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What key factors will drive Russian warehouse demand up to 2020?

Colliers International, the leading global real estate consultancy, has released the results of a study of the Russian warehouse market, using European benchmarks and global trends to evaluate the market’s growth potential.
Colliers International’s experts conclude that a number of structural features of the Russian market indicate great potential for development in this segment despite overall sluggish economic expansion. The primary factors pointing to growth in the warehouse segment in Russia include continued robust shopping centre growth over the medium term, under-penetration of online sales and long-term global trends in manufacturing and trade.

In comparison to markets in Eastern and Western Europe, the Russian warehouse market remains significantly undersupplied on a per capita basis: Russia’s 92 sqm of modern logistics stock per 1000 residents is less than half that of Poland (190 sqm) and only around 10% that of the United Kingdom (880 sqm). At the same time, Russia’s country-wide figures tell only half the story, as the Moscow region overwhelmingly dominates the market, accounting for two-thirds of the country’s prime warehouse stock. 

One of the key drivers of warehouse demand comes from retailers, and modern retailers require modern warehousing space to facilitate their expansion into markets. Shopping centres are a key proxy for this demand, given that they are the favoured formats for the majority of retailers expanding into Russian cities, and across Eastern Europe generally. The lack of modern warehouse space in the Moscow market has often been cited as being a drag on retailers’ ability to expand and run their ‘bricks and mortar’ retail operations. The Moscow market – Russia’s top retail market – remains well behind European peers in terms of shopping centre volume per capita with only 243 sqm of modern shopping centre facilities per 1000 residents, compared to a European average of between 350 sqm (Western Europe) – 550 sqm (Nordic markets). This suggests significant expansion of both retail and warehousing space is sustainable in Moscow – a doubling of space seems reasonable, taking it to a similar level as St. Petersburg, which is nearly twice (489 sqm) the size of Moscow (349 sqm) in per capita terms. 

The large volume of pipeline projects in Russia’s major retail markets will help close this gap in the medium term, but parity with the average for Eastern European markets will likely only be attained near the end of decade. Analysts from Colliers International note that as the Russian retail market grows to fill its space deficit, this will drive demand for modern logistics capacities to serve retailers opening stores in new shopping centres.

While Moscow lags behind most major Eastern European cities – for example it is only 34% of the level in Prague (707 sqm), 38% of the level in Warsaw (647 sqm) and 44% of the level in Budapest (549 sqm) – each of these markets is now very close to, or may have surpassed their shopping centre market capacity, given the evidence on the ground that certain non-dominant centres are struggling to perform. 

E-commerce, a key driver of demand for prime warehouse space, is another area where Russia is moving to catch up with its European and global peers. The share of online sales in total retail turnover is approximately 10% in the US and the UK and approximately 5% in China, France and Germany. In Russia, where Internet penetration has trailed that of developed countries, online sales account for just under 2% of total retail sales. However, according to the projections of Morgan Stanley Research, e-commerce will account for 4.5% of retail sales by 2015 and 7% by 2020. Analysts from Colliers International suggest that e-commerce could accelerate at an even faster rate.

“Growth in e-commerce is important for the warehouse market because this format absolutely requires new and technologically advanced logistics capacities. There is no question that we will be seeing increased demand from the leading online retailers and third-party operators as a result of the expansion of e-commerce in Russia,” explains Damian Harrington, Regional Director of Research for Eastern Europe, Colliers International.

A third source of potential growth for the Russian warehouse and logistics market is contingent on a new trend in global manufacturing as the world economy emerges from its prolonged crisis. The trend, which Colliers analysts call “best-shoring,” entails the restructuring of global manufacturing geography as major companies enact repatriation policies following decades of off-shoring.

In the last five years, almost 25% of manufacturers moved part of their operations to their home country. Colliers note that in some cases these moves are driven by consolidation and rebalancing of production, rather than by a deliberate repatriation policy. However, off-shoring and re-shoring cannot fully explain the movements of multinationals; instead, many companies are “best-shoring” with operations distributed across the globe to exploit competitive cost advantages globally, but increasingly to improve supply chain efficiencies and to get closer access to consumer demand.

This comes at a time when new technologies are emerging which benefit European manufacturing by reducing the importance of labour costs in the total cost of production. The expected beneficiaries of manufacturing expansion are Eastern Europe, Russia and Turkey, according to corporate preferences. 

“The implications for Russia’s warehouse and logistics sector from the ‘best-shoring’ trend are clear. Europe’s role in global manufacturing is no longer waning and may in fact be on the rise,” says Damian Harrington. “On the one hand, Russia could benefit as a possible host of new production facilities. On the other hand, Russia is geographically positioned to take advantage of its position between the key markets and manufacturing hubs of Asia and Europe. Russia is emerging as the Silk Railroad, and is investing in the Arctic sea route to Asia – both of which significantly reduce product lead times - and the country will need modern logistics infrastructure to support this.”

Vladislav Ryabov, Partner, Regional Director of Warehouse, Land & Industrial Department, Colliers International Russia, commented: “The potential of Russia’s cities of a million plus is appealing for the placement of large manufacturing projects. Following the best-shoring trend, an increasing number of Western FMCG companies are seeing Russia as a high priority market. Similar preferences are observed among the major car part manufactures, who are following the automotive giants to Russia and who require quality industrial premises. Over the past several years, the share of foreign investment in industrial real estate in Russia has increased by several times thanks to the fact that these companies are actively increasing their production volumes throughout Russia from Saint Petersburg to Vladivostok by opening their own industrial facilities or by acquiring the Russian manufacturing companies.”