Growing Money: As a result of foreigners

In 2007 the quality warehouse real estate market in the Moscow region was replenished with 800,000 sq.m, but this is not enough. Class A warehouses are completely full, and the level of vacant premises in class B warehouses is no more than 3 per cent. The lack of premises is forcing consumers to invest in logistics projects.

According to Alexei Bogdanov, a partner at S.A. Ricci / King Sturge, growth in the warehouse real estate market of the Moscow region in 2007 was first of all due to the construction of new class A logistics parks. According to Marina Petrova, an analyst in the valuation and consulting department at DominoM (part of Peresvet-Group), this was 54 per cent of all premises put into operation. According to Praedium, in 2007 about 800,000 sq.m of warehouses were built, although the volume of premises announced to be constructed at the start of 2007, was about 1.5 million sq.m.

Failure to execute plans

Among the reasons influencing the intensity of the realization of logistics projects, Alexei Bogdanov names complexities in the official registration of papers for the land on the one hand, and failure to put premises into operation on time by contractors on the other. "For the MLP (Moscow Logistics Park) and Eurasia projects, the deadline to put the premises into operation was delayed 1-3 months," Igor Kazimov, head of the department of warehouse and industrial real estate at Penny Lane Realty, gives as examples.

According to Michael Golomb, general director at PromSvyazNedvizhimost, another serious problem is finding a logistics operator. This also affects the deadline for putting new premises into operation.

In 2007 several large logistics complexes were put into operation. The most interesting projects were Severnoye Domodedovo logistics park (11 km from the MKAD on the Don route), the first phase of the second part of which measures 558,000 sq.m, MLP Podolsk (14 km from the MKAD on Simferopolskoye shosse), the first part of which measures 114,000 sq.m, MLP Leningradsky terminal (13 km from the MKAD on Leningradskoye shosse), the third phase of which measures 69,000 sq.m, and Kreshkino logistics park measuring 25,000 sq.m (24 km from the MKAD on Kievskoye shosse).

In addition in 2007, according to Andrei Belinsky, head of the commercial department at Tomilino, on the territory of the Technical-logistics Tomilino complex five class A warehouse buildings measuring 28,550 sq.m have been put into operation. "At the same time the construction of five more warehouse buildings with a total area of 107,000 sq.m was taking place and these will be put into operation in the first to third quarters of 2008," he adds.

Activity on the land plot and industrial purpose premises market has grown. Although, in Golomb's opinion, to find a suitable site for a warehouse in the Moscow region is still difficult. "The presence of suitable roads for super size vehicles, a railway line, and, for specialized warehouses, additional electric power capacities, gas and so forth is necessary," he specifies.

For the construction of warehouses the most promising sites are land plots 15-35 km from the MKAD on the main roads. "The construction of warehouse real estate in Moscow is inefficient," he says.

According to GVA Sawyer, the share of vacant premises in class A warehouses on average is 0.5 per cent, and in class B warehouses is no more than 3 per cent. Due to the construction and commissioning of new premises the geography of supply has changed slightly. "Supply in the south has noticeably increased and now you should expect to see an increase in competition between projects, while at the same time the share of supply in the east has fallen slightly," says Bogdanov.

According to Andrei Marusov, director of commercial real estate at development company Inter-regional, most popular among tenants were southern (45 per cent of the total demand) and northern (35 per cent) areas. Demand in the east and west makes up 11 per cent and 9 per cent respectively. The most demanded logistics complexes are located 15-30 km from the MKAD (44 per cent of demand) and 30-45 km from the MKAD (34 per cent). About 15 per cent of potential tenants are prepared to consider warehouses located further than 45 km from the MKAD. Demand for warehouses located up to 15 km from the MKAD, makes up 7 per cent of demand.

Build a warehouse yourself

Among companies forming demand for warehouse premises are logistics operators, chain stores and industrial companies, says GVA Sawyer.

The lack of supply is compelling store companies to start warehouse development themselves. For example, X5 Retail Group in the next 3-4 years plans to invest $1 billion in a logistics system. The company plans to put 600,000-700,000 sq.m of warehouse logistics complexes into operation in the European part of Russia. Finnish paint manufacturer Tikkurila and store operator Samokhval have also announced they will construct their own warehouses.

Penny Lane Realty notes that 2007 was marked by unheard-of interest in logistics and industrial parks both in the Moscow region, and across the whole of Russia by Russian and foreign investors. For example, Deutsche Bank and American International Group (AIG) have bought shares in the largest warehouse developer - Capital Partners, which owns the Pushkino logistics park (212,000 sq.m), and also Domodedovo logistics park (650,000 sq.m).

According to Igor Kazimov, head of the warehouse and industrial real estate department at Penny Lane Realty, the majority of developers operating on the warehouse real estate market, started developing in the regions in 2007. "This is explained by the intensive construction of larger shopping complexes, retailers entering the regional market, and also bringing large logistics bodies into the regions and the natural deficit of European-level warehouses," he explains. Svetlana Yarova, head of warehouse and industrial real estate at Astera Oncor, also notes the attempts of professional developers to develop large logistics projects in central logistics cities - Novosibirsk, Yekaterinburg, Samara, Rostov-on-Don, etc.

According to Colliers International, by the end of 2008 the first stage of the realization of a program to create a chain of logistics complexes in Russia by Evrosib Group will come to an end. This includes the construction of logistics complexes in St Petersburg, Moscow, Novosibirsk and Yekaterinburg. Investments will total $200 million. And Megalogix plans to invest more than $1.2 billion in the construction of class A warehouses and offices in 15 regions of Russia by 2013.

Golomb estimates the profitability of warehouse projects in 2007 at 13-15 per cent per annum with a recoupment period of 7-10 years. "Lengthier recoupment periods of projects in comparison with offices or shopping centers has led to there being mainly two kinds of investors in warehouse real estate: developed financial groups and western investment funds that came on the Russian market with logistics operators," he specifies.

Great demand

Nevertheless Yarova notes that large chains and manufacturers (especially international and national ones, such as Evroset, Nemiroff, etc.) prefer to rent warehouses than construct them when there are favorable offers.

The shortage of quality warehouses is the reason for excessive demand of premises entering the market. In 2007 there were some large rental contracts concluded for warehouses. Smart Logistic Group rented 82,000 sq.m in Severnoye Domodedovo logistics park, where 33,000 sq.m have also been rented by Multiflex, and Avalon Logistic rented 56,000 sq.m in Dmitrov Logistics Park (30 km from the MKAD on Dmitrovskoye shosse). Finnish logistics company Itella Logistics has rented 20,000 sq.m in the Leningradsky logistics complex terminal, belonging to MLP. Puma-Rus has signed a rental contract for a warehouse measuring 8,250 sq.m with development company TsvetMetGazoChistka, which is the proprietor of the class A Lvov warehouse complex (total area is about 15,000 sq.m) located 27 km from the MKAD on the junction between Varshavskoye shosse and the Betonka ring. Among the large tenants of the Pushkino logistics park on Yaroslavlskoye shosse are French retailer Auchan (rents 11,000 sq.m) and Hilti Distribution (6,000 sq.m).

Rates are raised

According to Ruslan Suvorov, head of the warehouse and industrial real estate department at Praedium, in 2007 rental rates grew on average about 8 per cent, and according to Kazimov, for class A premises grew 10 per cent and for class B increased 20-25 per cent. Rental rates for class A warehouses were $120-$140 a year, excluding VAT and operational charges, for class B stood at $95-$120 per sq.m a year. "Because of a sharp deficit in the supply of warehouse premises rental rates for class B premises approached the rental rates for class A warehouse premises," Bogdanov marks.

According to Tomilino, in the II quarter of 2007 the average rental rates for class A warehouses (taking into account the rental rate of offices and loft space) have increased from $120-$130 per sq.m a year up to $145-$170. "The increase in rates is connected with an increase in expenses for construction, in particular a rise in prices for materials, and an increase in the cost of services and land," Belinsky explains.

According to GVA Sawyer, in 2007 the average base rental rates for class A refrigerated warehouses stood at $180 per sq.m a year in the Moscow region and $400 per sq.m a year in Moscow, and for class B stood at $160 and $350 per sq.m a year accordingly. The cost of storage depends on the volume and the specificity of the goods and other factors. On average it is $0.5-$0.7 per pallet per day excluding VAT. The cost of cargo handling work is $2-$3 per pallet (excluding VAT), and the cost of forming an order can reach $40-$50 per pallet (excluding VAT). For refrigerated warehouses the price of storage costs $0.9-$1 per pallet per day (class A), and $0.7-$0.8 (class B) excluding VAT.

Astera Oncor talks about the standardization of rental conditions: triple-net for rental rates is the calculation of the operating costs by the open book principle, with periods of rent from five years and above, with an average of seven years for development projects.

The company also notes projects where it is possible to rent not only large blocks, but also small areas (2,000-3,000 sq.m). "On speculative projects, especially where they are divided into small blocks (from 2,000 sq.m), the time when deals are concluded is later: the majority of deals are concluded when a warehouse project is 50-60 per cent complete as potential tenants are confident that the project will be completed, and it is possible to plan more precisely when the premises will be put into operation," says Yarova.

More money

According to Blackwood, Norwegian fund Eastern Property plans to spend almost $400 million on buying commercial real estate in the Moscow region, including two warehouse complexes. One of them, under construction, has a total area of 61,000 sq.m and is located on Simferopolskoye shosse (developer - Logo-group). The transaction is estimated to be worth $68 million.

British fund Aberdeen Property Investors plans to invest almost $1 billion in office, shopping and warehouse real estate. Russian-Swedish Company United Bottling Group has announced its intention to invest 100 million euros in a new project that includes the expansion of drink manufacturing capacities, the construction of two logistics centers and the creation of a transport company. Belgian company Ghelamco plans to construct two logistics complexes in the Dmitrovsky zone in the Moscow region. An agreement between the local administration and the company’s management has already been signed. The project is at the stage of development.

British fund Raven Russia and Russian company RDI Group have become partners in a project for the construction of a warehouse complex with an area of approximately 100,000 sq.m. The land plot measuring 22.4 hectares is located on the 9th km from the MKAD on Kashirskoye shosse.

Parkridge Holding plans to invest $150 million in the construction of a warehouse complex on Leningradskoye shosse in the area of Sheremetyevo airport on a land plot measuring 40 hectares. The class A logistics complex with a total area of 150,000 sq.m will be under construction in two phases: the first phase provides for the construction of 40,000 sq.m.

The Malino logistics park is an affiliated company of Austrian developer C.R.E.D.O., which is the investor of a project for the construction of a warehouse complex in the Stupinsky area on a site measuring 40 hectares. The total area of the premises is 120,000 sq.m.

MosCityGroup has announced plans to construct a logistics park. The company has already bought a land plot measuring 75 hectares 15 km from the MKAD on Kievskoye shosse near Vnukovo airport.

Butovsky Kombinat plans to construct a warehouse complex with an area of 20,000 sq.m in the Butovo industrial zone on a site measuring 11.8 hectares.

According to experts, the sharpest deficit is observed in the segment of specialized warehouses - refrigerated and pharmaceutical. Therefore a significant event on the market was the intention of Litter logistics chain to construct a class A warehouse complex in the Doskino settlement on the Moscow - Nizhny Novgorod route. Within the 200,000-sq.m premises there will be deep freeze refrigerated warehouses measuring 13,000 sq.m and average temperature refrigerated warehouses measuring 26,000 sq.m. Investments in the project will total 4.8 billion rubles.

Praedium names the purchase of Pokrov logistics park with a total area of 61,000 sq.m by Eastern Property from national chain Agora for $68 million as a significant event.

Purchase and sale transactions for class A warehouses by end users is a rarity on the real estate market, and experts find it difficult to value them.