Regional retail boosts warehousing sector

The Russian warehousing sector, the youngest in the commercial real estate segment, has seen continued growth over the last few years, following the overall trend of the economy as a whole. This prolonged economic growth has meant ongoing development of the sector in Moscow, as well as a flurry of retail activity in Russia’s regions, which is increasing in demand for international-standard warehousing.
Moscow has the most developed warehousing market and is “way ahead of all other Russian cities in terms of retail sector maturity”, said Sergey Beloshopko, of RIGroup, a company that specializes in mixed use real estate development, property management, investment development and infrastructure development. Therefore, warehouse developers concentrate on the Moscow market. Apart from St.Petersburg, this means that “regional projects will stay very limited in scopw for a few more years”, Beloshapko said.
Large-scale Class A warehouse complexes currently in the planning stages or under construction near Moscow include the 172,000 square-metre Leningradsky Terminal on Leningradskoye Shosse; the 211,000-square-metre Pushkino peroject, recently started Yaroslavskoe Shosse; the 600,000-square-metre Tamilino, south-east of Moscow; the 300,000-square-metre Krekshino project, to the southwest; and the Belya Dacha complex to be built east of the city.
But analysts do not expect all of the promised space to come online at the same time. Such projects are often completed in phases, and sometimes financing dries up before the later stages are completed.

Regional development

Gerald Gaide, the partner at Ernst and Young, sees an increase in demand in the international-standard warehousing sector in the regions over the next few years. This will take place in those regional cities which command populations of one million inhabitants and more. This is especially true in the larger cities which are located in close proximity to Moscow and St.Petersburg.
“Demand for warehouse space in the regions is growing,” said Ruslan Suvorov, industrial real state consultant at Colliers International. “This is natural as you can see increasing consumption and growth of retail development first of all in “million inhabitant” towns like Yekaterinburg. Samara, Novosibirsk”, and so on. However, although growing , the demand in the regions is nowhere near that of Russia’s two largest cities, Suvorov said.

Profitability

Profitability of warehouses appears to be a double-edged sword. “Warehouse development seems to be a profitable business, especially if you have got rental rates at $150 or $160 per square meter per annum compared with $80 to $90 in the rest of Eastern Europe,” said Beloshopko. But, figures can be deceptive. This is because the costs of developing warehouses in and around Moscow are very high.
“I estimate the cost of building a warehouse at $650 per square metre. Add the cost of land, $300,000 per hectare of industrial land within 30 km’s of Moscow, and you will see $710 per square metre,” as opposed to some cost estimates for Eastern Europe at $400 per square metre.
Developers in the regions do not yet generally see warehousing as a profitable venture, said Gaige. They have very little experience with warehousing. The cause of lack of experience is that actual demand for warehousing in the regions is new. One of the reasons for this is that Russian regional cities are “over-built” with closed and obsolete Soviet-era buildings, which although available and easy to convert to warehousing, are not desirable, he added.