Commercial Real Estate

With the spread of business activity from the capital to Russia’s regions, the deficit of quality warehouse facilities has become an increasingly pressing issue. This is particularly so in the Ural regions, where the lack of quality warehouse infrastructure and the slow pace of warehouse development pose a serious threat to the growth of retail in the area. As a result, the warehouse business has recently become one of the most attractive sectors of the commercial real estate market.

Reality check

The total sum of warehouse facilities in the federal Ural region is currently estimated to be around 5 million sqm. However, no one is able to give precise figures because many businesses are using warehouses of the old format or unspecialized facilities, such as old factories converted into warehouses, hangars or basement areas. Most warehouses currently in use in the Ural region do not meet the international standards for technical design, maintenance services and various other parameters. In the Ural federal okrug, many warehouses are simply subdivided into open and closed sections and heated and cold sections.

In the opinion of Vitalia Kitsyuk, the director of the retail and industrial chamber at the investment center Yuzhno-Uralskoj, the warehouse real estate sector has developed spontaneously and not according to the demands of the market. She states, “For the most part, the warehouses are being built in areas where it is not possible to build something else. The costs for construction or re-profiling are therefore minimal. The existing lots, most of which are not specialized, include industrial parks, old factories or plants, and finished areas in basements or ground floors. As a result, it is very difficult to accurately determine the total sum of warehouse space.”

According to the standard international classification system, such basic Soviet warehouse lots are considered class C and D properties, and experts estimate that they represent 40-50% of available warehouse space in Yekaterinburg, Chelyabinsk and Tyumen. Properties with class A or B facilities are limited. “From the point of view of commercial logistics, adequate warehouse facilities are practically non-existent,” says Andrey Gostyaev, the chairman of the board of directors of Lori, a transport-dispatch company. “On the one hand, if dealing with just the city of Yekaterinburg, one or two quality logistics centers may be sufficient to meet the demand and allow for the successful operation of business within the city. However, if you consider that Yekaterinburg is a major distribution center and axis of freight flow, then several major centers with full sets of logistical services are required at a minimum.”

The looming deficit

The idea of creating a major transportation and logistics in the Ural region surrounding Yekaterinburg has long been associated with the plan to connect Yekaterinburg to the International Transport Corridor (MTK), which runs through Berlin, Warsaw, Minsk, Moscow, and Nizhniy Novgorod. Connecting the MTK to the Trans-Siberian Railway would be favorable to both Russian and European carriers. In addition, the extension of the MTK could help spur the development of the warehouse real estate sector in Yekaterinburg.

The mass arrival of major national and foreign retailers on the local market could also serve as additional stimulus for Yekaterinburg’s real estate market. According to Alexander Zakharov, the commercial director of the company Beliy Aist (wholesale trade), “Almost all foreign commercial companies first enter the Russian market by opening a warehouse in Moscow and then expand further to St. Petersburg and even further to Yekaterinburg. Chelyabinsk, Tyumen and Perm lose out because, from the point of view of logistics, these cities have only enough warehouse facilities to meet the local demand. Yekaterinburg, as a major regional logistics center, conveniently serves Ufa, Chelyabinsk, Tyumen, Perm, Izhevsk, Samara, Omsk, Tomsk, Novosibirsk, and even Khabarovsk. Therefore, in recent times, the need has grown in the city for warehouse facilities that are at least 1 thousand sqm in size.”

In response to the developing situation, the local authorities are one of the first groups to seriously consider how to address the issue and have calculated the total area of warehouse space in the city. As such, according to data of the commodity market committee of the administration of Yekaterinburg, the total area of warehouse facilities in the city is 670 thousand sqm, of which 390 sqm is cold warehouses (140 thousand sqm for vegetable growing and 250 thousand sqm for industrial enterprises). Heated warehouses comprise 280 thousand sqm. According to the data from the city administration, 450 thousand sqm can be considered class C and D properties, while 150 thousand sqm fall into class B and B+. As such, officials estimate that the deficit of warehouse space in Yekaterinburg totals 900 thousand sqm.

Market players consider this number to be conservative. In their opinion, the outdated warehouses in classes C and D, even though they are located near the train lines, do not provide good perspective for development on account of their inconvenient location in relation to the intercity and regional commodity market. In addition, the warehouses from the Soviet times are too low and have narrow openings.

Class A and class B warehouses are most in demand. “Such premises are characterized by a great deficiency. There are a number of the companies that have arrived on the Ural market and are finding it difficult to effectively work on account of the absence of modern warehouses,” says Tatyana Cherepanova, director of LLC Russian Logistical Service – Yekaterinburg.

If the situation with the warehouses in Yekaterinburg is considered problematic, then the situation in Chelyabinsk and Tyumen is downright lamentable. According to the experts at the MAN Real Estate Center, there is already a number of available modern warehouse complexes in the Sverdlovskaya region, while in Chelyabinsk and Tyumen, the precise demand for warehouses of international quality standards has not even been tallied. “There is no demand and there is also no offer. For this reason, investors are skeptical when considering the possibility of investing in the development of this real estate sector,” notes Maksim Yandemirov, the director of the Chelyabinsk affiliate of the MAN Real Estate Center. “In my opinion, Yekaterinburg has long been the logical center of the Urals, while Chelyanbink has missed this chance.”

However, this opinion may be considered too subjective. In Perm, for instance, new warehouse facilities, the ORTK Siberian on the Barabinskiy, are being built. Last year, work also began on T-Logic, a logistics center with 3600 racks. The warehouse is equipped with Nedcom shelving equipment, a covered automobile loading ramp and a covered ramp inside the warehouse.

Do it yourself

The need for warehouse facilities is compelling retail companies to build their own warehouses. For example, the Chelyabinsk-based operators Oksi, Forpost and Nezabudka have been contracted by individual companies to build modern warehouses. These warehouses are outfitted with high-tech equipment and serve as examples of modern facilities. Likewise, the new owner of the Ochakovo plant in Tyumen also initiated the construction of warehouses for the enterprise, which was put into use in the spring of 2006. As stated by the director of the plant in Tyumen, Mikhail Mezentsev, the area of the warehouse is 7 thousand sqm, which almost six times bigger than the old warehouse hangar in which the company had previously stored its products. The highest point of the facility is 12.5 meters, or 38 two-liter bottles of beer (if they are stacked). Until the creation of their own warehouse, Ochakovo had been renting a hangar located almost two kilometers from the plant.

Such is also the situation in Yekaterinburg. For example, the company Best plans to add 14,000 sqm to their existing warehouse area (40% of which will be rented out). The total warehouse space will be 53,000 sqm, 20,000 sqm of which will be high-quality class A and B property and 4,000 sqm of which will be cold warehouses. The remaining area is class C space. According to Nikolay Gavrilov, the assistant to the general director of Best, the sum of investment paid off from the profits will equal $600-800 for every one square meter that is built. He states, “With a constant growth of prices, we have allocated about five years for the full return on the investment.” Company-owned warehouse complexes are being built by contractors such as Yunilend-Yekaterinburg, Kalina and Baltika. Among the most well-known of the projects is the Yekaterinburg franchise Monetka, which will be ready by 2007 and will comprise 10 thousand sqm, including an administrative building. Investment for the project will be $5 million. Nailya Sakhapova, an analyst for the ALKO association, notes, “Today, such projects are being built by legitimate businesses. Thanks to them, the total size of the warehouse real estate market has grown. However, these facilities are maintained by the investor and are therefore not included on the free-rent market.”

At the same time, many companies that still have facilities from the Soviet times are trying to use the outdated warehouses as an instrument for financial gain. A clear example would be the company Chelyabenergo, which rents out its warehouse to an affiliate firm Makfin. In the opinion of specialists at Chelyabenergo, this symbiosis allows the company to save on the maintenance of warehouses, transportation, and other expenditures.

Doing it for others

Examining the developing situation in the Ural market, many developers already have planned for the construction of quality warehouse spaces. It is possible to count several interesting and potentially profitable modern warehouse projects in the capital of the Urals. In first place is the Euro-Asian International Transport-Logistics Center, construction on which began in 2002. The founders of the center include the government of the Sverdlovsk region, the administration of the city of Yekaterinburg, GUP POSTEK-Yekaterinburg, major players of the transport-freight market, including Ural-Container and Lorri, as well as insurance company Express-Garant. In addition, the complex will include areas for container storage, an administrative building, a car park and hotel. Covering an area of 53 hectares, the complex will include 70,000 sqm (14 blocks) of warehouse for short-term storage and 10,000 sqm of class B warehouse space. The total sum of investment will reach up to $48.5 million. At the end of the year, the company plans to rent out the two first terminals, each with 12,000 sqm.

Another project is being realized under the ABAK Corporation, which looks to build a retail-warehouse complex called Chkalovsky Terminal (at the intersection of ul. Alpinistov and ul. Chernyakhosky, near the circle road, along the highway between Chelyabinsk and Tyumen). In the long term, the 27 thousand sqm of this territory will be filled with class B and B+ warehouses. According to Ilya Lozhkin, the director of LLC Chkalovsky Terminal, the project is convenient because it is located on the circle highway, from which it is possible to reach any point in the city within in one hour. He states, “Already 1.5 thousand sqm is ready to be rented out, with the construction of another 15 thousand sqm of class A warehouse in progress. A lot of serious work was put into this project. It has been difficult to settle agreement with the state structures and the administrative of the railways, making the settlement process very drawn-out. However, we knew to expect such difficulties.

In addition, GK Oboronsnabsbit has planned the expansion of available area (25,000 sqm of class B+, B, C and D warehouse). In 2007-2008, the company plans to build a class A warehouse terminal with an area of 35 thousand sqm, as there is a particularly sharp deficit in this sector. All of Oboronsnabsbit’s warehouse areas will be rented out.

There are equally grandiose plans for Chelyabinsk and Tyumen. For example, Chelyabinsk investment company Liner, in cooperation with the firm Logist-ICS, has started developing plans for the first class A logistics terminal in the southern Urals. The terminal, LK-Liner, will be located on the northwest border of Chelyabinsk, between the settlements of Shagol and Krasnoe Pole. The Liner investment company has acted as both co-investor and developer of the project. The total area planned for the warehouse facilities of LK-Liner is to be 130 thousand sqm. The first phase of the complex is scheduled to be completed and ready for use at the end of 2008, with the second and third phases ready by 2009. The total cost of the project is preliminarily estimated to be $169 million.

Setting the Price

Regardless of plans for new developments, the deficit in warehouse complexes constantly provokes rent increases for warehouses. Observers note that the growth in price in this segment of the market has been 25% per year. If you look, for example, at Poland’s experience five years ago, before the country was admitted to the European Union, the rent for one square meter of warehouse property was as high as $100-110 per year on account of the absence of quality logistics complexes. However, now that the supply equals the demand in Poland, the rent rate has shrunk to $60-70 per sqm per year, nearly half of what it previously was.

According to Igor Sukhanov, the general director of GK Oboronsnabsbit, the average rent rate for class A and B+ warehouses in Yekaterinburg is around $100 per sqm per year, which not necessarily low. He states, “This price, of course, is lower than prices in Moscow, where rents for warehouses are around $130-140 per sqm per year. However, Yekaterinburg’s warehouse rates are still higher than those in several European capitals, including Warsaw, Berlin and Paris, where warehouses are rented for no more than $70 per sqm per year.” The price of rent in Chelyabinsk is around $80-90 per sqm per year, while it is $150 per sqm per year in Tyumen. Under such circumstances, the majority of market players (around 60%) prefer to rent out their own spaces.

What is more, prices for warehouse real estates are usually determined arbitrarily and often to now follow the trends of other segments commercial real estate market. It is often possible to observe two properties of the same quality priced at very different rates. Warehouses of different heights, for example, can be rented at the same rates if they happen to have similar heating systems. The price for warehouse real estate is growing faster than the rent rates, as the average rate in increase of value is 15-25%. As such, according to analysts, the value of one square meter of warehouse property equals 16.4 thousand rubles in Yekaterinburg, 11.5 thousand rubles in Chelyabinsk, and 13.5 thousand rubles in Tyumen.