Pyshma – made in Russia

We remind you that Eurasia Logistics is part of the IPG Eurasia - created especially for development of warehouse objects. The company has created a program which plans to develop a network of industrial logistic parks under the general title of Greengate. According to experts at Eurasia Logistics, the area of these objects will be around ten million square meters. Two of the Greengate network objects are in operation today: The first stage of the Severnoe Domodedova in Moscow and the fore-mentioned first stage of the Pyshma logistics park in Yekaterinburg.

The warehouse complex is located to the north of the city, two kilometers from the EKAD (Yekaterinburg Automobile Ring Road) and 15km from the historical town center. The object is being realized in a step by step fashion (with only three construction phases). The area will total more than 279,000 sqm with a first phase area of 84,000 sqm.

Strong prospects

The fact that Yekaterinburg, as opposed to some other town, became the first population center on the road to expansion was purely by chance. Developers managed to get the right land plot a bit earlier and receive all the necessary permits to begin construction.

It should be said that developers hardly predicted the start of their regional campaign in Yekaterinburg. “We consider Yekaterinburg a leader in potential among other Russian regions” commented Eurasia Logistics.”

The capital of the Ural region has indeed become a sweet spot on the real estate market. This is a town with a fast-developing economy that has long been attracting the attention of commercial real estate developers. Elena Bushmina, consultant of the warehouse and industrial department for Cushman & Wakefield Stiles & Riabokobylko, commented the following on the subject: “This town has high industrial potential and the consumer market is growing. This creates favorable conditions for logistics companies that form the principal demand for high-standard spaces.”

Vitaly Antonov, general director of Espro Development, has no doubt in the warehouse real estate market’s high potential. “Successful business indicators for network and trade operators will become the main factor in deciding whether or not major warehouse real estate developers (including Espro) will move into this region.” Apart from this, Yekaterinburg is exceptional in terms of its geographical location. “This is the key city of all the Urals”, believes Elena Bushmina. “I think that a warehouse complex will work, not only for the town, but for the Ural region as a whole.”

In addition to this there is one more reason for developers to rush. As surprising as it is, a town with such strategic importance currently lacks a competitive environment. There are not enough objects that (barley) even make class B, notes Ruslan Suvorov, director of Praedium’s department of warehouse and industrial real estate. The majority of demand is met by old food storage and reconstructed factory premises. With this in mind, Pyshma industrial park will long be the leader in modern warehouse construction as rival companies are only just beginning to emerge on this market. “The warehouse real estate market is still yet to form in Yekaterinburg,” confirms Vitaly Antonov. “At the moment there are a series of announced warehouse projects planned in Yekaterinburg but there’s still currently no need to worry about the competitive environment. For the moment this market is for the leaseholder, not the lessee.”

According to Praedium, the area of warehouses in Yekaterinburg is around 750-800,000 sqm. Ruslan Suvorov estimates the warehouse deficit to be at around 500-600 sqm.

Here we should note that Eurasia Logistics is planning construction of one more warehouse complex in Yekaterinburg. MLP and Raven group have also announced warehouse construction plans in Yekaterinburg and the company EAMTLS plans on building more that 60,000 sqm of quality space.

We build quickly

As specialists note, construction is moving at a quick pace. According to the drafters, the first warehouse premises were built within a year and put into operation in November 2007. In May of 2008 Eurasia Logistics are planning on completing the second construction stage (109,000 sqm) and lease the entire object by the end of the year (third stage area of 84,000). Edward Rossel, governor of the Sverdlovsk region, didn’t believe that the first lessees would be working here a mere year after the start of the project. His disbelief was in vain as the warehouse was built in twelve calendar months along with an entrance road. All engineering and utility services were also operative. “We managed to connect the gas, resolve the plumbing and disposal facilities issues, build our own boiler room and much more. Toward the final stage negotiations are underway regarding the task of connecting the electricity in a so-called continuations circuit.”

Project drafters stated that they encountered no problems during construction. There were some issues with the laying of the entrance road as a host proprietors made claims to the land through which the road was to run. The land plot was bought for construction on the secondary market in 2006 from Rosinka, the Special Police Force Sverdlovsk security society. The plot area stood at 50.3 Ha. “This is how we purchased the lot with no encumbrance that was already classed to be used for industrial purposes,” comments Eurasia Logistics. “All that was left was to receive the necessary permits to build the warehouse.”

Nicolai Ditsman, director of Eurasia logistics Pyshma’s marketing department, claims Pyshma is a typical network project for the company. Other Greengate warehouse projects with the same characteristics will also be appearing in other towns. In the opinion of the proprietors, the warehouse’s parameters comply fully with the Western perception of an A-Class complex. A few fine points should be mentioned here. The complex concept is such, that both small distributors and large logistics operators can lease the warehouse. The minimal lease space is 2,800 sqm. At the moment the minimal warehouse block being leased is 5,600 sqm.

Investment in the first stage of construction stood at around $70 million, from that sum $20 million went on setting up the infrastructure. According to experts, Eurasia Logistics is currently using money from the TuranAlem Bank with credit refinancing being taken care of by a major European bank (based on information from consulting companies it is probably Eurohype AG, but Eurasia fused point blank to comment). “With the help of this bank we are not just refinancing our credit funds, but also completing the second and third phases of the project,” explains Mr. Ditsman.

Made in Russia

All the first-stage space is currently being leased, moreover, a large majority is leased by logistics operators, in particular by Russian Logistics Service (23,000 sqm) and YuniTrans Logistics (23,000 sqm). One more logistics operator, TransLogisticConsult, has leased space in the third stage which is currently under construction (46,000 sqm).

In addition, one of Russia’s major sellers of electronics is working in the first stage. The names of the lessees and proprietors were not disclosed due to the confidential nature of negotiations. The only thing known is that, in a percentage ratio, the pool is as follows:

More than 50% of space is occupied by logistics operators with a 15% share of end users/distributors. The remainder consists of retail chains including the local Monetka company.

However, when analyzing the pool of lessees, it’s clear that the majority of warehouse space users in the regions are Russian companies. These are good, solid players, but you still can’t really call them true brand companies. Will this lower the investment appeal of the project or not? Is it a case of the more sold the lessee, the higher the capitalization? “it’s true that on the first phase we are seeing virtually no major companies with world-recognizable names that could raise the capitalization of the project”, comments Peter Zaritskii, deputy director of Jones LaSalle’s warehouse and industrial space department. “Here we should take into account that major foreign 3PL companies are slightly wary of coming onto the regional market, limiting their presence to Moscow and Saint Petersburg. There are currently few such clients operating in the regions. On the other hand, Eurasia Logistics has arrived first on the regional market and already has real experience in having realized and leased a project. This is very important for name lessees, especially on a market with a lack of faith in developers, after all, finished projects do more convincing than mere promises.”

The company refused to comment on the increase of lease rates, only informing us that they are market prices (lease rates have now gone up and are approaching $140 per square meter, per year, excluding utility and operational costs).

It is also known that Eurasia Logistics is now shedding its reputation as a discounter, so it’s possible that rates on the first and following construction phases will differ greatly. “As far as there being a drastically low amount of warehouse objects in the area, Eurasia Logistics are creating the regional lease market, teaching local players that there is no such thing as a cheap, quality warehouse,” comments one expert from the real estate market.

Class A

In the words of Ruslan Suvorov, the warehouse complex will fully correspond to the western perception of an A-class complex with the possibility to lease different size spaces making the concept flexible and viable. “From the East to the Volga region, there are simply no similar objects of such scale and nothing to compare it with”, notes Peter Zaritskii. “In Russia there are many examples of warehouse objects marketed as class A when really they are not. The Pyshma warehouse complex doesn’t just look good on the background - it is a true class A complex.”

Additionally, Peter Zaritskii notes the stage by stage realization of an object as an important factor for local retailers. I.e. companies who are already leasing space in a warehouse have the opportunity to receive extra square meters in the subsequent construction phases.

Experts at Euraisa Logistics bring our attention to the rail entrances (one branch line to 4000 sqm).

“The access ways are now in place and the first block lessees are making active use of them”, explains Euraisa Logistics. “The remoteness of Yekaterinburg from the Moscow region (roughly 1750 km) makes the use of rail transport more logical”, adds Ruslan Suvorov. “This idea was put to good use in the Pyshma Logistics park concept.”

Experts have mixed opinions as to the location. “In my opinion, the complex is built in a good location, but the conditions to make a correct analysis are not yet ripe as you can count the number of regional projects on one hand”, notes Peter Zaritskii. “From a distribution point of view, it’s possibly better that the complex be located nearer to the town center, but that’s not to say that is not too far away as it is. In any case, the complex’s location is definitely no worse than some other regional projects that we can think of.”

In Vitaly Antonov’s opinion, it would be more logical to place the distribution center to the south or southeast, but not the north. The expert does however note that due to underdevelopment of the land market it can be hard for a developer to find the right building plot.

The project’s drafters consider the complex’s location as optimal. Their rational is as follows: “Building a large warehouse in the very center of the city is pointless due to transport problems” says Nicolai Ditsman. “The town’s business activity will gradually shift beyond the EKAD where people are now making use of the land plots. Plans have already been announced by local authorities to create a four-town multifold industrial zone. It’s obvious that the newcomers will be forced much further away from the four towns because of the land deficit and cost growth on land. With this in mind, our complex, that is only 2km away from the EKAD, will have a major competitive edge.”

However, many experts disagree with this view point. “With the second wave of development in Moscow, warehouse complexes will indeed move further away from the four cities”, adds Peter Zaritskii. “I think that this tendency in mid term prospects will be seen in Yekaterinburg too. In regions, including Yekaterinburg, prices on land are significantly lower and, in theory, finding a location near the EKAD is entirely possible. There is another factor, namely that the leaders always have the largest choice and the only competitors for the most prospective land are the profile players (industrial developers), other large network retail (including the currently low amount of federal networks) and other consumers. Ruslan Suvorov also noted that for the majority of lessees the most important factor is the direction in which warehouses are located, not their distance from the city.

Expansion continues

Having built a warehouse complex in Yekaterinburg Eurasia Logistics has established a foothold for further expansion into the Ural region. Projects have been announced in Ufa, Chelyabinsk, Tyumen and, as mentioned before, construction of a second object in Yekaterinburg.

At the same time, in the words of Peter Zaritskii, the future of regional projects is behind those operators who are currently working in C-class space. These operators do not currently realize that a higher-quality product will allow for optimization of logistics flows and for a lowering of a product’s prime and operational costs. However, according to the experts, the mentality of such players will only change in the midterm. As for just the costruction business, the main difficulties in regions, according to Vitaly Antonov, remain the deficit of quality land plots and communication problems.