Real Estate
STORAGE SPACE

Warehousing industry remains underdeveloped in Europe’s great borderland

Promoters of Ukraine’s competitive advantages have long praised its potential as a transit country. Goods moving from southern Europe to Russian markets along with raw materials, especially in pipelines, flowing from western Asia to Europe offer a potentially lucrative trade for the huge east European nation. However, much of the infrastructure for goods travelling through Ukraine, and especially for those destined for sale in the country, remains far behind existing international standards. While the last few years have seen the emergence of modern warehousing in the country, not enough development has occurred to slake raging demand in the sector. Ukraine’s shortage of warehousing space continues to represent a major problem for its retailers and logistics companies.

Blazing growth in figures

The warehouse market is the youngest commercial real estate segment on the Ukrainian market and remains the least developed. In 2004-2005 most storage facilities were built by companies for their own needs, while many smaller companies preferred to use private rooms for storing goods. However, the situation has radically changed over the last several years and the segment has caught the attention of leading Ukrainian and foreign developers. “A rash of development in this sector was observed in 2006 when new supply grew more than 600% on the market. This figure is connected, first of all, with the appearance of new players on the logistics market as well as an increase of volume by Ukrainian and international logistic operators, and the growing potential of Ukraine in international business,” explains Oleh Kalenskiy, the director for strategic marketing and development at the UVK group of logistic companies.

Consulting company Colliers International pointed out that 65,000 square metres of warehouses had been launched in the Kyiv area in 2006, up from 10,000 square metres the year before. By the end of 2007 the total stock available in the country was increased to about 340,000 square metres.

The director of the logistics market operator FIM, Oksana Yelmanova, claims that information about available warehousing areas in the whole Ukraine can vary greatly according to the sources used and the way in which the different categories of warehousing are assessed. “According to analysts from FIM Consulting Plus, the market received an additional 156,000 square metres of professional areas of Class A and B in 2007,” comments Ms. Yelmanova. Class C – basically the equivalent of a garden shed – accounts for 800,000 square metres of so-called warehousing, and the overwhelming majority of the whole supply in Kyiv.

Rapid growth, supply shortfalls

Despite rapid growth in the availability of international-standard warehousing, Ms. Yelmanova says that Kyiv’s regional logistic real estate market is currently meeting only 60% of existing demand. Different sources estimate the shortage of warehousing facilities from 500,000 square metres to 800,000 square metres in the Kyiv area alone. Other locales need even more improvement if they are to realise their huge transit and storage potential. Outside factors are also hampering the growth of the sector, with many of the projects that have been planned in recent years failing to ever get off the ground. “Today we see a market where only about 20% to 25% of announced projects are actually implemented. The reasons for this shortfall are varied, including rising prices for financing on world capital markets and on the local level inflation on the building material market,” says Mr. Kalenskiy.

To build or not to build

To build or not to build is the fundamental question facing those with interests connected to the Ukrainian warehousing sector. While the return is not as high as in the office market, the payback term here starts early and can come as quickly as within four to five years of the completion of construction works, as opposed to 15 years or more in other parts of Europe. Warehouses are also less investment intensive than offices.

One of the reasons for this strong economic performance lies in the lack of supply, which is reflected in sky-high rental rates. In 2006 renting a square metre of storage within 30 km of Kyiv cost USD 8-10, and within the city limits this figure could reach USD 15. By the end of 2007, the rental rates for modern warehousing facilities within 30 km of Kyiv had climbed towards USD 12 per square metre. “Lease prices are approximately 30% lower than in Russia and 50% higher than in the rest of Europe,” comments Oleksiy Rudenko, an analyst from Aurum Terra commercial real estate company. Ms. Yelmanova, meanwhile, argues that Ukrainian lease prices are average for Europe because in contrast to Kyiv other European countries have not only expensive land plots, but also more expensive construction works.

“Today’s prices [for warehouse leasing] aren’t surprising and most client companies agree with the logic underpinning our tariffs, which is connected to the stable growth of demand for good quality storage. Today most warehousing projects are leased before the facility is actually put into operation,” states Mr. Kalenskiy.

Key warehouse locations

The most popular places for constructing logistics centres remain spots which lie on the country’s key strategic arteries such as the Boryspil-Brovary and Odesa highways because of geographical factors. “The majority of warehouses are situated in Kyiv Oblast. Construction was begun here earlier [than in other parts of the country] and the capital traditionally attracts all of Ukraine’s main transport streams,” comments Ms. Yelmanova, adding that the Kyiv-Zhytomyr route is closely tied in with the most direct routes to EU markets. “We have the biggest supply lying along this route but it is also the area where shortages are the largest,” she states.
 
The reconstruction of highways encourages the development of warehouse complexes. This happened, for example, in the case of the Boryspil-Brovary route. Mr. Kalenskiy says that about 75% of all new warehouse complexes are currently planned to lie along this western route linking the capital with the country’s main international airport or in the vicinity throughout Kyiv Oblast.

Elsewhere in Ukraine, the most popular place for construction in Odesa Oblast is along the E-95 highway linking the port city to Kyiv. Construction projects are also underway in Donetsk, Dnipropetrovsk and Kharkiv oblasts. In the early years of independence Left Bank Ukraine was not a popular location due to a variety of factors including the low carrying capacity of the region’s bridges, but today infrastructure improvements have helped remove many of the former barriers to the growth of warehousing in the east and south of Ukraine. Several companies have already announced their intention to construct new storage facilities to the east of the Dnipro River and some analysts say that Left Bank territory will grow steadily in popularity as it has numerous competitive advantages over the river’s more developed Right Bank lands, which have fewer land plots at far higher rates.

Consumer confidence driving demand

“The average growth rate in the key market segment of consumer goods is rather high, from 15% to 30% annually. This is stimulating demand for good quality logistic services and new warehouses,” explains Mr. Kalenskiy. “But the growth in supply for professional storage areas isn’t keeping pace with demand because there is a shortage of land plots with a good location, the necessary infrastructure and the necessary legal status.”

Market insiders say that these factors explain the rapid rise of A-class warehouses, while B-class storages facilities lag behind and new C class sites are all but absent from the market.

The size of individual warehousing facilities is also growing. According to UVK, in contrast to previous warehouse projects with 20,000-40,000 square metre totals, the new complexes currently under construction will boast total areas of not less than 100,000 square metres “The first of this next generation of Ukrainian logistic parks, which are currently being built to meet the contemporary demand for warehousing real estate, will only appear in the near future. However, even their presence on the drawing board demonstrates the prospects of this market and the room for future development,” concludes Mr. Kalenskiy.

Green technologies

As new warehousing sector professionals enter the market and existing facilities look to secure great returns we are likely to see an increasingly hot competition to offer the very latest in technological breakthroughs. The trend of using ecologically sound technologies has already reached the Ukrainian warehousing real estate market and is a good example of how construction companies are looking to gain a competitive edge. Delin Development, a real estate development company with operations in Ukraine, Russia and other eastern European markets, promises to introduce the first truly green warehouses into the country in next few years. “We plan to build Kashtan, an A-class warehouse facility along the Zhytomyr-Kyiv highway in line with new ecological principles. All of the projects we are planning to build will be completed in accordance with environmentally friendly technologies. We are the first who are constructing such warehouses in Ukraine,” states the vice-president of the developer, Arkadiy Mil-Man.

“The construction of ecologically aware warehousing facilities will mean added expense. The price for lease will be also different, of course, but the renter will take possession of a warehouse which is of absolutely different quality. He will have cheaper maintenance than in other warehouses, for example, because of electricity-saving measures we will introduce. He will use sunlight instead of other sources,” explains Mr. Mil-Man.

Leasing prices for ordinary professional warehouse facilities will not go down in the near future, no matter how many wonderful new facilities appear to ease the supply shortage. “I would not advise anyone to wait for decreases in lease tariffs but there will be also no large prices rises. They can grow not more than by 10% to 15%,” promises Ms. Yelmanova.

Oksana Bondarchuk
Business Ukraine