Money-Growing: Unwanted Plots

The Moscow Region is running out of plots of land suitable for development of prime warehouse facilities, rated as class A and B, property experts report. The best “golden” sites have been snapped up by the investors of the first wave.

The market of the Moscow Region has always faced an acute shortage of top quality storage properties and sites suitable for warehouse development. Unsatisfied demand for class A and B offices today exceeds 1 million square meters, says Ruslan Suvorov, head of warehouse and industrial real estate at the company Praedium.

The rate of return in the sector still stands at 11.5 to 12.5 percent per year. But apparently the problem of finding a building site of appropriate quality is moving into the foreground. Developers who plan to realize logistics projects these days have to choose between plots, each of which has certain disadvantages, and to choose the lesser of evils.

The State of Affairs

Warehouse developers attach utmost significance to the size of the building plot, which should measure at least 10 hectares, availability of engineering lines and proximity to large busy highways (preferably, the plot should be situated right along the road). And, of course, the plot should be designated for industrial development.

Plots that meet all those requirements are becoming increasingly rare, while plots where developers have to deal with all sorts of encumbrances and risks and where land needs to be transferred into industrial category increasingly often, experts at Pepeliaev, Goltsblat & Partners report.

Some experts already speak of imminent price stagnation in the industrial land sector. Sergei Beloshapko, head of warehouse and industrial real estate at DTZ, says the rates are nearing the limit. For example, industrial lands in the south of the Moscow Region are offered for sale at $380,000 to $450,000 per 1 hectare. “I anticipate stagnation on the market,” Beloshapko says. There are still many arable plots but most of them have no access to communications, he says.

The transfer of land from one category into another is a time-consuming and difficult procedure that takes many months and costs millions of dollars, says Vitaly Mozharovsky, partner at Pepeliaev, Goltsblat & Partners, says. For example, the cost of reclassification of a 10-hectare plot on Novorizhskoye Shosse, 15 kilometers away from the town of Istra, has run into $2 million.

But even arable lands are not always available for sale, Mozharovsky adds. 31% of all lands in Russia are freeholds according to Pepeliaev, Goltsblat & Partners. 8% of those are privatized arable territories. The remaining 69% are either federally or municipally owned.

Arable lands in the Moscow Region are the most expensive in the country. The largest parcels in the countryside are held by major companies, such as Znak, Nafta Moskva, Vash Finansovy Popechitel, Tsentr Kapital, Absolut Group, Vizavi, Promsvyaznedvizhimost and others. Interestingly, today many of them see no need in selling their plots, Vitaly Mozharovsky notes. Having sold a part of their properties earlier those owners have already secured desirable revenues and are in no hurry to part with the rest, anticipating a further increase in land prices.

Sergei Beloshapko says that over the past two years the sale price of parcels of land grew approximately by 30%. “The price increase depends, first and foremost, on the Moscow Region's plans for development of the road network," Beloshapko comments. “Lucrative sites are areas between Moscow and Noginsk and Odintsovo. Lands in the east of the region remain underestimated, and an increase in prices there will begin as soon as a new major trunk road is built. Sites located in proximity to convenient road junctions will always pay.”

Today the situation is such that plots more or less suitable for warehouse development have already been occupied by builders or are held by owners who retain them, waiting for better times to come. Many lands available for sale today few developers and investors would venture to acquire. At times, the cost of eliminating all faults and preparing the plot for construction render the project unprofitable. There are well-known examples where plots for warehouse construction were on sale for quite a long time and changed hands several times before they found their developers.

One of such examples is the Leningradsky Terminal project by the Multinational Logistics Partnership (MLP) at the 13th km of Leningradskoye Shosse. The buyers who had acquired the site before MLP refrained from eliminating existing encumbrances. At first, the U.S. investment fund Prologis planned to buy the 42-hectare plot of land currently occupied by Leningradsky Terminal from the company Bamo. But the U.S. fund was not satisfied with the terms of sale. MLP's owners accepted the terms and acquired the plot for $400,000 per 1 hectare, according to other operators’ estimates.

Another example is that of Coalco, which purchased a freehold near the town of Domodedovo, Moscow Region. Coalco announced a plan to build 1 million square meters of warehouse facilities in 7 years, on a 220-hectare plot acquired for the purpose. Afterwards, the company revised its plans and sold a part of its lands, measuring 120 hectares, to Capital Partners for warehouse development, for a price of $350,000 to 500,000 per 1 hectare, according to market operators’ estimates. Reportedly, namely that site, formerly registered as arable land, had problems with access to communication lines.

Yet another project that cannot be left unmentioned is an ambitious plan by RIGroup (Russian Investment Group), estimated to be worth $180 million, to build storage facilities in three districts of the Moscow Region. The market first learned of those plans about two years ago. But hitherto the group failed to find investors or developers for the three sites measuring 20 ha each. RIGroup, which said earlier it would build warehouses on those sites itself, later abandoned those plans.

The Tale of One Project

In the spring of 2005 a spokesperson for RIGroup announced the company’s plans to build a total of 300,000sqm of warehouse space in three districts of the Moscow Region. That was an ambitious statement and the news was published in the media. A network of warehouses planned by RIGroup in the Moscow Region was the third-largest project of all announced in 2005. The company planned to build approximately 70,000sqm of storage facilities near Chekhov, just as many in Istra and 160,000sqm in Naro-Fominsk.

Before that more ambitious plans were announced only by the company TLK Tomilino, which planned a 600,000-square-meter property southeastwards from Moscow, and the National Logistics Company (300,000sqm in Krekshino). Both have already set about implementing their ideas.

RIGroup had pledged to put up approximately 50% of warehouse space to be developed in Moscow countryside for rent through an open tender. But the group never proceeded with its plans. In those days RIGroup’s plans seemed to be quite clear-cut. The company reported that the developments to be launched on a 20-hectare site in Chekhov District (50km outside the Moscow outer ring road, MKAD), 20 ha in Istra District (45km) and 35 ha in Naro-Fominsk (33km) were in licensing and design stages. The group planned to spend $180 million on the project, to be financed by 30% from the company’s own funds. The rest would be covered through a bank loan.

A site near Istra had been secured under a long-term lease agreement, while the plots near Naro-Fominsk and Chekhov were freeholds. RIGroup rose to prominence. Real estate agencies who are fond of compiling all sorts of market surveys included the company in their rankings. Months went by but nothing was heard about the beginning of building works. When asked about the fate of the project, Dmitry Kotlyarenko, RIGroup’s vice-president reiterated that “the company continued development activities aimed at construction of logistics parks in the Moscow Region”. RIGroup’s executives refused to elaborate.

In 2006 it turned out that RIGroup had radically revised its plans. The company launched a wide publicity campaign to promote its new program aimed at construction of shopping centers across the Moscow Region. Speaking at a retail real estate industry conference this fall, Andrei Khalturin, who also holds the post of vice-president of RIGroup, made a rather flat statement. He said that RIGroup was no longer interested in warehouse development. But he refused to explain why the company had revised its policies.

The rumor had it that the company planned to sell some of its plots and use others for construction of retail centers.

RIGroup maintains two websites, for international audience and domestic operators. Judging by information posted on the web RIGroup is a holding that pursues practically all sorts of activities, ranging from design and construction to operation of completed residential and commercial properties.

The company was set up in 2002 in New York by Janna Bullock, Mark Himon and Dmitry Kotlyarenko. The Russian branch was also named RIGroup, although in the U.S. the acronym RIGroup stands for Restoration Interiors Group. The holding also runs a branch in Paris and plans to open offices in London.

In the Moscow Region, according to a report released by RIGroup in 2005, the company held titles to 15 plots of land where it planned to build 500,000sqm of commercial real estate. No data as to financial turnover of the company is available.

The Russian-language site announces the company’s plans regarding its plots near Chekhov and Istra. The site located at a 55-kilometer distance from the Moscow outer ring road, 3 km from the newly built Simferopolskoye Shosse and 2 km from Chekhov, is part of an industrial territory where FM-Logistics had built a warehouse complex several years ago. The plot, reclassified as land for industrial use, is available for sale, or else, the group is ready to undertake development of a custom-built warehouse complex to order of customers with a view to sell or let the property afterwards.

Another site, situated 2 kilometers away from Istra, 48 km outside MKAD and 8 km away from Novorizhskoye Shosse, is a plot of arable land that has yet to be reclassified. RIGroup holds a long-term lease to the plot. The statement concerning those plots has not been updated since 2005. There is no information regarding the Naro-Fominsk project.

Before this article was sent to print RIGroup’s press-service reported that the company was negotiating the sale of its warehouse construction plots to an investment group, whose name remained secret. But the decision is yet to be taken whether RIGroup abandons warehousing operations completely by selling out its plots or retains a share in the projects. To all appearances, RIGroup is not going to assume the role of an investor in those projects.

Commenting on the group’s progress Alexei Novikov, head of warehouse and industrial real estate at the company Knight Frank, said a year ago that the company’s claim that the projects had entered the design and licensing stage could imply that the plots must be ready for building works. But he was surprised by the fact that the group still had not found any potential tenants or buyers for the future warehouses.

The Leads

In the opinion of Alexei Novikov, a plot such as held by RIGroup near Checkhov will most likely find a buyer. The location itself, where the Chekhov industrial territory is situated, appeals to investors and developers. But from the very start it was clear, Novikov believes, that all of the three plots were suitable rather for custom-built projects than for speculative development.

It is quite possible that RIGroup has abandoned that project as insufficiently interesting. Novikov admits that the story of RIGroup’s sites reminds him of the situation with Coalco near Domodedovo. But unlike RIGroup, Coalco did not withdraw entirely from its development projects. Ruslan Suvorov, who visited the site near Chekhov, says that it is traversed by a pipeline, which renders warehouse construction impossible. Developers who acquire that plot will have to reroute communication lines.

An anonymous source close to the project has suggested that RIGroup had never planned construction of warehouses on those sites in the first place. Instead, the company could assume a wait-and-see attitude until the sale price grew, and in the meantime launch a publicity campaign in the media. But Ruslan Suvorov does not share such an opinion. “It is doubtful that RIGroup is involved in land speculations. The company makes a good impression, after all. If they pursued the goal of making money by re-selling lands their strategy would be different. Besides, they would acquire more plots,” he said.

Out of all mentioned variants the most suitable for RIGroup is the role of a developer and investor, judging by the strategies pursued by the company in other sectors of the market. It appears that the company, indeed, is set to develop warehouses in three districts of the Moscow Region. Or to sell them. RIGroup could abandon its plans in logistics as commercially unviable, due to faults of the sites or lack of customers. Today, the question whether the sites will be sold or not remains open.

RIGroup is a diversified company that gains revenues from operations in a variety of businesses. The team may have opted for a line of business, which it believes to be more profitable, for example, the aforementioned mall development, rather than warehouse construction, where the company has not been very successful.