Money Growing: 29 Lost Klondikes
Moscow Region (Moskovskaya Oblast) may be ranked second Russian region for investment appeal. The Moscow countryside is precisely where the most ambitious developers head to, seeking to expand their operations beyond the capital.
Logistics and industrial projects are especially popular in the Moscow Region. Industry and transport are the sectors which help boost GRP growth, judging by annual reports of the regional economy ministry.
Investors and developers of warehouses, production facilities and industrial parks are always on the lookout for new building plots. The market of warehouse and industrial real estate is far from saturated. The demand for storages and manufacturing facilities exceeds the existing supply. Colliers International puts the demand for prime class A and B warehouses at 1.4 to 1.5 million sqm, generated by domestic and international logistics operators, retail chains, FMCG companies, distributors, manufacturers of home appliances, printed output, stationery and cars. In 2006 the Moscow Region's supply of warehouse space stood at 2.5 million square meters. Vacancy rates were low due to soaring demand. For prime warehouses that figure stood at 0.5%, for class B 2.5 to 4%.
“In 2006, warehouse real estate was booming as major warehouse projects were launched by Russian and international developers (such as Pushkino logistics park – 1st phase, Krekshino – 1st phase, TLK Tomilino, Belaya Dacha Logopark – 3rd and 4th phases) and new ambitious class A logistics projects were announced.
Those include Domodedovo North by Eurasia Logistic (1.1 million sqm), a warehouse complex by Giffels (600,000sqm), Ghelamco’s warehouse complex (220,000sqm), Pokrov logistics park (60,000sqm), MLP Podolsk by MLP (180,000sqm), industrial park Vostochny by Kulon (190,000sqm of storage facilities), and Springs Park by Springs Group (a total of 100,000sqm)," Colliers International reports. Such projects create the demand for building plots situated precisely in the Moscow Region. Logistics and industrial territories are traditionally developed out of town. Moscow does not have so many building plots for large projects. Besides, plots required must have be suitable for development and provide access to communication lines, utilities and power lines, as well as major transport routes. An example of a plot which meets all those requirements is the warehouse terminal MLP on Leningradskoye Shosse (200,000sqm, 42ha).
Here, the plans of the local government agreed with aspirations of the market operator. But for the time being, only on paper. Following a regional government’s decree (PPNo410/24, of June 6, 2005), a plan to establish several industrial districts across the region before 2010 was adopted.The plan, penned by the Institute for Socioeconomic Development of Central Federal District of Russia, Makro-Trest Consulting and the government-run company MosgiproNIIselstroi at the request of the regional economy ministry, have designated plots for development of what was termed “industrial districts” (okrug). By the year 2010 the region plans to establish 29 such districts.
Government Takes a Step
The government decree ordering establishment of industrial districts was signed two years ago. But it was not until 2006 that first steps in that direction were taken, hailed by market operators as evidence of feasibility of the ambitious plan. Then, the government decreed on reclassification of an arable plot acquired by the company Espro, developer of an industrial park near Istra, as land for industrial use. Also in 2006 preparations for construction began on the site. The project on Novorizhskoye Shosse was included in the government plan. The first phase of the park Kulon Istra is to be finalized this year; the project will provide 50,000sqm of space, the company reports.
In the summer of 2006, regional officials hosted a conference to present their plan at Alexander House. Addressing the forum, Vyacheslav Krymov, economy minister of the Moscow Region, emphasized that namely owing to the government's target-oriented approach the reform of the regional economy was going smoothly. The key objective pursued by the government is to create conditions across all municipalities whereby people could fully satisfy their professional and household requirements without having to travel far away from home. In other words, the plan is aimed at improving the investment climate and creating conditions for growth of competitive manufacturing firms and support companies. Industry-oriented and logistics projects will result in more jobs for local residents and construction of new homes. One of the objectives of the program is to earn extra budget revenues. To that end it is necessary to boost economic development in each specific district.
Regional government officials hope that fixed capital investment will grow 1.5-fold each year, while industry annual growth rate will increase from 13-15 to 23-25%. Prospective budget revenues are estimated at 28 billion and over. By 2010 the region expects the stock of newly-built industrial facilities to reach 10 million square meters, class A and B logistics facilities at least 7 million sqm, prime office space 4.5 million sqm, social infrastructure facilities 0.3 million sqm, low-rise housing 1 million sqm, and create some 40,000 to 50,000 new jobs.
Funding for the program is expected to be provided by private investors. The total cost of the project is estimated at 341.6 billion rubles, according to the regional economy ministry. One more goal the regional government seeks to achieve is promotion of high-end technologies; to that end it is necessary to meet investors' demand for building plots, the program reads.
The government has pledged to provide investors with building sites prepared for construction. Today, over 60 sites are available. Many of those are located next to main district towns Podolsk, Voskresensk, Shchelkovo, Stupino, Domodedovo, Kolomna, Klin, Kashira etc. Plots in underdeveloped districts Taldomsky and Lotoshinsky, and near the town of Roshal have also been designated for development.The list of plots compiled by the government outlines recommended uses of those lands. For the most part lands are allocated for development of industrial parks, warehouses and technology parks.
The list has been drawn up. All that is left to do is to find investors. The program states that investors' bids are to be examined at a tender. The terms and conditions are familiar: if in the course of 30 days after the government’s announcement on invitation of bids is published it receives several bids for the same project a tender is held. Where only one bid is made no tender is held. If no bids are made the government accepts the first offer that arrives after the 30-day period expires. When determining the winner, organizers give preference to legal entities and individuals whose proposals agree with the goals and objectives of the government program to the maximum. Following the tender the government enters into a trilateral investment contract with the winner and the administration of a district where the project is to be launched.
Not all plots will be transferred into ownership. But 27 out of 68 listed plots are privately-owned. Projects underway on municipally-owned territories were among the first to be placed on the list. Those include a 474-ha industrial park by Italian company Terre di Lama in Volokolamsk, a technology park by AFK Sistema and Information Business Systems in Dubna (428 ha) and Kulon Istra (33ha) near Istra.
The government of the region has pledged support to investors who join in. In particular, officials promise that the developers will receive all necessary permissions for construction sooner and will enjoy a more favorable tax regime. The government has even promised to assist by raising loans from Russian and international banks and financial institutions. At the same time, officials reserve the right to determine placement, size and uses of the projects.
An industrial okrug [district] on the territory of the Moscow Region is defined as part of a municipal territory featuring all elements of engineering, transport, commercial and social infrastructure required for normal operation of manufacturing facilities (centers, units, etc) and support services, according to the government program.
Investors’ Response
But investors and developers showed little interest in the plan after 2005. The list of investors compiled by the economy ministry so far contains not more than 3 or 4 firms. Espro, the developer of Kulon Istra, believes that in long term the government’s plan has good prospects, but now it is too early to discuss its results. Sergei Beloshapko, head of warehouse and industrial real estate at DTZ, is skeptical; he believes the program is reminiscent of a planned measure necessary for the record. He doubts that the project is truly market-oriented. “For example, the criteria on the basis of which plots are designated for industrial and warehouse development are vague. Investors are not likely to acquire them unless they meet certain requirements," Beloshapko says.
Developers taking part in the program fall into two categories – those who only plan construction and those who have already begun building works but do know that they are working on a territory placed on the government's list; perhaps, they are not even included in the list of participating investors.
As regards Espro’s Istra project, market operators suggest that the project was included in the plan for development of industrial districts only after the investment contract had been signed. Espro’s deputy marketing director Yelena Vesyolova does not deny that. Officials estimate the projected budget tax revenue from Istra industrial park at 150 million rubles.
Bolshoye Domodedovo project pursued by Coalco occupies a territory a part of which is also falls under the government program. The plot in question is where the logistics facility Belyye Stolby is situated. The complex occupies the area designated for development of what is to become the town of Domodedovo in the future. In line with the plan within the next 7 to 10 years the town is to get nine new localities providing 12 million sqm of apartments, 2 million sqm of storages, 322,000sqm of office space, 411,000sqm of shops and 75,000sqm of hotel rooms. In 2006, Capital Partners took over Belyye Stolby and launched a $400 million project to build 600,000sqm of warehouses on the site. When acquiring the project Capital Partners had no idea that the project had been included in the government plan. The company's chief managing director Erkan Erkek said he had not been informed about that program.
A project by Eurasia Logistic (which is part of IPG Eurasia) – a warehouse terminal Severnoye Domodedovo (Domodedovo North) – is also underway in the same area. The first phase, measuring 360,000sqm, is slated to be commissioned in 2007, real estate consultants say. The company is not on the government’s list of investors although its project is listed.
MLP did not know that their project MLP Podolsk is situated next to what is to become the Podolsk industrial district in the future. But even if the company had been informed of the government's plans in advance its participation would have been unlikely. The company refrains from direct contacts with district administrations, MLP’s marketing department has explained. MLP prefer to acquire building plots from private owners.
This year, another company – KomStrin – said it has begun construction of an industrial park in the town of Stupino.The plan is to build 610,000sqm of production facilities, offices, community services, health care institutions, homes and recreation areas. The project will take at least a decade to be finalized and is estimated to be worth $1 billion. On January 17, 2007 Stupino’s town-planning council approved the concept of the future industrial park. Production facilities will account for 50% of the park’s territory, logistics centers and offices will occupy 30 and 10% of space respectively. Several golf-courses, medical centers, local chapters of vocational schools and universities are planned along the banks of the Oka River. After the project is finalized the district's population will have doubled, according to Stupino officials’ estimates.
If…
Sergei Beloshapko says the lack of investors’ enthusiasm may stem from the fact that they deem the terms and conditions of registration of rights to land and quality of plots unacceptable. “I would advise my clients – investors – to insist on registration of freehold and access to engineering lines on the site, to begin with,” he says.
Connection to power lines is especially expensive. Quite often developers are charged $1 million for 1 megawatt. It is much more convenient if the government assists in such matters, holds Roman Burtsev, partner at Knight Frank.
Companies who participate in the program admitted, speaking on condition of anonymity, that so far they had received virtually no support from the government and had to obtain all necessary permissions and carry out preparatory works on their own.
Espro counts on support from the government in obtaining necessary permissions at later stages of the project.
Roman Burtsev suggested that the idea to launch the program may have been proposed to the government by market operators themselves. Every day developers and investors call on district heads with requests to allocate building plots for industrial facilities or logistics parks. It cannot be ruled out that the government compiled the list of plots and the program on the whole on the basis of operators’ recommendations. But for the time being the program is reminiscent more of a zoning plan and offers no tools for practical implementation of projects. Investors are nevertheless advised to look for suitable plots among those included in the plan. Or else, the risk is high that quite soon the best plots will no longer be available. For example, the administration is quite likely to place utmost priority on development of municipal territories. Registration of titles to those plots and their preparation for construction is likely to prove less time-consuming than the case is with privately-owned lands.