Money Growing: Fashionable storerooms

Under the forecasts of analysts, in the next two years the supply of professional warehouse areas will at least double, exceeding 1 million sq.m. In the newborn market characteristics of ill growth are being observed. Supply and demand are unbalanced. Different experts estimate a deficit of qualitative warehouses in St. Petersburg from 1.5 million to 3.5 million sq.m. However in view of the announced rates of construction this could already be liquidated by 2010 after which the market be at a stage of saturation. Many logistic operators complain that developers offer goods that don't match their requirements and at overestimated rental rates. The construction of complexes is extremely non-uniformly distributed in the city. The main storerooms in St. Petersburg promise to be in Shushary while the strategically important northern area is obviously underestimated by investors.

According to the municipal government department for investment and assessment of real estate as of January 1, 2007, in St. Petersburg there were 4,908 warehouse structures with a total area of 5,662,200 sq.m. In addition there are approximately 684,200 sq.m of warehouses located in other premises, and mainly concentrated in the basements and plinths of residential buildings. So cumulative warehouse space in St. Petersburg totals 6.34 million sq.m, or 8.2 percent of all uninhabited premises in the city. "Unfortunately, about 26 percent of the city's warehouses are located in places that have difficult transport accessibility," Nikolai Asaul, vice president of the committee for investments and strategic projects, says. "Therefore the administration will lay emphasis on moving these complexes close to the KAD and to the future line of the West Circular Ring Road. In the general plan of development of St. Petersburg the building of 26 industrial-logistics zones is envisaged. This does not mean warehouses in the city center will be liable to liquidation. Within its borders those located on highways where movement of truck transport will be kept will be certain. Logistical complexes should also be placed based on the roads where they are located so they don't stand idle in "godforsaken places," in inefficiently used areas. Of course, such migration will occur not in direct form, but with the use of market mechanisms accessible to us today."

In May 2007 the government of St. Petersburg has correlated a list of industrial-logistic zones, which are subject to prime development, including those that will be funded by the city budget. The list contains nine territories: Shushary, Metallostroi-2, Konnaya Lakhta, Noidorf (Strelna settlement), Krasnoselskaya, Pybatskoye, Ruchi, the territory north of the New-Oryl forest park and Kamenka. For these zones, in the first instance, the town-planning documentation should be compiled and complex engineering preparations be carried out.

According to Becar Realty Group, in St. Petersburg the share of class A warehouses stands at 3 percent of the total supply, the share of a class B warehouses stands at 8 percent and the reminder is class C or D. According to estimations by experts at Knight Frank, the total space of class A and B complexes at the beginning of 2007 totaled 505,000 sq.m. About 80 percent of this space is used by its owners for rendering logistic services or for the storage of its own goods. Colliers International (St. Petersburg) put this figure at 350,000 sq.m (without taking into consideration terminals constructed for internal needs).

Experts at Astera Onkor cite this figure at 760,000 sq.m of quality warehouses, half of which are not presented on the open market but used by their proprietors. The market remains closed, information on it is not systematized, and this explains the approximateness of the estimations. However it is evident that in the volume of warehouses, St. Petersburg substantially lags behind Moscow and European cities.

According to Knight Frank, triple net rental rates (the rental rate not including operational charges, payment for municipal services and VAT) range from $105-130 per sq.m per year for class A premises and from $80-110 for class B. Utility bills and operation charges on average add $40 per sq.m per year to the rate for class A warehouses and $30 for class B.

According to the observations of experts at Colliers International, during last year rental prices for high-class premises practically did not change, despite a deficit In available space. This is connected with the fact that the majority of developers direct their attention to large tenants of whom there are not many of in the market (no more than 20 companies).

The cost of storage in quality warehouse complexes averages $0.3-0.5 per palette place per day, not including handling and VAT. Last year tariffs increased approximately 5 percent (data of Colliers International). According to the estimations of Praktis CB, class C premises are rented for $60-90 per sq.m a year (not including VAT and public utility payments).

If we consider the structure of demand, 36 percent of potential tenants need premises with an area up to 1,000 sq.m and 41 percent of clients need areas measuring 1,000-3,000 sq.m. Only 4% require warehouses measuring more than 10,000 sq.m (data of Knight Frank).

Experts at Praktis CB estimate the level of vacant premises at 1.1 percent in class A and B+ warehouse complexes, in class B complexes at 4.3 percent and in class C at 7.2 percent. This, from the point of view of the experts, testifies to the great market potential of class A and B+ warehouses.

Respectable storekeepers

Until recently only terminals built by large manufacturers for their own needs (JFC, Wrigley, British American Tobacco), retail chains (Iskrasoft, Agrotorg, Lenta, etc), and also logistic companies (Containerships Lld Oy, NKK, Avalon Logistics, Astros Logistics), meet European standards.

In 2006 serious investors finally entered the warehouse sector. The main trend is a chain approach to the development of business and the inclusion of logistic centers within the structure of multipurpose commercial complexes.

"Why are modern warehouses profitable for developers? Probably, they are not as profitable as high class office centers, but they are simple to construct and operate. Currently it is the easiest and least risky investment in commercial real estate premises," Oleg Barkov, general manager of Knight Frank says about St. Petersburg. The expected returns on your own capital of In the realization of warehouse projects Is 18-21 percent. The average returns for an investor (rate of capitalization) in purchasing a premises is 12-13 percent. The average length of recoupment of projects is 6-9 years."

The estimations of analysts concerning the volume of quality warehouse space to have entered the market in 2006 varies. Knight Frank names the figure at 130,000 sq.m, Colliers International at 98,000 sq.m, Praktis CB at 176,000 sq.m, and Astera Onkor at more than 300,000 sq.m. This is connected with the lack of information on projects (especially those that do not appear on the free market), and by the different representations of advisers about what warehouse objects it is possible to rank. Such variability of data is connected as with deficiency of the information on projects (especially that do not appear in the free market), and with different ideas of advisers about which warehouse premises can be ranked as quality.

Among complexes that were put into operation in 2006, complexes built for the needs of owners were significantly small in number. According Becar Realty Group's data, their share was 35 percent of the total area put into operation (in 2005 it reached 60 percent).

Warehouse space in the Pushkinsky and Moskovsky areas made up 38 percent and 36 percent respectively of the total space, according to the data of Astera Onkor.

Among the most significant openings last year was the partial launch of the class A multipurpose transport-logistic complex at 73 Kubinskaya street (Predportovaya-1 industrial zone), which will have the largest internal ("rear") container terminal. Once construction Is complete, which is planned for the third quarter of 2007, the carrying capacity of the complex will be more than 1 million tonnes of goods per year. The project Is being realized by Interterminal, Big City and Green Mark. The assets of the group already include the operating Interterminal-Parnas warehouse complex in the north of city. The area of the development on Kubinskaya street measures 18.4 hectares. The area of class A warehousing will measure 68,745 sq.m. Investments In the project total almost $63-65 million. The calculated time of recovery of outlay is 5-7 years.

Last August Ahlers St. Petersburg (part of the Belgian group of companies Ahlers International) opened the second phase of the Astors Logistic Center logistic terminal in Gorelovo (almost 15,000 sq.m). Belgians intend to construct here four more warehousing blocks to make the total area of the terminal 72,000 sq.m.

Among other complexes started in 2006 are premises of Evrosib-Terminal on Predportovaya Street (4,500 sq.m) and Lipsanen at 71 Kubinskaya street, etc. the Listed projects are realized manly by the logistics companies.

In 2007 the picture will change. The first large terminals constructed by developers and intended for rent will come on the market.

Investments in warehouses

The largest scale opening promises to be the first phase of the MLP Utkina Zavod complex, started in July 2006 in the Hovosaratovka village (200 m from the border of the city) on the internal side of the KAD. The developer - International Logistic Partnership (ILP) Is developing a 40-hectare land plot, which it owns. The total area of the future class A terminal is almost 200,000 sq.m. The first phase will be put into operation in September 2007 and the second phase should be ready in the first quarter of 2008. The volume of investments in the construction of the complex are estimated at $150 million. These funds were provided by Deutsche Bank Hypo Real Estate.

In the spring of 2007 a pool of tenants for the first turn of the terminal had already been completely generated. The main anchor is logistics company Relogix, which has reserved 55,000 sq.m for 10 years. The value of the contract exceeds $60 million. This transaction became the largest on the region (if not in Russia) warehouse real estate market in 2006. A further 15,000 sq.m have been rented by RLS (also a logistics operator).

In 2007 ILP will start the construction of a terminal-twin in Shushary which will enter the market in 2008-2009. The general plans of the company are to create a chain of warehouse terminals in Russia and the near abroad, with a total area of almost 1.5 million sq.m.

In the second quarter of 2007 the class A terminal RNK-2 in Shushary (900 m from the KAD, on Moskovsksoye shosse) was put into operation (total area - 40,200 sq.m). The complex consists of three 13,400-sq.m buildings (including office premises) which have all been completely rented out. This project was realized by investment company Fleming Family & Partners, which also owns the RNK-1 complex (14,500 sq.m), which was put into operation in 2005. Britain's purchased the prepared project from the developer - RNK Logistics. Logistics operator Tablogix, which works in Moscow, the Moscow Region and Novosibirsk, will rent the whole area. This warehouse was the first purchase by Fleming Family & Partners in St. Petersburg, and now the British have decided to act in the role of developer.

By the end of 2007 the first phase of the Logopark Neva terminal, also located in Shushary, should be completed. It, as well as all the listed premises, is built on formerly agricultural purpose land bought (the land plot measures about 26 hectares). The project is being realized by British investment fund Raven Russia Ltd and logistics company Avalon Group. Logopark Neva is the first-born of all-Russian warehouse chain Megalogix, which has plans to enter class A terminals in 15 Russian cities on the market.

The total area of the project is 129,000 sq.m. The whole of the first phase will be rented by logistics operator Avalon Logistics - a subsidiary of Avalon Group. The rest of the area (74,000 sq.m) will be put on the market in blocks starting from 5,000 sq.m. Raven Russia Ltd and Avalon Group are acting as equal co-investors. Construction is broken into three phases and should finish in the middle of 2008.

Logopark Neva is not the only warehouse premises of Raven in St. Petersburg. The British are working on another two in tandem with Moscow company Espro Development, which is managing these projects. By the end 2008 near the Pulkovo airport two class A complexes on adjacent sites on a total area of 15 hectares should be constructed: Kulon-Pulkovo (approximately 34,000 sq.m) and Pulkovo-Estate (about 60,000 "squares").

Among other warehouse premises which according to plans will be completed this year are the class B Staraya Derevnya terminal at 12 Mebelnaya street (almost 20,000 sq.m), a new phase of the Astros Logistic Center project in Gorelovo (an approximate 15,000 "squares" more), Ruslan transport-warehouse terminal (14,800 sq.m) in Shushary, another class A complex in Shushary (almost 20,000 sq.m) by PAN, which until now specialized in the development of the center of St. Petersburg, and the first block of the class A Obukhovo warehouse terminal (almost 37,000 sq.m), whose investor is Teorema. Incidentally, this premises, which is planned to be completely handed over in 2008, claims to be the largest within the city's boundaries (83,000 sq.m).

According to various experts, the volume of quality warehouse space to enter the market this year will be 400,000-600,000 sq.m.

Naturally, sites adjoining the functioning and raised ground of the Ring are most attractive to developers. Almost all warehouse projects announced are in the south. The absolute leader by rates of construction is the Pushkinsky district with the Shushary settlement (almost 450,000 sq.m), and in second place is the Vsevolozhsky district (more than 80,000 sq.m), according to the data of Astera Onkor. Investors are inspired by the close proximity to the port and strategic traffic from Moscow, and also by the spacious former state collective farms. The southwest and southeast are rather popular. Many projects have been announced in the east, not so much for its prospects for logistic operators, but by the number of free land plots here. The north, which is currently poorly developed by warehouse developers, is strategically important.

"We predict that in 2007 almost 400,000sq.m of quality warehouses will be handed over. And this is the only premises intended for commercial use. The plan for 2008 is approximately 800,000 sq.m. And for the future it is more. For example, in Shushary, not including the neighboring Predportovaya Industrial zone, projects measuring a total of 1.6 million sq.m have been announced," Nikolai Pashkov, director for professional activities at Knight Frank comments about St. Petersburg.

The most grandiose warehouse construction project is the class A Kolpino logistics park by Eurasia Logistics, an affiliated company of investment-industrial group Eurasia. The company describes Itself as a chain developer. It plans to build 16 warehouse complexes in the next five years (more than 4 million sq.m in total) in Russia, Kazakhstan and Ukraine.

Near St. Petersburg on a land plot measuring 187.7 hectares (8 km from the KAD on E-95 line) a 700,000-sq.m terminal Is planned to be built. The project is divided into four phases, the first of which (200,000 sq.m, divided into five buildings) should be completed in 2008. In 2010 the entire premises should be ready. "The pool of tenants has already been formed, and many companies will be present straight away at several of our regional complexes," Sergei Marinichev, head of projects at Eurasia Logistics, says.

Last summer White Days Investments (a subsidiary of Investment fund White Days) bought about 40 hectares of land in the Vsevolozhsky district near the KAD and the Yanino settlement for a high-class 200,000-sq.m logistics terminal. White Days Investments will construct a second similar complex (almost 100,000 sq.m) in the Moscow region.

Among other large scale plans are the joint project of Finnish investment fund EPI (Evli Property Investments) Russia and Finnish development company YuIT Lentek. The class A will be almost 160,000 sq.m and according to the plan will open in 2008 in Gorelovo. In August next year a complex in Shushary measuring almost 52,000 sq.m will be started to be built by AKM Logistics. In the spring of this year Finnish Sponda Plc bought a 46-hectare land plot in the Leningrad region for the construction of a warehouse terminal. And Lithuania's Hanner plans to build a 106,000 sq.m complex on a 20-hectare land plot.

Investors today include warehouse terminals in the structure of large multipurpose centers. For example, Tsveti has included warehousing in a industrial-logistics park for which about 217 hectares in the Lomonosovsky district (territory of Villozkoye rural settlement) have been allocated. Panticapaeum has sold a 50-hectare land plot for a class A warehouse complex (250,000 sq.m) as part of the LenKAD Megacity projects (between Yukkam and Poroshkio).

One does not want, others cannot

Many logistics operators and end users of warehouses complain that developers offer them overestimated prices for goods that are needed by them. Construction companies mainly count on large western tenants, offering areas divided into 5,000 sq.m, thus ignoring a significant share of existing demand. Besides not all operators have planning on the horizon, that allows them to conclude agreements for 7-10 years, which is desirable for developers

"We, as a logistics operator, could easily fill a 100,000 sq.m warehouse with the goods of clients. And in several months - the same again. Demand from foreign companies, which aspire to come to the St. Petersburg with the goods, is huge. But rental rates for quality areas, which developers today denote as market prices, for us are excessive. The tariffs of warehouse operators in St. Petersburg are above those in the Netherlands, Belgium or Hungary. Therefore we prefer to build warehouses for ourselves. Even Moscow is noticeably cheaper," Valery Minashkin, chief engineer at Nienschants, says.

"There are practically no high class warehouses on offer in St. Petersburg, except for individual projects. Therefore rental rates discourage medium-size logistic companies from renting premises. Besides both St. Petersburg and Moscow developers aspire to gicanticism. Projects less than 50,000 sq.m are a huge rarity, and frighten off both operators and end clients. Frequently clients do not want to be located in a warehouse that has the production of 3-4 other companies of the same profile in it. And in large complexes this would be inevitable. The current market is a seller's market, therefore developers are extremely reluctant to consider the specific wishes of future operators," regional director of logistics company Kuehne + Nagel Vladimir Novozhenin believes.

"A moment of truth will come in 2009 when large and significant warehouse projects will all be completed at the same time. It is evident that by this time the requirements of tenants concerning the technical parameters of complexes and the set of given services will change," Kirill Malyshev, senior consultant in the department of office and industrial real estate at Colliers International (St. Petersburg), says. "There is no doubt enhanced attention will be given to the management of warehouses. Developers still currently do not pay special attention to this, although the first experience In attracting both Russian, and western management company in the market already is. Supply and demand will inevitably move towards each other. And it is not so much the level of rates, but how many other conditions of rent there are (timelines, the size of blocks, the quality of service and so forth)."