Money Growing: Scarce Warehouses

In 2007 in the Moscow region hardly more than half of all warehouse areas announced by developers (1.14 million from 2 million sq.m) have been put into operation. Plans for this year (1.2 million sq.m) will also not be executed 100 per cent, the experts questioned by Vedomosti say without doubt.

Postponed deadlines

Under the most optimistic forecasts, the market will be replenished with 50 per cent of the announced areas, and under pessimistic forecasts about 10 per cent. "A share of developers’ plans will remain just plans, and only companies already bound by rental contracts for premises currently under construction will get new premises and those that desperately need them. Others will prefer to wait," says an analytical report by Knight Frank. And this is in conditions of a backlog of demand at a level of 1.5 million sq.m, notes Olga Yasko, regional director of the analytics department at Colliers International. "Difficulties for developers in receiving financing is a result of the liquidity crisis," he continued.

Moscow developers are looking for other land plots. A number of large companies (Eurasia Logistics, RosEvroDevelopment, International Logistics Partnership, Megalogix) are developing long-term plans of development in the regions. The analysts questioned by Vedomosti name chain projects as the main trend on the modern warehouse market. They allow to lower not only the expenses, but also the risks of developers, explains Alexei Gushcha, general director of Avalon. The loss of one premises from 20 is not so terrible, as the loss of a single project.

Among the advantages of chain projects Kirill Vlasov, president of Russian Logistics Service, names the high quality standards of development, uniform arrangements for the mechanisms of interaction with tenants, the opportunity to rent additional areas, transport availability, etc. But in this case the land lord dictates rather severe constraints for the tenant: the tenant completely depends on the landlord and its subcontractors and can neither choose a suitable operating company, nor plan its turnover – the launch of the premises, as a rule, is always postponed, and logistics operators are compelled to bear high investment risks.

In Russian cities besides national chain developers local players are also engaged in warehouses. Several are having a stab at some immensely large scale projects. "There have been a lot of declarations, but from practice, about 60 per cent of them will remain just that," said Maxim Shakirov, regional director for warehouse and industrial real estate at Colliers International, at the Logistics 2008 conference, organized by Vedomosti.

At best, according to him, these people will stop at so-called land development. That is to say, they will transfer the land from agricultural purpose to industrial purpose, install communications, announce the construction of a large warehouse and then understand that they can’t construct anything (because of a lack of financing, experience, etc.), and will sell the site. During that process, the land will have had time to increase in price in order for the developers to also make some money. Shakirov has admitted that at Colliers International receive many applications from such regional developers who say: "We want to build 100,000 sq.m of high-quality warehouses, but have built nothing similar before. It is impossible to compensate the absence of experience with the desire to make something big.

If the warehouse project all the same is possible to realize, it does not mean that it will be successful. The problem is that warehouse operators study the needs of the local markets, without analyzing the real freight traffic, and only approximately estimate how many potential clients they will have. The transport-logistics field in Russia is rather isolated. Andrei Ivanov, president of the Volga region logistics association, gives an example. Balakhninsky paper factory sends up to 15 container trains full of products to all the nearest ports each month. And all the containers (mostly from St. Petersburg) come back to Balakhna empty. "Why don’t we send them back with imported cargo for the Volga region?" asks Ivanov. Especially as Balakhninsky is just 15 km from the Logoprom Sormovo multimodal terminal, which has container areas and is capable of processing the container stream.

Logistics operators questioned by Vedomosti hope that in the long term Russia will competently unite multimodal transport and modern terminals, especially in view of the general plans of development of each region. "For example, it takes lorries the same time to get from Nizhny Novgorod to Orekhovo-Zueva (300 km) as it does from Moscow to Orekhovo-Zueva (100 km) because of traffic jams. The cost of one palette place in Nizhny costs 7-12 rubles per day, and in Moscow costs 20-25 rubles. Therefore the transfer from the main distribution centers in the capital to other regions in Nizhny Novgorod is just a matter of time," Ivanov considers.

Who wants warehouses?

The main consumers of warehouse services are traditionally store operators and logistics operators. Usually they come together. The number of logistics companies that become tenants and then hand over the warehouse areas for sub rent is constantly growing. For example, in the Moscow region this makes up almost half of all rented areas, analysts at Knight Frank calculate. The same trend is noticed in the regions. However, it is not very defined yet. "There are practically no high quality terminals outside the capital, many warehouse complexes are under construction for consumers own needs," says Yasko.

Logistics companies usually work with clients under the following scheme: a month’s contract is signed and then it is traced what happens to the goods. The parties agree individually how much they’re going to pay. There is no standard price in the warehouse logistics market, says Yury Surkanov, president of Unitrans Logistics. Small clients, for example, define how much they can spend on the storage of the goods, and establish certain requirements for the logistics company. After a month the two parties look at for what price these specifications have been executed. Therefore after a month the contract is usually reconsidered, and as a rule, the rates are usually increased.

Expensive and not nice

Rates for class A warehouses in the regions already correspond to Moscow’s, notes Yasko, and on average are $120-$140 per sq.m a year. Plus operational charges - on average $30-$40 per sq.m a year. Shakirov explains that it is so expensive because in the overwhelming majority of regions there is practically none of the necessary infrastructure: the developer must not only incur costs connected with the purchase of the land plot and construction of the warehouse, but also install communications, build entrances, expand roads, install sewer systems, etc. "Nobody wants to do charity therefore rates are growing," Shakirov summarizes.

For example, in the Moscow region, according to Ruslan Suvorov, head of the warehouse and industrial real estate department at Praedium, in 2005 the cost price of building 1 sq.m of warehouse was $650, and the rental rates were $115. Accordingly, the developer could make returns on the project after 5.7 years. In 2007, despite an increase in rental rates of up to $130, the period for making returns has also increased to up to 7.3 years, as construction per sq.m already costs $950. Since the beginning of 2008 the cost price of building warehouses has been $1,100-$1,200 per sq.m, adds Shakirov. And this, according to him, will only grow. Previously the price of land was growing at a catastrophic rate only in Moscow. Now, good land plots in St. Petersburg, have joined the capital in terms of rising prices as have Novosibirsk, Rostov, Nizhny Novgorod and Kazan.

Vyacheslav Kholopov, deputy director of the warehouse real estate department at Knight Frank, says a lot matters in terms of choosing a site for a terminal including transport availability, multimodality, quality of the plot, the presence of communications, and how far the administration is willing to cooperate, etc. Alla Soloveva, executive director of International Logistics Partnership, objects to this and says that according to experience, in areas where administrations try to create specific zones specially intended for logistics, it is more difficult for developers to work – the time periods are longer and the competition is higher.

To build on land that you have just because you have it is the wrong approach, Kholopov says categorically. However this approach still predominates over choosing a site. The high cost of land, a growth in the cost price of construction and other encumbrances mean that now only the construction of high quality warehouses is profitable. For example, in the Moscow region more than 0.9 million sq.m of 1.2 million sq.m of warehouses put into operation in 2007 were class A terminals. According to analysts at Knight Frank, last year 1 hectare of industrial purpose land in the 30-kilometer zone from the MKAD rose 20-40 per cent in price.

But clients more often need class A warehouses with minor alterations to take into account a feature of their goods, Suvorov says. According to Kholopov, now developers do not try to capture various groups of consumers, offering them unique products. The same class A warehouses with a minimum rented block area of 5,000 sq.m is offered to all clients.

Difficulties in choosing

According to Yasko, "proprietors of premises under construction have begun to approach the choice of tenants with more care." This will make it difficult for tenants: in addition to the level of vacant areas now being at no more than 1-2 per cent, rates are also constantly growing. But tenants, according to Svetlana Yarova, head of the project department at Astera Oncor, do not present what they need in a warehouse: they come to a meeting with a lawyer that has never worked with real estate, and ask for "something ideal."

Surkanov, however, says that tenants basically precisely know what they need. The problem is that warehouse areas are initially created for a standard client: developers have presented a draft on the market: a square building 12 m high, one gate for every 1,000 sq.m, etc And "non-standard" tenants are compelled to store different categories of cargo (dangerous, large-sized, etc) in different places, which is not exactly convenient: when forming an order, it is necessary for them to distribute goods from various locations.

Developers try to fill as much of the land plot as possible with warehouse space. "They start to build and then think about who they will sell to - for logistics this is incorrect," complains Surkanov. "Developers do not provide services, they only create a building, where these services will be provided. Even to create an additional gate for a logistics operator, is not simple and demands new approvals and superfluous expenses," Suvorov says in defense of developers. Surkanov says the main problem of all complexes is that there is practically no empty space in them, no empty open-air spaces. Inward transport is compelled to wait at the gate of the logistics complex because the parking territory is limited. "Our company is not interested in "settling" tenants into warehouses which have been constructed without taking into account the specificity of the activity of the tenant," the president of Unitrans Logistics summarizes.

According to Suvorov, the volume of demand for non-standard buildings is not so great, although for developers such "unusual" projects come with increased commercial risks. It is possible to build for a specific client who will then occupy the warehouse. Announcements of developers that they are going to realize a big project within the limits of which will be both a container terminal, refrigerators, a hotel, a Cosmo port, etc, are frequent, says Suvorov. But such declarations do not normally become reality. Unitrans Logistics itself has negotiated with developers for the construction of a warehouse for dangerous cargo ("this is an unequivocally profitable business: tariffs here are significantly higher," says Surkanov), but "while there is no client, this project will not be started," its president has admitted.

Nevertheless, despite of all the difficulties, the warehouse logistics market is actively developing. Vlasov admitted at the Vedomosti conference: " In some city, when we carry out a large advertising campaign for a class A warehouse project, there is not one local client ready to rent it." Nevertheless he trusts in the prospects of high quality terminals. "In 3-4 years the level of logistics in Russia will be the same as in Germany," says Vlasov looking to the future with optimism.