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Warehouse Real Estate of Russia: Today and Tomorrow’s Outlook for Tenants and Developers

On November 12, Colliers International and the Kommersant publishing house organized the roundtable Warehouse Real Estate of Russia, bringing together the market’s leading players: tenants, developers and representatives of major logistics companies. The meeting was held at the recently opened Four Seasons Moscow Hotel. The general partner this year was the British investment fund Raven Russia Limited, one of the largest investors and developers on the Russian warehouse market.
The participants of the roundtable discussed the situation on the warehouse market in light of recent economic developments, how exchange rate fluctuations impact the market, how the warehouse market is developing in Moscow and the regions, whether new construction should be expected and the future prospects for this segment.  

Nikolay Kazanskiy, Managing Partner of Colliers International Russia, opened the conference. He was followed by Adrian Baker, Managing Director of Raven Russia Limited, who in his welcoming remarks noted that in the current macroeconomic situation it is important to monitor the changes occurring on the Russian warehouse market, to react to these changes expediently and to share experience with the key players of this segment.

Vladislav Ryabov, Partner, Regional Director of the Warehouse, Land & Industrial Department, Colliers International Russia, provided an overview of the year’s preliminary results for the warehouse market of Russia. The first discussion session followed on the topic “Warehouses in Russia: What Will the Coming Year Bring?”, where the speakers included: Oleg Mamaev, Executive Director, PNK Group; Polina Vinokurova, Director of Marketing, MOLCOM; Jens Eichhorst, Supply Chain Director, Enter; Eleonora Bogdanova, Business Development Director, Warehouse and Industrial Department, Colliers International Russia; Evgeny Sokolov, Director of Logistics Department, O’key. The session was moderated by Andrei Voskresensky, Editor-in-Chief of Kommersant Dom.

Commenting on the current market situation , which is closely connected to the currency market volatility, Vladislav Ryabov said: “The dollar’s spike came as a surprise for us just as for the tenants. And right now many projects are being put on hold. In the near future the number of warehouses offered will decline. However, the consumption of goods is not coming to a halt and tenants are going to need warehouses, which means that the market will continue to develop. As a result we can expect a space deficit.” According to Ryabov, “during the previous crisis the market stabilized over the course of a year, and within one and a half years it was completely healthy. This time the instability on the market will last 3-6 months.” 

Jens Eichhorst noted that the increase in warehouse leasing costs due to the growth in the dollar is not as critical as the growth in the cost of imports. “With a 50% increase in the dollar rate, the share of expenses on rent in our budget increases from 2% to 3.75% while overall logistics costs rise from 10% to 11.5%. That is not as frightening as a 50% increase in the cost of imported goods.” At the same time, Eichhorst says, logistics operators are facing a particularly difficult situation. “For them, changes in the exchange rate are a catastrophe, as all of their contracts with clients are denominated in roubles for 1-2 years in advance. In this case, the growth in dollar and changes in lease rates mean that their business ceases to be profitable or even becomes a losing proposition.” Polina Vinokurova stated that for the logistics company MOLCOM the situation is better than with others: “Our warehouses are corporately owned, so we are not dependent on the dollar exchange rate. Prices, however, will be corrected depending on the market situation and general growth of prices and salaries. According to Eleonora Bogdanova, the upcoming year 2015 will be more favourable for tenants than 2014 in terms of negotiating advantageous conditions. 

During the course of discussion Oleg Mamaev predicted that “the dollar will remain strong and the main currency for the warehouse market, since the entire business model is built on the dollar and there is no systemic rouble-based model. Linking to the rouble means depreciation through inflation. If we had zero inflation, like in Japan, then I would use the rouble without indexation, if I was certain that today I could for the same amount of roubles buy the same amount of product that I could 3-4 years ago.” In conclusion, Mr. Mamaev recommended purchasing warehouse real estate now, since the prices in dollars have declined sharply.

According to Viktor Afanasenko, Director of Marketing and Leasing, Raven Russia Limited, the decline in business activity in the Moscow warehouse market at the start of the year has to a certain degree been compensated by the growth in regional deals, which is connected to the active expansion of retailers into Russia’s regions. Incidentally, on the Moscow market over the past 1.5 years the most active players have been retail chains, especially food retailers. In 2013-2014, this business sector has accounted for the largest deals in Nova Riga and Noginsk logistic parks, Raven Russia’s Moscow projects currently under construction.  

Evgeny Sokolov added that the supply and demand disequilibrium has shifted the balance of power in the market in tenants’ favour. In the next six months this trend will persist and is likely get stronger as demand remains unstable along with numerous new warehouse projects coming to the market.   

The second session of the roundtable addressed the topic of “Reasonable Economizing in Decentralization of Logistics, Construction and Operation of Warehouses”. The speakers included: Vyacheslav Zelepuga, Commercial Director, A Plus Development; Valeria Solok, RE Director (Large Formats), X5 Retail Group; Sergei Kuzichev, Director of Property Development in Eastern Europe, FM Logistics; Andrei Postnikov, Managing Director, Logopark Development; Pavel Khobotov, Design Department Director, WESP; Alexandra Selezneva, Director of  Warehouse & Industrial Department, Colliers International Russia. The experts discussed how effective Class A warehouses are in the regions, how to correctly select the optimal warehouse and which technologies allow for real savings.

Alexandra Selezneva noted that “an effective warehouse is a Class A warehouse. What was used earlier was poor quality and inconvenient with regard to both storage height and logistics. Warehouses are now developed according to the build-to-suit principle: matching the requirements and considering the preferences of the client. This is already a well-established trend: to focus on the tenants and listen to their requests.” Vyacheslav Zelepuga agreed: “It is very rarely worthwhile on the regional markets to build a Class A warehouse on a speculative basis, as warehouses are built in the Moscow region.” Mr. Zelepuga also believes that “in order to support effectiveness it is necessary to properly establish relations with your partner. How your business develops and whether you maintain your volumes depend on this.”

Speaking about the effectiveness of warehouses in different regions, Sergei Kuzichev noted that effectiveness depends on the region: “A hammer is just as effective in Moscow, Vladivostok, Chelyabinsk and Khabarovsk. A warehouse is effective when it is utilized to the fullest. To ensure this, you need to pay attention to the structure of demand.”

During the session the speakers discussed what is happening in various regions of Russia, how the warehouse markets in Chelyabinsk and Yekaterinburg differ, why warehouses in Novosibirsk are complete filled with tenants while in Kazan rates have been reduced to attract tenants, and other issues of concern.

At the conclusion of each of the sessions the audience using remote electronic voting selected the best speaker. During the first session the audience most highly appraised Oleg Mamaev, Executive Director of PNK Group, while the top speaker of the second session was Sergei Kuzichev, Director of Property Development in Eastern Europe for FM Logistics. The moderator of the conference, Andrei Voskresensky, also selected the best questions from the audience. They came from Viktor Afanasenko, Director of Marketing and Leasing for Raven Russia Limited, and Mikhail Luchinsky, Head of the Warehouse Department at Schenker.