Money Growing: Business for Professionals

But against this background large chain developers are feeling it rather easy. However projects connected with the construction of universal class A terminals, in due course will lose out to “mixed” projects, consisting of warehouses, manufacturers and accompanying infrastructure. The first such complexes called industrial parks, are already under construction near St. Petersburg. Such approach allows investors to diversify the risks.

Modest achievements

According to the forecasts of analysts, in the first six months of 2008 about 500,000 sq.m of quality, mainly class A terminals were supposed to have been put into operation in St. Petersburg. Experts at Colliers International have calculated that 140,000 sq.m (excluding warehouses used for companies’ own needs, and refrigerated ware houses) were put into operation. Knight Frank give a hardly more modest figure of 129 000 sq.m. Knight Franks estimates the actual capacity of the local modern warehouse market at 1.054 million sq.m. Thus, in the first half of the year it has grown approximately 13% instead of the 50% promised by developers. In the third quarter of 2008 there were also no major expected openings. The largest premises put into operation in 2008, was the first phase of Neva logo-park in Shushary (investor - British fund Raven Russia). This complex is the first-born of the future Megalogix warehouse chain, which according to plans, will incorporate class A terminals in 17 Russian cities. The British company is realizing the chain project together with logistics company Avalon Group, which is acting as a co-investor, and its affiliated company, Avalon Logistics, will become one of the anchor tenants in the future complexes.

The total area of Neva logopark will be 130,000 sq.m. It is being constructed on former agricultural land (the area of the plot is about 26 hectares). The owner of the land and the constructer is Resurs-Ekonomiya, which belongs to Raven Russia Ltd.

Neva Logopark will consist of three buildings. The first, measuring 56,000 sq.m came into operation in April. Avalon Logistics occupies the entire building. The second phase (44,000 sq.m) and the third phase (30,000 sq.m), according to the plan, will be rented out by the end of the year. Premises in them are intended for tenants. The target group of clients is large logistics operators and companies engaged in light construction production. The rent will range from $130-$140 per sq.m a year (triple net).

In March in the Nevsky area of St. Petersburg, at 295 Prospekt Obykhovskoi Oborony, the second phase of class A warehouse complex Teorema-Terminal has opened. The investor is Teorema, and a 21-hectare site has been developed near the main ring road of the city (KAD). The site was bought in autumn 2006 by the State Obykhovsky Factory. The total area of the logistics terminal will be 100,000 sq.m. Developers position the project as the only high-category, large warehouse in the city.

The first phase involved the complete reconstruction of the factory warehouse measuring 11,000 sq.m and started operating in the middle of 2007, and the second phase will be a new building constructed from zero. It will have 28,700 sq.m of warehouse space and 4,500 sq.m of office space. The area of the third phase of the terminal will be 42,770 sq.m. Teorema has already started its construction.

Eurasia Logistic, with its Kopino industrial park, which was supposed to enter the market in the second-third quarter of this year, and Evrosib MLP, with its second phase of the Utkin Zavod project, etc, all failed to follow their schedules.

Basically, the result is predictable: for the first time in the history of the St. Petersburg warehouse market several large projects should have been completed at the same time, but every developer had their "objective reasons” for not completing to time, and the failure as a result was quite significant. One thing provides hope: it is highly probable that all the leaders will complete their construction this year. According to the forecasts of Colliers International, by the end of 2008 the market will replenished with 628,000 sq.m of space, all of which will be class A. Knight Frank predict that more than 550,000 sq.m will come onto the market, of which about 80% will be leased. As a result the share of quality warehouses will reach 33% of the total amount on the market, and class A terminals will make up about 63% of supply in the segment of high quality real estate.

Experts at Astera also estimate the results of the second half of the year at 500,000-650,000 sq.m.

Naturally, the influence of the international financial crisis has been felt. According to Colliers International, the cost price of construction of quality terminals has reached $1,100 per sq.m, which, on average, is 24% more than last year. "Additional financial resources have been required by many Russian players, and to find them in the present situation is rather problematic," notes Maxim Shakirov, regional director of the warehouse and industrial real estate department at Colliers International.

Storerooms for sale

This summer Raven Russia Ltd (RR) fund concluded a landmark transaction on the purchase of class A logistics complex AKM Logistics, which is under construction in Shushary. The terminal is being constructed by the same company, which is part of Venture Investments Yield Management LLP (VIYM) holding, which specializes in the development in commercial real estate.

RR has announced the creation of a joint venture with VIYM with fifty-fifty shares. The British fund will incur the future financing of the project and will gradually redeem it entirely. The terminal is under construction on a 32.8-hectare site. The total area of the complex will be 164,000 sq.m. At the moment only the first phase of 52,000 sq.m is being built. According to the schedule, the first phase will be put into operation in the fourth quarter of this year. The whole construction should be completed in 2010.

According to the estimations of experts involved with RR, expenditures on the project will total $216 million. The price that RR will pay for the warehouse terminal as a result, has not been calculated yet. According to the estimations of experts, the final sum will depend on various factors and may range from $220-$280 million.

This summer Teorema announced its will to sell its partly put into operation terminal. The asking price is $220 million.

Many developers will reject warehouse projects ain the initial stages. According to some information, the following companies are selling their projects: M-Industriya (in Utkin Zavod), Hermitage Construction Management (in Shushary), VVV Company (in Utkin Zavod), White days Investments (in Yanino), Trigon Capital Group (in Tosno), etc.

"Entry to the warehouse market has become too difficult for companies that do not have operational experience in this sphere. Their projects most likely will remain informational announcements. In the warehouse business there will only be professional developers. The situation for new players entering this market is not good," considers Vladislav Kovalevsky, head of the industrial and warehouse real estate department at Knight Frank St. Petersburg.

Experts are united in their opinion that the land market for warehouse construction is overheated, and prices are overestimated so that to realize projects is unprofitable. "Territories lengthways along the KAD are overestimated by at least twice," believes Nikolai Vecher, director of the Northwest branch of GVA Sawyer. "In Shushary, you will not find a site without defects for less than 160 euros per sq.m, and the top price reaches 200-220 euros," complains Vera Boikova, head of the industrial real estate department at Astera.

According to Kovalevsky, some landowners along the KAD have already agreed to reduce prices by up to 30%. Other experts do not yet see a readiness to compromise. As a result the market is frozen.

Operating warehouse terminals still do not experience problems with overloading: the share of vacant space ranges from 1.5-3%. It is characteristic for complexes under construction to have an already substantially formed (70-80%) pool of tenants as with the second phase of Utkin Zavod and the first phase of Kolpino.

Rent rates are stable. According to Colliers International, the average price for class A premises is $120-$140 per sq.m a year excluding VAT and operating costs (triple net), and for class B is $110-$120. Thus, the activity of tenants is rather slow. "In connection with the mass output on the market of large projects tenants are not in a hurry to conclude contracts because they expect rates to collapse," notes Andrei Amoss, an adviser in the warehouse department at Jones Lang LaSalle. However no experts expect this to happen.

Opinions on how events in 2009 will develop are divided. Kovalevsky believes that the market may suffer a deficit of quality premises as complexes that are at the stage of construction, by then will already have entered the market and will be filled, and no new scale openings are expected yet. Executive director of MLP Alla Soloveva predicts there will be unsatisfied demand for quality warehouses measuring 830,000 to 1 million sq.m. "The development of retail and industrial zones is an additional factor for expansion in the future," she considers.

According to Boikova, tenants will soon have a real choice and developers will be compelled to conduct a more flexible pricing policy: "For example, Eurasia Logistics is already offering concessionary terms of rent in the first year for the Kolpino industrial park project. However, during the period of the contract - due to the indexation of rates - it expects to compensate these losses. It is clear that other price compromises will also be considered.

Warehouse transformers

Constructers, as before, count on large tenants, and mainly divide the space into blocks from 5,000 sq.m. Demand is traditionally focused on premises up to 3,000 sq.m, and according to Knight Frank makes up 65% of all applications.

"Previously the increasing demand for quality warehouses was formed first of all by foreign retail and logistics companies entering St. Petersburg, but now the structure of demand is influenced more and more by the light industry sector. An automobile cluster in the Shushary area has contributed to the concentration here of subsidiary production and services," says Shakirov.

"It’s a shame that the majority of sold projects are aimed exclusively at logistics and does not consider the tendencies of the market. Meanwhile, class A warehouses are suitable for the accommodation of light manufacturers, and to convert them for this purpose is not particularly difficult. However the problem is that builders will not have received approval to do so in due time," says Amoss. It is impossible to place production facilities on sites intended for social business.

Only the most perspicacious developers are prepared to build-to-suit, i.e. build warehouses for a specific customer, and also include a store within the structure of the logistics complex.

For example, Lithuanian investor Hanner in partnership with logistics company Girteka (also from Lithuania) has started construction of the Optima Logistics Park terminal located in the Shushary-2 industrial zone on Moskovskoye shosse, near the Toyota and General motors factories this summer. The total area of the complex will be 102,000 sq.m. The first phase (approximately 42,000 sq.m) should be completed in the first quarter of 2009. This will comprise typical class A warehouses, though the minimum size of each section has been reduced to 2,500 sq.m. In the second phase, which should be completed by the end of next year, the investor is going to provide for several stores, having altered the project due to corresponding applications. The functional purpose of the land plot has allowed this.

On the territory of the Kolpino logistics park (the largest warehouse complex near St. Petersburg, which is being built by Eurasia Logistics) there will also be the factories of Foxconn and Hewlett-Packard. The factories will occupy a 12-hectare plot, which was bought in February this year from Eurasia Logistics. Investments in the project, including buying the land plot, are estimated at more than $50 million. Eurasia Logistics will build the facilities (approximately 52,000 sq.m) themselves and will then transfer them to the customer on a turnkey basis.

The holding has almost 190 hectares on the crossing between Moskovskoye shosse and Kolpinskoye shosse, and is therefore prepared to share even more "surpluses" and sell about 20 hectares to another manufacturer. The total area of the logistics park itself will be approximately 580,000 sq.m. The first 90,000 sq.m should be put into operation in November, and 120,000 sq.m more at the beginning of 2009. According to Nikolai Ditsman, head of the marketing department at Eurasia Logistics, a pool of tenants for the first phase of the industrial park have already has already been generated for 70-75% of the area. A preliminary rental agreement has been concluded with one company and others have signed protocols of intention. Among the future tenants of Kolpino are STS Logistics, Logistics Engineering Consult and Smart Logistic Group. All three are clients of the chain and are present at Eurasia’s complexes located in other cities. In the second and third phases of the complex (370,000 sq.m) premises for specific customers have been stipulated.

In autumn 2008 the Gorigo logistics complex, located on the territory of a future industrial park was put into operation in the Gorelovo district. The developer is YIT Lentek (the Russian branch of Finnish holding YIT). The finished premises will be transferred to its proprietor Finnish investment fund Evli Property Investment (EVI). The deal concluded between YIT Lentek and EVI on the terminal was concluded as far back as spring 2007. Payment for the terminal has been on a stage-by-stage basis – in correspondence with the performance of works at the site. The class A Gorigo terminal will consist of two buildings with a total area of 91,000 sq.m. EVI has the option to expand the logistics center by 70,000 sq.m. But no decision has been made yet.

YIT Lentek is developing in an industrial park on a land plot of more than 110 hectares in the Gorelovo district. The total area of the future construction will be about 400,000 sq.m. Approximately 40,000 sq.m of this will be allocated for manufacturing and 355,000 sq.m for logistics. The remaining area will be occupied by technical premises. The first phase of a factory that YIT Lentek has built on a turnkey basis for meat-processing company Atria Russia (part of international Atria Group plc) has been completed already.

ImmoRosIndustriya, a joint venture between Russia’s Rostik Group (restaurant business, logistics and tourism) and Belgium’s Immo Industry Group (development of industrial real estate) intends to construct an industrial park in Shushary. It will measure up to 210,000 sq.m. The land plot belongs to ImmoRusIndustriya. The developer is considering applications for areas measuring from 5,000 sq.m. However, the completion of the date of the project is still unclear.

VTB has more specific plans about the Marino industrial park. The developer of the project is Moscow company Espro and the owner of the land plot is a closed share investment fund created by VTB. They intend to develop a 130-hectare land plot, of which about 78 hectares has been allocated for an industrial zone. The developer will be responsible for the complete engineering maintenance, and will then divide the plot into 1.5-2-hectare sections and will either put them up for sale or build premises for specific customers. On 45 hectares there will be a class A warehouse complex, which will be built in four phases. The areas in it are planned to be handed over to big clients at the construction stage so that they can adapt the premises for their own needs. Experts agree that in terms of saturation of the market, the share of universal, high category warehouses constructed for a specific operator and industrial-warehouse complexes will steadily increase in the market, despite the specific risks of this segment.