Commercial Real Estate

An industrial park (IP) is a complex with production, warehouse and office premises located typically outside the city on a large land plot and is occupied by the representative offices of various business types, from large to small, and is combined via an integrated solution for utility services and transport infrastructure. An IP is not the random selection of neighboring enterprises looking for a united technical solution in their own facilities, but, rather, an IP is a specially organized facility with a single legal, technical and transport infrastructure receiving the support of various governmental bodies, such as the Russian regional governments as well as the Russian Federation government. An IP is designed to house companies requiring premises for production and warehouse storage located within close proximity to each other, thus allowing said resident companies to save on expenditures for developing the engineering infrastructure and its subsequent operation. Indeed, an IP has integrated security and lighting, while expenditures on cleaning and maintaining the territory are split correspondingly among all of the tenants.

Considering that a company delivers its goods and freight throughout the Russian Federation from an IP, one of the necessary conditions of an IP is its close proximity to a large transport artery, while there should also preferably be a private railroad juncture. Another important factor contributing to the success of an IP is an adequate electrical and gas supply for all the resident companies, given that the production and logistics complexes located in an IP typically consume a lot of energy. Accordingly, special attention is paid during construction to providing all companies located on an IP’s territory with sufficient electrical and gas power supply; therefore, given the existing problem in Russia with supplying newly built facilities with enough electricity, IPs are more and more frequently installing their own gas piston stations. However, this is a rather expensive solution for providing IPs with stable electricity and heat.

Private investors usually develop IPs, and an IP can be organized so that the developer itself remains the owner of a plot and constructed production and warehouse premises and leases out the space as per long-term contract, such as the case with the Sheremetyevo IP. An IP can also be organized by selling a land plot as property to a resident company of said IP and an owner-contractor agreement must be signed between the IP’s resident companies and the developer company for the construction of the utilities services, or for a participatory share in the construction of the utilities services, such as with the Noginsky IP. A third variant is using budget funds to construct the necessary infrastructure, following which the plots are offered for sale, such as with the IP in the Kaluga Region. However, it must be noted that this arrangement is ahead of its time in Russia, given that typically an IP is developed and constructed today via non-budgetary sources of financing.

There is a whole number of problems associated with locating an IP in the Russian Federation’s subjects, beginning with the acquisition of a land plot. Indeed, appropriate plots for constructing IPs are located beyond populated areas, which is natural and justified for environmental reasons, and the required premises (up to 500 ha) are occupied by agricultural land. The process for transferring land from agricultural use to industrial, transport and other special uses land takes at least six months, with the assistance of the authorities. The support of the authorities is a required condition, given that according to the law on land designated for agricultural use, said land may only be re-designated in the even that the authorities of the federation subject relinquish their rights to preferred purchase.

Furthermore, a developer and future owner must survey and delineate plots into small sections for each specific investor and establish the permitted use for each section, which is only possible once a resident company has been determined and an agreement of intent or a preliminary agreement has been signed. A change in permitted use is effected after a public hearing, which must be announced 30 days prior to it being held. Following the public hearing, the results must be approved by the head of the administration and they must be published. All of these steps require a lot of time and draw out the beginning of construction on an IP.

In addition, all of the utilities and telecommunications installed on a plot require serious capital investment, which a developer recoups no sooner than within a year in the best case scenario. The resident companies in an IP are often willing to take a participatory share in developing the infrastructure, but only once they have reviewed bank guarantees or contracts of guarantee from a developer. Constructing industrial parks on the territories of former industrial enterprises is a rather prospective practice, given that these territories usually already have all the power requirements, there is often a railroad juncture on the territory and there are water wells as well as transformer and gas distribution substations, respectively. Although there generally are dilapidated buildings on the territories, thus requiring additional expenditures to remove them, given the existing complications with installing utilities and telecommunications, the razing of old buildings is a far less capital-intensive procedure.

Taking into consideration the financial expenditures assumed by an IP developer, the risks associated with constructing an IP (changing the land designation could be unsuccessful based on an unfavorable environmental or sanitary and epidemiological finding, etc), as well as taking into consideration the advantages the construction and operation of an IP brings to a region (such as generating tax revenue, providing new jobs, attracting foreign know-how, etc), the administrations of the Russian Federation’s subjects would be better off supporting IP developers and providing incentives for their constructing IPs specifically in their regions. Indeed, the Kaluga Region has had favorable experience in this area, with the regional authorities having provided a number of tax incentives to the developers and resident companies of IPs.

Special attention and support on the part of the Russian Federation government will be given to IPs constructed outside the Moscow Region, given that this region is already experienced in building IPs and large developers are interested in constructing IPs here, while the Moscow Region government has already approved a program for developing industrial zones (more on this later). As German Gref, minister of economic development and trade, states, “the highly prospective regions have not been developed enough as of today.”

The Moscow Regions from 200-2005 became one of the most stably and dynamically developing regions in Russia, being interesting to not only commercial real estate developers, but to industrial and warehouse developers. The region is gradually gaining experience in constructing industrial zones, although there are still too few completed projects to summarize and draw conclusions.

The following factors contribute to the attractiveness of the Moscow Region as an area to construct IPs: there are several large airports, cargo and freight operations, a railroad branch network and convenient transport intersections and the A-107 (the so-called concrete highway) has been widened and expanded.

Additionally, the region’s government has approved the Program for Creating Industrial Districts in the Moscow Region by 2010, whose goal is to assist developers to construct IPs by overcoming administrative hurdles at the locations. The program was developed in accordance with decree № 271/16 of the Moscow Region government, dated May 13, 2004 and entitled Designing the Moscow Region Government Program for the Development of the Industrial Districts on the Territory of the Moscow Region by 2010 and approved as per decree № 410/24 of the Moscow Region government, dated June 6, 2005.

A list of proposed areas for creating industrial districts, land plots available for the construction of IPs as well as investors interested in developing several plots has been drawn up as part of the program and they include the following: Schyolkov IP, 49.7 ha, Vozrozhdenie Bank; Volokolamsky IP, 474 ha, Terre di Lama; Papivino IP, 292.39 ha, Klin-based agro-industrial company Region; Spas-zailok IP, 100 ha, U.S.-based Kohler Co.; Malino, 40 ha, Malino Park Logistics; Obraztsovo IP, 65 ha, Stupino Industrial Park; Stupino IP, 150 ha, A.M.G. Group; Stupino IP, 800 ha, Stupino-Technopark.

The 18,000-sqm Sheremetyevo IP has already been completed in the Moscow Region, while several projects are in the design stages, with the following ones of particular interest:

Kulon-Istra IP: This park will be located on 33.3 ha on the Moscow-Riga M9 highway, 57 km from the center of Moscow and eight km fro the A-107 concrete highway (fourth ring road). The overall storage area will be around 170,000 sqm, with the production modules to be built-to-suit a specific client. (www.kulon.ru/under.phtml).

Noginsk IP: This park will be located on a territory of more than 80 ha in close proximity to Noginsk (to the right when entering the city), 37 km from the MKAD. The park will include mainly German companies and producers, while the park’s special feature will be a retail park with a hypermarket, construction materials store and other stores located on the first line along Gorkovskoe Shosse

Stupino IP: This park will be located in the Stupinsky district on 2,000 ha. The special feature of this IP will be residential construction and a recreational zone in addition to the full development of the IP. As per the plans of the Moscow Region government, 12 industrial parks on 50-ha to 500-ha plots will be built and delivered to the market by 2010. (www.restate.ru/news/22331.html).

Domodedovo IP: This park will be built on a 10-ha plot in the Domodedovo industrial zone, 14 km from the MKAD and 10 km from the eponymous airport, nearby the eponymous railroad platform. The overall area of the IP will be around 50,000 sqm, of which 38,500 sqm will be production and warehouse premises and 7,500 sqm will be office space.

The Moscow Region is not the only one providing incentives for constructing IPs on its territory, as the regions neighboring the Moscow Region are also actively attracting investors. The advantages for investors in these regions are the significantly lower cost of the land plots for construction, the serious support from the regional authorities, the tax incentives and breaks offered as well as the sometimes easier to receive limits for gas and electricity.

For example, the progressive experience of the Kaluga Region government in developing the Grabtsevo, Vorsino and Kaluga-South IPs is well-known. Indeed, large investors like Volkswagen, Volvo, Bosal and others have been attracted to the Kaluga Region as a result of the favorable and advantageous terms and conditions for constructing production zones here.

The city of Gagarin is also promoting the construction of IPs on its territory. On one IP plot in this city, Krasnaya Line, Wild Orchid, a linoleum production plant and plywood manufacturing plant will be located, while the IP has its own railroad junction and electrical power supply.

In conclusion, an analysis of the modern trends for expanding production – as part of the development strategy for the country’s production sector approved by the Russian Federation government – allows us to assume that the construction of IPs in the Russian Federation’s subjects, and foremost in the Moscow Region, will set the trend for industrial real estate market development over the next decade.