In-Depth: Canons of Warehouse Development

Many investors think that the market, suffering an acute shortage of storage facilities, will accept anything. But it should not be forgotten that only those projects will succeed and stay afloat that are being implemented in compliance with established rules. I would like to recall some of those.

The Land Issue

The basis of any development project is registration of land-use relations. Mistakes made at that stage are fraught with enormous expenditures and loss of profit. Today the procedure of registration of titles to plots of land is complicated, highly bureaucratized, with a large number of government bodies on all levels involved. The process is time-consuming and costly. Securing a leasehold title to a plot from its owner – the regional government, for example, may take months.

For, the lease agreement has to be approved by plenty of government bodies. Specific problems, not only of temporary nature, arise during reclassification of arable land as industrial. Due to objective reasons the majority of warehouse projects are planned on arable lands. Quite often namely that procedure becomes a stumbling block for developers. In this case, the developers have nothing to do but to push that stone aside and roll it like Sisyphus did, for there is no way to by-pass it. After all, the duly registered title to the plot of land forms legal and economic foundation of the future project.

Without securing it, it is impossible to raise bank loans even if the borrower’s financial standing enables him to assume 35 to 40% of the total cost of the project. Needless to say, that selling a completed project at a fair price to a Western investment fund is out of the question.

Westerners’ Tricks

Incidentally, foreigners show unfeigned interest in such assets believing warehouse development to be more stable and less risky than other commercial and residential projects.

To a considerable extent such stability is brought about by tenants’ commitment to long-term cooperation as companies renting storage facilities are compelled to spend cash not only on fittings (as the case is with offices) but also on technical equipment of the project, purchase shelves and warehouse hardware.

Besides, the circle of would-be warehouse tenants, and hence, the scale of operation and returns on the project depend directly on location. Our experience shows that a warehouse complex situated 15 to 20 km away from Moscow is an optimal option for retail chains, given the specifics of movement of their goods flows.

As to more remotely located warehouses, retailers’ interest in such properties wanes as the distance grows. That is why when building storages in locations farther off from the capital it is more logical to count on such tenants as large manufacturing companies or logistics operators.

It has to be noted that the commercial success of the project may also depend on neighboring projects. Quite often the proximity to major production facilities imposes significant restrictions on the list of merchandise, which may be stored and processed on the premises of the warehouse concerned. For, warehouses must observe applicable sanitary and hygienic standards.

Therefore, it is not worth raising a pharmaceutical warehouse or open-air grocery storages next to industrial estates. Such projects are unlikely to attract tenants, even if let at lowest possible rate. Besides, the construction will never be approved by the government in the first place.

A Five Year Record

It is generally believed that a commercially successful warehouse is a project that pays back after five years of operations. To achieve that goal instead of going broke very little is needed, i.e. as early as during design stages to take into account special technical requirements for warehouse complexes.

With competition on consumer markets growing retail chains and goods manufacturers are attaching increasingly high importance to logistics, seen as one of the key instruments of cost management these days. Effective logistics, however, is impossible without warehouse facilities that meet all modern requirements.

Unlike residential real estate or office markets whose operators have already developed clear-cut property classification criteria, quality standards for warehouse properties are only being formed. For the time being, despite titanic efforts on the part of the business community, those standards are quite conditional. However, to a certain extent they do reflect international practice.

Without going into detail we can say that the key criteria are bay spacing (preferably 12 to 18 meters), height of the building (11.5m), number of dock shelters, availability of sufficient space for maneuvering and high-end engineering systems.

Certain developers intentionally increase the height of warehouse complexes seeking to squeeze the maximum profit out of their projects. Clearly, the higher is the complex the more goods may be stored there. But afterwards the owners of such monsters risk facing problems with insurance. For example, western insurance firms refuse to insure properties built with violations of generally accepted standards.

The correlation between the area of development and the total area of the site it is built on is yet another important parameter, which needs to be taken into consideration when designing a warehouse project. The rules of warehouse development provide that the project must have 1sqm of free space per 1sqm of storage facilities.

Such correlation ensures effective movement of vans across the territory, handling of goods and parking. It is also useful to provide for a free auxiliary zone where tenants could package and assemble goods. With a view to optimize the project it should not comprise many offices. 100 sqm per each 1,000sqm of storage space is quite enough.

Special attention should be paid to the choice of flooring. Our company faced that dilemma when building a warehouse complex in the Moscow Region. We were familiar with official requirements floors had to meet. They are to be even, durable and non-sagging. However, it transpired that flooring of such quality is offered by dozens of manufacturers. Eventually, it was our tenant who helped us to make the correct choice – a large retail chain company who took interest in our project six months before it was completed. They recommended a flooring manufacturer whose product met all requirements of our future client.

Dig Deeper

By the way, throughout all the stages of warehouse construction the developer should not try to save on any costs if he is to make everything as effective as possible. Take, for example, engineering communications. If a warehouse is designed for storage of specific goods, such as, deep frozen foodstuffs, a large power capacity will be required. Meanwhile, the cost of putting in engineering communications may prove quite high (especially, in the light of recently introduced charges for plugging into power lines and overall power shortage).

Our experience shows that the best building sites in terms of access to power infrastructure are the plots situated within industrial territories. For example, our first warehouse project was built on the territory of Mosmek plant in Moscow countryside, specializing in production of aluminum structures used in construction. The plant owned a plot of land reserved for expansion of production facilities but later revised its plans and allotted part of the reserved land for a development project. In our case, as a condition for connecting to the plant’s boiler-room we were asked to build a substation and a waste disposal facility, which we did.

Where the energy sources are not available in the vicinity, an alternative solution is possible – to purchase an independent gas powered generator for generation of hot water, heat and electricity. The price of such a device depends on its capacity, but at any rate the purchase pays back in five years.

Geological and construction risks may impede successful implementation of the project. In fact, any warehouse property suffers from two specific problems – the ground it is built on and roofing. Where a project is being raised on a wasteland, there is a high risk that problems may arise from mobility of ground which may lead to cracks in floors and columns and cause tenants to flee in panic. Preventing unwanted trouble is possible with the help of piles. That will push up the cost of the project but at the same time improve its quality. As to the roofing, to avoid leaks it should receive regular maintenance and be heated.

On the whole, when pursuing a development project one should seek to achieve maximum quality. A warehouse complex rated as class A today will be inevitably downgraded to class B in some 5 or 7 years. The better it is built today, the longer it will stay in the top price segment.

This piece was contributed to Vedomosti by Igor Zhukov, general director at the company BEL Development, affiliated with the Russian-Asian Investment Company (RAInCO). The point of view of the author does not necessarily reflect the position of the editors.