Money-Growing: Expanding Warehouse Chains

Available market analysis data and some of the plans publicly announced recently show that a number of development firms and diversified groups of companies are set to conquer new lands outside the Russian capital. Having secured a strong foothold on the Moscow market they are now seeking to expand their chains into other economically developed regions of Russia and the CIS countries (former Soviet republics).

As a result, the capital is set to become the starting point for a number of so-called logistics axes as developers and logistics operators build large distribution centers in major Russian cities to service each given region and provide storage facilities for goods imported from remote locations. Thus, it will be possible for numerous goods imported from Europe and Asia to be transported directly to the provinces, bypassing Moscow.

However absurd it may sound, in days gone by goods imported from the Orient quite often used to be shipped, say, to Rostov-on-Don via Moscow, says Alexei Novikov, head of warehouse and industrial real estate at Knight Frank realty.

The Russian regions have long experienced a severe shortage of distribution facilities. The time has finally come for major developers and warehouse investors to divide the regional market and snap up the best sites. Those operators are scarce and they control the largest projects in the country. Such are the trends that have been taking shape on the market over the past few months.

Bracing for Expansion

The projects in question involve the development of prime, top-quality warehouse facilities, rated as class A and B. It would not be true to say that regional cities still have not seen any such projects yet; nevertheless, those warehouses were raised erratically and unevenly, Alexei Novikov agrees. What is required now is a comprehensive approach and a strategy. Each town in Europe has a distribution center of its own. In Russia, Moscow is the only city enjoying that privilege.

Warehouse development, logistics services and retail chains are closely connected markets. Recent years have seen a boom in retail. Heavily dependent on foreign imports, Russia has witnessed an influx of international retail brands active in the light and food industries, furniture manufacturing and other sectors. IKEA, Ramstore, Auchan, Real, Metro, OBI and other retail giants have launched operations in the country. Famous brands of clothes, footwear and grocery products are also very popular with Russian consumers.

“The Moscow market remains lucrative and its growth potential is not exhausted yet,” says Yelena Tsaturova, senior manager at Ernst & Young. “These days most retail companies focus their growth strategy namely on regional markets which – taken together – exceed that of the Moscow Region considerably. On the whole, the situation on the regional markets is reminiscent of Moscow two or three years ago.”

The logistics services market is growing, too. Being used to the comfortable working conditions of top quality modern warehouses, foreign firms, such as Nestle, won’t put up with storing their goods at Soviet-era warehouses. Following in the retailers’ footsteps are international logistics operators, as well as domestic companies seeking to match European standards. Their projects attract investors for and developers of warehouse terminals.

Numerous examples show that a variety of schemes are practiced. For example, Auchan prefers working with the same logistics companies for years. The Eldorado chain has set up its own logistics division. As regards the warehouses, most of the large projects in that sector are custom-built, developed to order for specific logistics operators. An example is the 200,000-square-meter Pushkino facility rented by DHL and Relogix.

Some projects are being developed by groups of companies that include a logistics operator and a developer (RosEuroGroup). Quite often logistics firms take up the role of developers and co-investors and raise facilities for their own use (FM-Logistic, Tablogix). To all appearances, many of those schemes will be used in the regions in the near future.

Regional Pie

Judging by the plans reported by either the developers themselves or real estate consultants, construction of major terminals is to be launched, first and foremost, in the cities with populations of over 1 million – St. Petersburg, Samara, Nizhny Novgorod, Yekaterinburg, and in the large cities of the CIS, for example in Kiev.

Retail operators are rapidly developing their chains in all of those cities, hence, the demand for logistics services. Pyaterochka has pledged to spend $200 million on the development of storage facilities in all the locations where the chain has its outlets, in the course of ten years. Each regional capital will be distributing goods imported from other parts of Russia and other countries across the territory of its region, Novikov explains. Those cities play the role of strategically important locations, in terms of warehouse development.

One of those is St. Petersburg from where goods imported from Europe are shipped to Moscow and all across the country. St. Petersburg, located next to the state border, is a sea port, and sea shipping is a lot cheaper than, say, air transport. Thus, St. Petersburg is, indeed, the northern gateway of Russia. Cargo trucks from St. Petersburg enter Moscow along the Leningradskoye Shosse, which largely explains the commercial development boom in that part of the capital.

Kiev’s mission is different. The rapidly growing Ukrainian capital attracts Moscow producers eager to market their goods there. In this case, cargos flow in a different direction – from the Russian capital to Kiev. Goods from Asia are shipped into Russia by rail, chiefly by the Trans-Siberian Railway. According to a report by Knight Frank, the population of Kiev is over 2.5 million. The volume of freight traffic in 2005 stood at 827 million tons, including 460 million tons shipped by rail, 20.6 million tons shipped by waterways and 124.4 million tons by motorway.

Ukraine’s capital has only 100,000sqm of modern storage facilities, which equals approximately half of the total size of a large terminal near Moscow, such as, for example, a project by the Multinational Logistics Partnership on Leningradskoye Shosse. The total demand for class A and B warehouses in Kiev exceeds 500,000sqm.

Novosibirsk, a large city in Russian Siberia, is a major transportation hub where freight routes from Asia and Europe meet. The city stands at the crossroads of key railway routes. Besides, Novosibirsk has a river port and an international airport. The population is over 1.4 million. The total supply of completed warehouse developments of prime quality is only 50,000sqm, while the demands is estimated at 250,000sqm.

Rostov-on-Don is a port of five seas, a large industrial, logistics, scientific and cultural center in southern Russia, with a population over 1 million. Prime warehouses available here measure 80,000sqm in total. The city is still short of nearly 150,000sqm of class A facilities.

Developers active on the Moscow market, including Capital Partners, Coalco, AIG Lincoln and RIGroup, polled by Vedomosti, admit that so far they have no clear-cut plans to move into the provinces within the next year or two. RosEuroGroup, MLP (Multinational Logistics Partnership) and Tablogix, on the contrary, have reported they are nurturing large-scale projects across Russia.

MLP’s Vector

Multinational Logistics Partnership, or MLP, is set to expand its presence in the provinces this year. Priority targets are St. Petersburg and Kiev, Michel Pascalis, chairman and partner at MLP, has reported.

In Moscow, MLP is currently developing two terminals – on Leningradskoye Shosse and in the town of Podolsk in the Moscow countryside, measuring 200,000sqm each. A network of world-class warehouse facilities operating under a single brand will help meet the demand for prime warehouses generated by major foreign and Russian firms, says Paskalis. The partnership plans to raise two large warehouse terminals in St. Petersburg and Kiev – MLP St. Petersburg and MLP Kiev – of 200,000sqm each. Each building site measures 40 hectares. MLP executives believe Kiev has very good prospects.

In other cities, such as Yekaterinburg, the company plans to develop 100,000sqm facilities on sites measuring 20 hectares. The partnership, however, has refused to further elaborate, saying only that they planned to spend at least $800 million on regional expansion.

Stakes in MLP are held by companies controlled by Russian magnates Alexander Mamut and Viktor Vexelberg and Igor Kolomoisky, head of the Ukraine-based Privat Group, Vedomosti reported earlier. The partnership was set up two years ago with a view to developing warehouse projects in Russia. Michel Pascalis has been working on the Russian market for over a decade. Before moving to MLP he worked as Central and Eastern European managing director at Jones Lang LaSalle.

This year Germany’s Hypo Real Estate International extended a $150 million loan to MLP for construction of the Podolsk warehouse. Renova Capital, Privat and Alexander Mamut’s companies each hold approximately 30% shares in MLP.

Into Siberia and Southwards

Another major market player, RosEuroDevelopment, which is part of RosEuroGroup, is set to build a network of warehouse terminals across Russia, a group spokesperson confirmed. One of the projects is the national logistics park under construction in the city of Ob, Novosibirsk Region. The company has already spent over 1 billion rubles on the project. Taking part in the project is the National Logistics Company (NLK), which is also a part of RosEuroGroup. In late 2005 NLK was acquired by Citygroup.

The warehouse terminal in Ob, to appear near the Tolmachyovo airport, is the first-ever project on such scale to be launched in the area, Novosibirsk governor Viktor Tolokonsky said as he spoke at the official opening ceremony. Another terminal is to be built in the town of Bataisk, Rostov Region, 10 km from Rostov-on-Don. The group has already launched construction of the prime class A 50,000sqm facility, estimated to be worth 1 billion rubles.

RosEuroGroup is a group of six companies, that includes RosEuroBank and RosEuroDevelopment (office and housing construction), logistics operator NLK, wholesale flower supplier 7 Tsvetov and RosEuroConsult (a consulting and legal services firm). NLK’s spokesperson Polina Vinokurova has reported that as of 2006 the company will focus on the development of logistics infrastructure in the Russian regions.