Who will house the warehouses?
A demographic contrast is rearing its head in warehouse investment in Russia, and experts are split on where it will stay
The growing trend of warehouse construction is potentially bringing new opportunities for investors, but it also means more vacancies in some markets across the globe.
Throughout Europe, real estate investment is on the increase, and the trend is moving towards the east. Foreign investors are showing interest not just in new property technology, green or luxurious residential assets, but also in warehouses.
BNP Paribas Real Estate published a report in September, based on trends in Spain, France, the Netherlands, the UK, Germany and Poland, showing that the volume of transactions for warehouse properties over 5,000 square metres has dipped by 22 percent between H1 2015 and H1 2016 due to the low demand for warehouse properties.
Following 2015, which was a strong year for the industry, the volume of transactions is now similar to the average levels recorded in 2013 and 2014.
However, for warehouse investors, the east of the European continent is looking brighter than the west.
Warehouse development requires not only money but also space. From logistics to storage centres, this type of investment is the most prevalent in countries with space to spare, such as Russia.
The biggest country in the world does not lack land-mass and Russian e-commerce online retailer, Ulmart, knows that.
Headquartered in St Petersburg, Ulmart has invested in more than 480 pick-up and outpost centres across 240 Russian cities since its creation in 2008, and has achieved an annual revenue of around $1 billion since 2013.
The logistics infrastructure of the company is divided into urban fulfilment centres, suburban fulfilment centres and pick-up points.
Unlike a traditional online or offline retailers, Ulmart goes beyond constructing conventional warehouses to store its goods and develops multifunctional fulfilment centres from which customers can themselves pick up the goods they have ordered online, following the consumer trends in the country.
Ulmart’s near-term strategy focuses on the development of large infrastructure facilities in the Moscow and St Petersburg regions, in the attractive areas located close to the main traffic routes and airports. However, its new infrastructure module has been developed to cover the areas of central Russia, as well as the mid- and far-Ural mountain regions, which make up around 85 percent of Russia’s domestic purchasing capacity.
Such large facilities may accommodate a regional or suburban fulfillment centre for the storage of 150,000 to 500,000 stock-keeping units, with open-air and sheltered warehouses, as well as auction centers and discount hangars for shoppers.
According to Denis Soloviev, chief investment officer at Ulmart, Russia faced significant challenges following the crisis in 2008. However, since 2015 the economy has seen a rise in investment in real estate property.
He says: “If we compare Q1 2015 with Q1 2016, we can see that investment has increased two-fold.”
The company has so far invested RUB 12 billion ($2 billion) in warehousing across the country.
Soloviev adds: “The money for all these investments usually comes from shareholders’ capital, bank financing, or from investors, who also help us finish the models before we introduce them to customers.”
In a presentation at Expo Real Munich 2016, Ulmart also revealed a plan for the deployment of its infrastructure facilities, or large regional fulfilment centres (RFCs). The centres will be located across the west of the country, including close to key cities like Moscow and St Petersburg.
Even though Ulmart centres are generally spread throughout the west, the company has a strong focus on investing more in the Russian capital.
Soloviev comments: “Our key target market is Moscow, we hope to look at other cities after we finish with the completion of a couple of fulfilment centres of large format close to the airports.”
Before that happens, Ulmart plans to construct 12 similar facilities by the end of 2021, ten suburban fulfilment centres of 25,000 square metres each and two regional distribution centres of 70,000 square metres each.
Soloviev adds: “Investing in airport zones is more complex due to the long processes of planning and building permissions needed from the government authorities.”
Even though Russia offers seemingly unlimited land, there is also a conflict of interest here. The fast expansion and usage of space through the building of warehouses is also increasing vacancy rates.
According to the JLL Russia Moscow & Moscow Region Warehouse Market report, released in Q2 2016, the vacancy rate in Moscow warehouses was 12.5 percent in Q2 2016, compared to 10.2 percent in Q1.
The report found that the Southeast and Northwest Moscow regions are the ‘busiest’ points for the distribution of existing warehouse stock, but also the areas with most availability.
For example, Ulmart centres are distributed throughout Northeast and Southeast St Petersburg, as well as in the northeast of the Moscow region.
JLL’s estimates show an increase in warehouse supply for 2016 compared to 2015, as well as a drastic decrease in the volume of transacted space.
Petr Zaritskiy, regional director and head of the warehouse and industrial department at JLL Russia and the Commonwealth of Independent States (CIS), said at the time: “Such an increase in vacancy was caused by sizeable volume of speculative completions and by growing availability on the secondary market.”
“In addition to this, there is ‘hidden vacancy’ that exists on the market—officially occupied space, but not used by the tenants. Tenants would like to return the surplus space to project owners; however, the latter are reluctant to do so.”
Despite the results, the report predicted a decrease in vacancies from 12.5 percent to 11 percent for the rest of 2016. In addition, leasing demand has increased steadily over the last five years, from 50 percent in 2012 to 75 percent in 2016.
However, the latest JLL update on Moscow’s warehouse market for Q3 2016, released at the end of October, showed an increase from 12.5 percent to 13.6 percent in vacancy rate.
Viacheslav Kholopov, regional director and head of the warehouse and industrial department at JLL for Russia and CIS, explains: “An uncertain economic situation, high vacancies, and low net absorption coincide with significant amount of deals on the market. This forces developers to be more selective in regards to speculative construction in the largest Russian market, the Moscow region.”
“Developers try to reduce costs and modify offered products, looking for the new niches of business development. The readiness of the key players to work on build-to-suit construction on the land plots not in their ownership, offer small buildings and sale of the big premises by blocks, testing market appetite for industrial premises, illustrate their attempts to adjust to new realities.”
Conversely, Ulmart’s prospects point to the ongoing construction of fulfilment centres in order to deliver more business-to-consumer and business-to-business opportunities to its Russian clientele.
Some of the projects include the completion of St Petersburg Pulkovo, a 41,325-square metre fulfilment centre, located close to St Petersburg’s main airport; St Petersburg Sofiyskaya, a 60,000-square metre project whose construction is planned for 2017; St Petersburg Piskarevskiy, a 45,000-square metre suburban fulfilment centre, expected to be completed by Q4 2016; and Moscow Mytishchi, a 52,000-square metre facility scheduled to be finished in Q1 2017.
Kholopov stays positive, saying: “Taking into account approximately 400,000 square metres in transactions under negotiation to be closed by the end of the year, the 2016 take-up volume will likely equal 1 million to 1.1 million square metres.”
“If this scenario materialises, the recent trend will be reversed, and the vacancy rate will decline to 12 percent by the end of 2016.”
Whether vacancy rate is due to the over construction of centres or not, Ulmart’s fulfilment centres seem to have benefited the company so far, and its expansion throughout Russia is expected to bring better revenues. While JLL Russia results point at the instability in the warehouse sector in the Moscow region and apparent challenges for traditional online and offline retailers, Ulmart seems to stand out, by virtue of its strategy to focus on developing multifunctional centres that address the evolving needs of the market. REIT