In-Depth: Emergency Exit for Warehouses

Serious financial shocks have affected both consumers of warehouse complexes, and developers. Companies are looking for anti-recessionary measures that will help them during difficult times.

Stop in order to remain

The crisis has far from affected all segments of business, and a number of companies, on the contrary, have experienced an increase a sales volume: distributors of alcohol, manufacturers of tobacco products, etc. Kkey consumers of warehouses - logistics operators and retail chains – are reconsidering plans for development in Russia.

Many companies have decided to place emphasis on key regions with the highest consumption, having slowed down or stopped programs of expansion in other cities. For example, Finnish company Stockmann has announced the postponement of the opening of stores in Yekaterinburg, St. Petersburg and even Moscow. Х5 Retail Group has temporarily frozen the construction of a store in Samara. Vester group has put up for sale land plots in the regions. As a result, demand for modern warehouse complexes has started to decrease.

In parallel, developers, who previously built warehouse complexes with cheap enough external funds (8-10% per annum), are now facing difficulties with crediting that has led to delays with the realization of new projects that have already started. For example, in the Moscow region in 2009, by tentative estimations, 400,000-500,000 sq.m of warehouses will enter the market - less than 2007 (1.2 million sq.m) and 2008 (about 600,000 sq.m).

How to complete

For all projects there is a certain point of no return after which it is more profitable to complete the project that freeze it. This point is reached after investment in the project of 30-40% of investments.

When there is insufficient financing new projects can be suspended, for example, before an investor capable of financing the construction of the premises for its own needs (build-to-suit format) is found. Under obliging contracts concluded prior to the beginning of construction, a number of developers can renew credit lines. Such a scheme of mutual relations involves signing a rental contract 9-15 months prior to the end of construction and for the long-term planning of activity by the tenants. The project, of course, should possess doubtless advantages that justify the long wait for the warehouse areas for the tenant. But such a scheme does not yet operate in the warehouse market.

In the current situation developers can save considerably on the reduced prices of materials. The price of concrete has fallen up to 40%, and metal by up to 30% from 2008 prices. Thus, the cost price of construction can be 10-15% lower when concluding new turnkey contracts. Developers are starting to reconsider the conditions of already concluded building contracts. Builders may also take part in tenders to minimize expenditures and give the bought materials to the contractor, thus reducing the possible risks of not meeting deadlines.

Also, the optimization of building technologies and the introduction of new approaches will essentially help lower the cost of construction. For example, in the US, the cost of similar construction is 1.5-2 times lower. If in Russia it is $1,000-$1,200 per sq.m then in the US it is $500 or less.

How to rent out

In the current situation developers are changing tactics in terms of renting out premises. Although demand remains high, the decision-making time of tenants has increased, and a share of deals are not made.

Proprietors have a more flexible approach to guaranteeing the conclusion of rental contracts and consider various variants of deposits and bank guarantees. The standard conditions in the Moscow market today are for a three-month deposit and a bank guarantee for 3-12 years or a guarantee from the parent company of the tenant. The alternative now is to replace the deposit with a bank guarantee or reduce the deposit to about one month.

Flexible price policy is the most influential for a client’s preference to an owner of a terminal. Rental rates for warehouse complexes in Russia are some of the highest in the world: $145-$165 per sq.m a year. The difference between the initially offered rate and the rate concluded in the contract is insignificant - about 2-4%. A decrease in rates due to the lower price of construction will only be implemented on premises constructed with some delay, most likely not earlier than 2010.

In the regions where demand is lower than in the Moscow region, rental rates are falling but only in the range of $120-$125.

How to sell

In the sale market in the present situation for both land plots and warehouse complexes companies are getting rid of non-profile assets. Discounts on uncompleted premises can be 30-40%. There are not many examples of such discounts on the market, we know of only 3 or 4 for which active negotiations are taking place.

In the warehouse market several projects have come back on for sale for which preliminary contracts had already been concluded and advance payments already paid. At the moment these premises are on offer for their former price.

In connection with the absence of institutional investors in the market, investment transactions are not occurring and those that had already started will more than likely only be completed at the start of 2009. Companies that have cash can now choose the best offers. After the opening of credit lines by banks, which is hoped will happen at the start of 2009, a revival of the market and an increase in the number of transactions is possible.

Owners of logistics complexes that planned to sell their premises now have time to prepare the scheme of sale, provide all the necessary documents, solve any disputable questions concerning the sale of the premises, etc.

For the investment sale of a warehouse complex it is necessary to provide a well-fitted out complex at market rates, with good quality tenants and guarantees of business stability: the requirements here have not changed. It is necessary to pay attention to competitive offers to estimate how long the premises will be on the market for, to prepare the full package of documents and a transparent scheme of sale.

For the future

Developers, planning to develop projects, are doing so very cautiously - small phases with the possibility to quickly complete the project. In addition it may be worth reconsidering the concept of development and considering the possibility of constructing the premises to order and minimizing the risks.

In Russia there are already industrial parks appearing where the construction of premises to order is possible: for example, I-Park Lemcon industrial park, being realized by Finnish company Lemkon in the Kaluga region and Vyazniki industrial park (Vladimir region), established by the administration of the region and Slovakian company Trimo. A number of developers are offering prepared land plots with all the necessary communications and if a client wants they can sell it without a contract for construction, as, for example, company Aksis & Co has done.

Regional projects will be under construction in view of existing market realities, the needs of local players and with emphasis on small warehouse areas from 2,000 sq.m. It is necessary to expect that developers will fight for cheaper financing of projects, and will optimize their internal structures including reducing their staff and outsourcing some functions.