create additional incentives for the development of that zone.

In a move to encourage investors, Smolny (the St. Petersburg city authority) has set the lowest possible cadastre value of land in Predportovaya, Shushary, Metallostroi, Konnaya Lakhta, and partially Parnas, at 750 rubles per square meter (the land-use tax rate is 1.5% of that amount).

Most investment projects in Shushary are being carried out on privately-owned lands, purchased by developers from collective farms. The National Container Company (NCC) is set to spend up to $150 million on a project it has launched in the area, on a plot measuring 90 hectares. NCC plans to open the new terminal by 2016. More precise data concerning the project parameters are not yet available. NCC is the owner of the largest terminal in the Big Port of St. Petersburg (JSC First Container Terminal). The company is also involved in construction of a container facility in the port of Ust-Lug.

A 128,000-square-meter class A logistics center, to be developed on a 26-hectare site in Shushary, is currently on the drawing board of the Resurs-Ekonomia company. The $70 million facility will be phased in during 2007, and will be operated by Avalon Logistics, which already runs a warehouse facility in Parnas, Alexander Ustinov, general director at Resurs-Ekonomia, has reported.

The city’s largest class A transport and logistics center is under construction in the neighboring Predportovaya-1 zone, at 73 Kubinskaya Street. The new facility will feature an internal container depot (28,600sqm, 2,500 to 4,000 TEU) with the highest capacity in this country, an 18,000-ton 9,200-square-meter refrigerated storage space, offices and auxiliary facilities measuring 4,200sqm in total, and a railway track.

The Interterminal-Predportovy complex, estimated to be worth up to $65 million, will be phased in during 2006. The projected payback period is five years. The investor is Interterminal, co-owned by Big City and Green Mark. The group has already built the 11.4-hectare warehouse facility Interterminal Parnas in northern St. Petersburg.

Another project to be commissioned shortly is the Predportovy logistics center, under construction on a neighboring site, by Eurosib Group. The 4,500-square-meter facility, worth $15 million, occupies a territory of 4.9 hectares. The projected container terminal capacity is 1,500 TEU. The projected payback is seven years. All the above-mentioned facilities are being built by logistics operators or their affiliates for their own use.

“Certain producers and retailers are moving into logistics because the market for such services is underdeveloped,” says Artur Kim, head of the industrial parks and business centers department at Management Company PSB. “But, of course, professional companies have an advantage. For example, they are able to cope with the seasonal nature of that business – a problem faced by those whose main area of specialization is something other than warehousing.”

“Within the next couple of years St. Petersburg will have professional world class facilities measuring up to 200,000sqm. For the time being, most transit cargoes moving through the city are being processed and stored in Moscow, Finland or the Baltic States. But the situation will change after the announced developments are completed,” holds Alexei Filimonov, head of Astera Oncore.

“The warehouse property sector will be dominated by logistics operators over the next 2 to 3 years,” Nikolai Pashkov is convinced. “While the standard payback period may take 8 to 9 years, logistics operators are able to speed up the process by deriving extra income from services. The open market is still growing chiefly due to small facilities or redevelopments. So far, there are no major developers in the sector, capable of raising large complexes on their own.”

Investment on the Rise

Investors only started showing an interest in warehouse property recently – a year or two ago, says Igor Luchov. Storage facilities under construction for further sale or rent rarely measure more than 10,000 to 15,000sqm. One of the pilot projects completed in 2005 is a 14,000-square-meter class A storage on Moskovskoye Shosse, raised by PNK Logistics on a 2.9-hecrate plot formerly owned by the Shushary farm. The property was put up for sale at $850 per square meter. Whether it has been sold or not remains unclear.

JSC Korta – a part of the production and building group Korta – plans to open three one-storied hangar type storage facilities, measuring a total of 6,000sqm, in April. Properties rated as class B occupy a 2-hectare plot at 82 Kubinskaya. The title to the plot is held by the investor. By late 2006, the company plans to complete construction of an office and retail complex (1,100sqm) on the same site. The project is estimated to be worth $1.5 million.

“Warehouse development is a new line of business for us,” says Larisa Karchenko, head of property management at Korta. “We learned about the shortage from personal experience.” Warehouses on Kubinskaya are rented at 9 c.c.u. (or “conventional currency units”) per square meter per month, mostly in blocks measuring 500 to 700 meters. (The size of the currency unit is based on the dollar or euro exchange rate.)

In March, Korta will launch construction of one more warehouse facility, to be rated as class B+, at 17 Alexander Farm Prospekt. Korta has secured a freehold to the plot. The new facility will comprise seven detached sections, measuring 4,500sqm in total. The complex will be phased in, in stages during this year. The project is estimated to be worth $2 million.

Prospective tenants have expressed their readiness to join the project as co-investors by covering rental charges for six months ahead. Rates range from 7-8 c.c.u. per square meter, Karchenko says. Korta is mulling plans to develop other warehouse projects, as well; one of those could be launched in the village of Murino, north of the city. The company’s analysts set the optimum size of a storage facility at up to 20,000sqm.

OOO Magistral, a company that is part of General Construction Company Group, is set to build a 8,300-square-meter class A facility on a 5.5-hectare plot at 17 Magnitogorskaya Street, by early 2007. The group holds the title to the site. The project, worth $7 million, is expected to pay back in 4 to 5 years. “We plan to rent out the property to a single tenant at the rate of 12 c.c.u. per square meter per month. We do not intend to sell it,” deputy general director in charge of commercial affairs at Magistral, Alexander Semyonov, says.

The largest project carried out in the city these days is the Old Village Terminal (Staraya Derevnya), by a company of the same name. The multifunctional complex with warehouses, retail and office properties (a total of 36,000sqm) is under construction at 12 Mebelnaya Street (Primorsky District), on the site of an uncompleted development, formerly owned by a research institute for broadcasting appliances. The new facility will be made of several adjacent buildings, 2-7 stories high.

The project will be implemented in two stages. The first stage to be phased in this fall will feature a 3-storied class B warehouse terminal (21,000sqm), equipped with lifts with a carrying capacity of 3.2 to 5 tons, and a loading gate catering for as many as 20 Eurovans at a time. The height of the ceilings are 5.5 to 8 meters. Boris Tomalak, general director of the SKS Padams company – the general contractor for the project – says the storage areas will either be sold in full to a single logistics operator, at $600 per square meter, or rented also to a single tenant, at $10 per square meter per month.

Property analysts are certain that investor activity in the sector will grow gradually. “That is the only niche of the commercial property market where investors can enter freely. Despite specific problems, warehouse construction is cheaper than, say, that of business centers. Given the shortage of storage facilities, the risks are low. Besides, the St. Petersburg government has pledged support to investors capable of turning the city into a transport and logistics center,” Nikolai Pashkov explains.

Artur Kim of Management Company PSB says that professional warehouses may bring returns of up to 15-18% per year and pay back within 4-7 years. The cost of construction of a class A facility is $650 to 850 per square meter; for class B properties it is $400 to 600 per square meter.