Money-Growing: A Long Way to Go for Warehouse Developers

Foreigners took part in all of the major deals the market has seen over the past 12 months. But foreign brands do not always belong to foreign firms. In some of the key niches foreigners still have not established a foothold.

Since the early 2000s, Russia’s warehouse and logistics sector has drawn attention of almost all the major players. Investors, developers, logistics operators and their clients, management companies and investment funds are active in that field.

Remarkably, almost all of the large-scale projects of 2005 and 2006 were announced by companies with foreign participation. Some have foreign financing, others have adopted foreign approach to business, and still others are run by foreign executives. The tendency became notable last year and grew stronger in 2006 in the light of a number of recent deals.

Multinational Logistics Partnership, or MLP, is actively expanding its presence in the Moscow Region. The company is currently developing two terminals, on Leningradskoye Shosse and in the town of Podolsk in the Moscow countryside, measuring 200,000sqm each.

Other major developers are Capital Partners, Lone Star Ventures and ICD International. Their developments are underway in Pushkino near Moscow (20,000sqm) and in the vicinity of Domodedovo (600,000sqm). Another serious rival active on the market is RosEuroDevelopment where the U.S. hedge fund Moore Capital Management has recently acquired a stake.

National Logistics Company, or NLK, which is a part of RosEuroGroup, too, has recently sold part of its shares to Citigroup Venture Capital and Germany’s DTB. NLK and RosEuroDevelopment have launched the development of Krekshino logistics park (115,000sqm), 24km west of Moscow between the Kievskoye and Minskoye motorways.

Virgin Soil

Analysts at Russia’s Central Bank and the Statistics Committee report that in 2005 foreign investment in Russia reached $13.1 billion. In addition to traditional oil sector foreigners have been showing increasing interest in commercial real estate, according to the experts.

The acquisition by Raven Russia of the Krekshino terminal under construction near Moscow, at $110 million, became the deal of the year – the first-ever investment deal local warehouse market has seen whereby a foreign fund secured a property under construction on condition that the development will be finalized and put up for rent.

Heiko Davids, Director Capital Markets, Russia & CIS, at Knight Frank, says that his company alone brokered transnational deals with warehouse facilities to the tune of $250 million. Rates of return in Russia are many times higher than in the West, Davids says.

According to realty analysts’ calculations funds to be raised by Raven Russia would suffice to develop 1.3 million square meters of warehouse facilities in the Moscow Region. Raven Russia puts the projected rate of return at 12 percent in Russia and 9 percent in UK.

The presence of foreign brands in the sector is growing. Everything is interconnected on that market. Services of logistics operators are in demand as the country’s retail is booming. International retail chains and logistics operators set high requirements for storage facilities. Hence, the demand for services of warehouse developers and professional property management firms is growing.

Michel Pascalis, chairman of MLP, believes that the arrival of foreign operators is a positive sign. Foreigners are willing to invest in Russian warehouse development, after all. On the other hand, Pascalis still sees no single pattern or common strategy in the actions of foreign funds. Such deals are still rare. But he expects international investors’ interest to grow in the future as new top quality properties appear in Moscow and other Russian regions.

“Our market still has a huge growth potential, capitalization rates in Russia are higher than in Europe, and development is becoming more civilized,” says Dmitry Levonyan, head of the Renova Capital direct investment fund.

Roman Burtsev, partner at Knight Frank, says that returns on warehouse real estate investment now stand at 16 to 18 percent. Several years ago rates were higher but then risks soared, too. But there advantages, as well. The scale of projects grew, which means project costs dropped. Developers and real estate consultants brought tenancy deals at warehouse complexes in compliance with international standards. The term of lease grew to 7 years. The number of tenants grew, too.

Nikolai Gvozdev, marketing analyst at NLK, puts the profit rate on the Russian warehouse market at 20 per cent on average, which makes that sector highly attractive for foreign funds. European markets have no such rates.

Foreign logistics brands account for some 20 percent of all operators active on the market, Burtsev reports. World’s leading logistics companies Excel, DHL, Kuehne & Nagel, Maersk, FM-Logistics, Tablogix and others have launched operations here. But many other market leaders still shun Russia. “So far there are no facilities for that,” says Burtsev. “There is a shortage of prime warehouse properties. Foreigners still think Russia is a complicated and risky market.”

Foreign logistics operators are still few but judging by the stock of warehouse properties they are operating their positions in Russia are quite strong, Burtsev says. Simple calculations show that over the past twelve months foreign firms or companies with foreign participation secured titles to properties under development and completed high-end storage facilities commonly rated as class A.

The above-mentioned British fund Raven Russia has acquired warehouse facilities developed in recent years by the Kulon company – Kulon Baltia on Novorizhskoye Shosse and Kulon Yuzhny on Dorozhnaya Street, measuring a total of 41,600sqm. Stakes in projects by MLP and Capital Partners are held by owners of those development firms.

MLP plans to develop 1 million square meters of storage facilities across Russia; Capital Partners is set to build 1 million square meters of warehouse space in the Moscow Region alone. Once all the projects by MLP, Capital Partners and Raven Russia are finalized the country will have over 2.5 million square meters of warehouse facilities. Roman Burtsev and Ruben Alchudzhyan, managing director at Praedium realty, agree with those estimates.

Nowadays, the warehouse stock in the Moscow Region amounts to only 660,000sqm, NG/CBRE reports. The prime property market itself is still small in terms of volume, says Ruben Alchudzhyan. Foreign operators, of course, show interest in rare facilities that match international standards. But there is a number of projects by Russian developers in the offing, and once those are completed the volumes of properties in Russian and foreign ownership may become equal.

Roman Burtsev has reported that there are warehouse terminals measuring 50,000 to 100,000sqm currently under construction. For example, STU Logistics is building a 100,000-square-meter facility in the town of Lobnya. ZAO Tomilino Poultry Farm has recently announced plans to develop a terminal of 500,000sqm.

First Arrivals

Ruslan Suvorov, head of warehouse and industrial real estate at Praedium, says that Russian firms control the lion’s share of the national logistics market. Local operators, in particular, NLK, were the pioneers. But, of course, they took international experience into account.

Alexander Gutekulov, general director at Relogix, a logistics operator renting properties at Pushkino terminal, one of the first international logistics providers to arrive in Moscow was the French firm FM Logistics. In those days, logistics operators themselves assumed the role of developers. The first property developed by FM Logistics was a complex near Sheremetievo Airport.

FM Logistics builds storage facilities for own use. The company has been operating in Russia since 1994, Alla Laoz, public relations manager at FM Logistics, has reported. From the very beginning the company offered a standard package of logistics services, including warehousing, transportation services, packaging and custom clearance.

In the early days FM Logistics rented 10,000-square-meter properties in Mytishchi, Kuzminki and Strogino. The terminal near Sheremetievo was launched in 1998. These days, the company holds title to 180,000sqm of warehouse space in the region; one of the facilities is under construction in Chekhov District. Besides, FM Logistics rents a total of 30,000sqm across Russia and a 10,000-square-meter storage in Ukraine.

Another pioneer was Tablogix, formerly JD Logistics, Alexander Gutekulov reports. The company rented a warehouse in Strogino, at 6 2nd Lysakovskaya Street, measuring 10,000sqm. “Securing a freehold to a plot of land in those days was impossible, only leaseholds were available. Providers showed interest in warehouse facilities, sometimes high-rise properties. FM Logistics rented such a property on Ryabinovaya Street, JD Logistics – at Mostranssklad. Those days saw a number of partnerships forged whereby landlords provided warehouse space to logistics frims in exchange for personnel, software, international reputation and clientele. The parties shared their profits, as mutually agreed,” Gutekulov recalls. .

“We began our operations in Russia in the early 1990s,” says Anna Velskaya, public relations manager at Tablogix. “The first properties we rented measured 5,000sqm. Nowadays, we develop properties for own use and rent space available on the open market.” Tablogix’ first clients included Kodak, Liggett Ducat, Cadbury, etc. Beginning 2004, Tablogix’ main client is Ford Motor Company. The company runs the carmaker’s distribution center in the town of Dzerzhinsky just outside Moscow.

By the end of 2006, Tablogix plans to rent 60,000sqm in the Moscow Region, including properties at Tomilino. Across Russia the company runs 71,000sqm of warehouse space. One of the recent deals involves the Shushary warehouse developed by PNK Logistics.

David Lane, chairman and co-founder of JD Logistics, renamed Tablogix in 2001, has been in logistics business for nearly 30 years. He worked in the U.S., Hong Kong, Switzerland and UK. The British branch, too, bears the name of Tablogix. Four years ago it merged with a British logistics firm iForce.

Although from the very start Tablogix, established in Moscow, belonged to foreign investors, its executives insist that their company is a Russian entity as it has been operating here for years and employs many Russian nationals. But the lion’s share of the company’s capital comes from Britain. Besides, Tablogix Russia maintains close ties with the British office, Velskaya says.

History of Investment Deals

Raven Russia Limited began with acquiring two warehouse facilities from Kulon – on Dorozhnaya Street (13,000sqm) and on Novorizhskoye Shosse (27,000sqm). The $35 million deal was signed on November 24, 2005, says Yelena Surova, head of warehouse real estate at NG/CBRE. The fund continues talks with the owners of other terminals and is set to buy two more properties from Kulon, on 8 Marta Street (10,000sqm) and Kulon Istra industrial park (160,000sqm), realty consultants from NG/CBRE report.

Analysts put the sum of Raven Russia’s deal with RosEuroDevelopment for the November 2005 acquisition of the first stage of Krekshino at $110 million. The British company took over Krekshino in November 2005. Andrei Podgorny, commercial director at RosEuroDevelopment, says that Raven Russia secured title to the first stage of the complex (115,000sqm). Construction of 33,000sqm has already been completed.

Under the agreement RosEuroDevelopment undertakes to finalized construction works and rent out the facilities whereupon Raven Russia will take over the entire business. When the British fund first arrived in Russia it pledged to invest a total of 500 million pounds in Russian real estate ($800mln). In July 2005, Raven Russia raised 153 million pounds, or over $266 million, through an IPO of a 30 percent stake in the company on the London Stock Exchange. Other funds were raised through bank loans.

Investment in Krekshino and both Kulon facilities have proved successful. Igor Bogorodov, head of Raven Russia’s office in Moscow says the company will continue its operations here, with a focus on logistics and industrial facilities in Moscow, St. Petersburg and other parts of Russia.

Ruben Alchudzhyan says the investment funds’ interest in real estate operations and acquisition of real properties is a normal practice in Europe, where titles to most real properties are held by investment funds.

A Moscow-based office and warehouse developer Coalco has sold a plot of 120 hectares and a project for development of a warehouse complex to an alliance of Capital Partners, ICD International and Lone Star Ventures. The deal was signed in late 2005. Capital Partners plans to build the Domodedovo logistics park on the site situated not far from the town of Domodedovo. Consultants estimate the deal at $350,000 to $450,000 per hectare. Erkan Erkek, chief managing director at Capital Partners, says by the time the deal was signed the plot of arable land had already been reclassified for industrial development, technical specifications prepared and engineering lines laid.

A spokesperson for Coalco reported that the company planned to develop 1 million square meters of warehouse space southwards from Moscow. To that end the developer had secured a 220-ha freehold in Domodedovo District of the Moscow Region and originally planned construction of the Bely Park (White Park) terminal later renamed Cross Point M4. Afterwards the company ruled on selling that land to another developer and focus on the development of a neighboring 100-hectare plot.

In the opinion of Yelena Surova, in near future it will be hard for Russian investors to vie with foreigners in logistics sector as Russians are focused rather on office and retail development where returns are high and payback period is shorter. Western firms, on the contrary, take interest in warehouse development as they have cheap capital and are quite satisfied with rates of 11 to 14%. Besides, they are attracted by stability of logistics.

RosEuroGroup, too, has seen a number of significant events of the past 12 months. In addition to the sale of Krekshino, RosEuroGroup has also sold a 38 percent stake in NLK to Citygroup Venture Capital and DTB and a 20 percent stake in RosEuroDevelopment to a U.S. fund Moore Capital. A source close to the firm has explained that those moves came as no surprise, as RosEuroGroup had planned the sale from the very beginning. Most analysts agree that it is too early to speak of acquisition of stakes in Russian development firms or logistics developers by foreigners as of some general tendency.

A RosEuroGroup official reported that the group’s cooperation with Moore Capital began last year with the development of a class A business center RosEuroPlaza in Novosibirsk (30,000sqm, $35 million). After approximately six months of joint work on the project the partners decided that the U.S. firm should become a shareholder in RosEuroDevelopment.

Moore Capital’s acquisition of the stake in RosEuroDevelopment is a landmark event for it was the first time when a U.S. company took interest in a Russian development firm. Knight Frank and Jones Lang LaSalle estimate the deal at $55 to 60 million. Funds raised through the sale will mostly likely be used by the group to finance its projects in other parts of the country.

Last year saw other deals that did not receive wide media coverage. Praedium has confirmed the sale by PNK Logistics of the Shushary warehouse terminal near St. Petersburg to Fleming Family & Partners. FM Logistics has sold a warehouse near Sheremetievo to AIG Financial, NG/CBRE confirmed.

Who Is Who

Espro Management – a development firm also known as Kulon – was established in 1997-1999 by Portugal’s ESAF, Ruben Alchudzhyan reported. One of the first developments by Espro Management was the Kulon facility on 8 Marta Street, the most expensive property in terms of rentals in those days.

A spokesperson for RosEuroGroup reported that the group was co-founded and is owned by three partners, Ilya Brodsky, Sergei Grishin and Andrei Suzdaltsev. In the beginning, there were no foreigners among the founders and shareholders of the group and the companies under its control (NLK and RosEuroDevelopment, in particular). Nowadays, the group nurtures ambitious plans. By 2010 the companies – members of the group plan to pour approximately $2 billion into commercial real estate development across Russia, in the cities of Samara, Tolyatti, Rostov-on-Don, Yekaterinburg, Omsk, Novosibirsk and Krasnoyarsk.

The idea to set up the National Logistics Company, or NLK, first occurred to RosEuroGroup in 1995, when Russia had virtually no prime warehouse facilities available. Warehouse terminals operating across the country failed to match modern requirements. Those were the days when international retailers, producers and distributors began to arrive in Russia, generating demand for high-end storage facilities. One of the first clients of NLK was Procter & Gamble. The developer, originally known under the name Terminal Lesnoi (the company’s first project on Minskoye Shosse), was renamed NLK in 2000. The key stakes in the company are held by Brodsky, Suzdaltsev and Grishin.

The Capital Partners development and investment company was established in 1996 in Kazakhstan. Its projects are financed by Kazakhstan’s Kazkommertsbank. In 2001, the company arrived in Moscow where it is developing Ritz Carlton Hotel on a site earlier occupied by the Soviet-era Intourist hotel (the project is estimated to be worth $150 million), and a 311,950-square-meter mixed-use property on the site of Radikon plant at 16 Leningradskoye Shosse, near the Voikovskaya metro station (worth $300 million). The company is about to complete the first stage of Pushkino logistics terminal ($115 million) and is launching construction of Domodedovo logistics park.

Lone Star Ventures, an investment, management and consulting firm is a partner of Capital Partners in warehouse projects in Russia. Lone Star Ventures’ partner ICD International is involved in development of industrial parks in the U.S., Europe and Asia.

Raven Russia Limited is run by Raven Property Management, a part of The Raven Group. The Raven Group, which was formed in 1992, is owned by Raven Mount, which has invested ?1 billion ($1.75 billion) in Britain and Croatia. It has a listing on AIM, which is run by the London Stock Exchange. Raven Group's earnings in 2004 were 83 million pounds. Shareholders in Raven Russia, set up in July 2005, are Amvescap Plc (28%), Jupiter Asset Management (10%), Schroders Investment Management (9%), Moore Europe Capital Management (6%), BlueCrest Capital (6%), банк HBOS Plc (8%), Raven Mount (6%) Morley Fund Management (4%) и Invesco (19%).

Moore Capital Management is a $10 billion hedge fund with headquarters in New-York and offices in Washington and London.

Does Russia Needs Foreigners

Companies co-owned or co-run by foreigners aside, the number of foreign operators involved in the development of Russian warehouse chains remains small. Cooperation proves more fruitful where Russian and foreign players enter into various alliances. An acquisition of a stake in a firm is one of the forms of participation. The issue caused heated debates at a recent presentation held by Cushman & Wakefield/ Stiles & Riabokobylko (CWRS). Warehouse property sector suffers the same drawbacks as the commercial real estate market on the whole. So far the market still has not seen the arrival of leading international developers, who would bring their staff and money to Russia.

AIG Lincoln has been watching Russia for nearly seven years now, mulling the possibility of joint participation in local projects with Russian developers at least, if not launching own projects. AIG Lincoln withdrew from the Domodedovo logistics park project after it failed to come to terms with Coalco. Another U.S. developer – Prologis – has suspended its operations in Russia altogether. Alexei Novikov, head of warehouse and industrial real estate at Knight Frank says that Gelamko, a developer active in Poland, reportedly mulls plans to enter Russia.

Sergei Riabokobylko, chief executive officer at CWSR, believes that Russia has enough money to finance its projects on its own and local operators do not feel the need to forge partnerships with foreigners. But management experience is something Russian operators could learn from foreign partners.

Foreign companies are still warded off by Russia’s complicated land-use regulations, especially as regards projects outside Moscow. The warehouse sector has its specifics, as developers deal with large building plots that need to be reclassified for industrial development, difficulties arising when laying engineering communications, transport accessibility, etc. Roads, as well as energy infrastructure are, indeed, Russia’s sore points.