Real Estate Review Baltic States and Belarus

Real Estate Review
Baltic States and Belarus
1stHalfYear2008
Estonia, Latvia, Lithuania, and Belarus
www.colliers.ee
Baltic States and Belarus – Key Regional Statistics
Warehouse Market
Stock, sqm
Riga
Vilnius
Tallinn
Minsk
316,130
290,000
643,340
115,200
Vacancy, %
7.6
5.2
4,8
1.0
Rent Rates,
4.5-5.3
4.9–5.2
4.8-7.0
5.0-10.5
Supply forecast for
2008 - 2009, sqm
Yield, %
180,000
153,100
182,000
132,000
7.5-8.5
7.5-8.0
7.5-8.5
10.0-12.0
Estonia Industrial Market
Overview
The steep deceleration of the economic growth rate (0.1% in 1Q 2008 y-o-y) in early 2008 was
mainly caused by a decline in domestic demand (-0.7% in 1Q 2008 y-o-y) due to a slowdown in
borrowing activity and the resulting declining trend in fields orientated to the domestic market
(industrial production, internal trade, and construction).
Nevertheless, recent indicators confirm that an economic adjustment is occurring safely as
Estonian enterprises continue to be competitive in foreign markets and exports remain strong. For
example, in May the value index for industrial export sales in total manufacturing grew 7%
compared to May of the previous year while the value index for industrial domestic sales fell 11%.
The export share in total manufacturing output has grown steadily and exceeded 60% by June
2008.
Supply
In the 1st half of 2008, the supply of new industrial premises was
estimated at approx. 73 000 sqm. The majority of the projects
were built-to-suit with a total GLA of approx. 30 000 sqm
(or 40%) of the new supply. Nevertheless, the largest industrial
projects were speculative developments: Maardu Logistics Park
(20 000 sqm) and the ViaBaltica Logistics Centre (20 000 sqm).
By June 2008 the estimated total stock of modern industrial
facilities was approx. 642 000 sqm (200 000 sqm of generic
facilities plus 442 000 sqm of built-to-suit facilities).
The realization of phase 2 of Mõigu Industrial Park (25 000 sqm)
brought the number of projects with a GLA of over 20 000 sqm
to ten. The total leasable area of these projects is about
387 000 sqm, i.e. 60.4% of the total stock.
The initial development of several new industrial parks (with a total area of over 100 hectares) as
well as the enlargement of already existing parks (Tänassilma Industrial Park by 9 hectares;
Mõigu Industrial Park by 5 hectares in phase 3) was announced. The main observed tendency is
an expected increase in the development of those industrial projects close to Estonia’s ports. This
tendency was supported by plans amongst Chinese companies to use Estonia’s ports to develop
the largest distribution centre of Chinese goods in the Baltic Sea Region. The development of
several large-scale industrial parks has been started near Estonia’s largest ports:
Paldiski Industrial Park with an area of 11.1 hectares is 50 km from Tallinn and has immediate
access to Paldiski Northern Port and Paldiski South Harbour. Another industrial project with an
area of 68 hectares is planned near the port of Muuga.
Interest among international investors is constantly seen in industrial market development activity;
e.g. international investors also involved in the development in such large-scale industrial projects
as Terminal No. 11 and the American Corner Business Park (with an area of 85 ha).
Demand
During the 1st half of 2008
the demand for additional
industrial space was more
modest compared to 2007
due to a general recession
where corporate economic
figures are generally declining
and companies are adjusting
their development strategy
towards preservation instead
of growth. Nevertheless, the
demand for high quality
facilities with a favourable
location has remained
strong as several already
successfully functioning
industrial parks are planning
to expand. Demand is mostly
being generated by
companies which are
moving to higher quality facilities.
In respect to location, the greatest demand for new industrial premises
was seen in areas located along the Tartu and Peterburi highways,
where the largest planned industrial projects will be also realized. This
is due to a location close to the international airport, harbour, densely
inhabited areas (especially Lasnamäe municipality and Maardu) as
well as convenient access to the main strategic highways. It is
important to note that the shipment of goods through Tallinn’s airport in
the 1st half of 2008 grew threefold compared to the same period of
previous year. Demand for industrial premises located within Tallinn’s
city limits has remained strong as locations close to more inhabited
areas are very important due to the availability of a labour source. This
has meant a very successful beginning for Lasnamäe Industrial Park,
which will already start to expand this year. Additionally the new
Suur - Sõjamäe Industrial Park was started at a location inside the
st
Tallinn city limits in close proximity to the airport in 1 half of 2008.
Rent and Vacancy Rates
Industrial space rents remained stable when the
prime rent rates were EUR 7 sqm/month. Over the
past couple of years construction costs have grown
very significantly, which has also been a major factor
in the rent rate increase. During the 1st half of 2008
the stabilization of construction costs was seen.
Nevertheless, continual pressure is seen on rent
growth due to the increasing financing costs
(on average from 6.08% to 8.09% in May y-o-y) as
well as the steadily high inflation rate (11.4% as
June 2008).
The vacancy rate for modern industrial facilities
continually remains at the low level of about 4.8% as
of June 2008. The vacancy rate trend is expected to
increase as there is an emerging trend for an
increasing supply of speculative industrial properties.
Tendencies and Forecasts
- A stable demand generated by large production companies as well as high-tech companies is
expected for high quality facilities.
- The tendency to buy industrial facilities is declining while the tendency for leasing and
saleleaseback deals will strengthen.
- The number of built-to-suit projects will continually predominate among new projects but the
portion of speculative industrial projects is expected to gradually increase.
- Rents will remain generally stable.
Latvia Industrial Market
OVERVIEW
The stock of modern industrial premises in Riga is continuing to grow rapidly, completely meeting
the market capacity forecast 2.5 years ago by Colliers International. The demand is being
created by both the increasing needs of the local retail chains and logistic companies and through
the replacement of the outdated warehouses which still comprise the bulk of Riga’s industrial
premises.
SUPPLY
Colliers International estimates that the stock of modern
warehouse space in Riga and its suburbs was 316 000 sqm at
half year 2008. The first two quarters of 2008 saw the entry
of a number of warehouse complexes both within Riga’s city
limits and in its outlying regions. The largest were the
Bergi Logistics Center (partially builtto-suit for JYSK) and the
first phase of the Olaines Logistic Park, which is being
developed by Girteka. High-class stock in Riga District
increased a total of 96 773 sqm in the 1st half of 2008, i.e. 55%
of the total area expected to be completed in 2008.
Approximately 180 000 sqm of industrial premises are
currently under construction or have an announced completion
date in 2008 – 2009.
A trend exists for multiple projects to be tenantdependant in. Riga These projects are not under
construction but some preliminary work has been done.
(The projects in question comprise a total of about 50
000 sqm scheduled for completion by 2009 and 80 000
by 2010). A potential exists that once started, such
projects may be completed within 9 – 12 months if an
anchor tenant is found. Often, however, the construction
dates for such projects are repeatedly postponed. This
strategy complicates the estimation of the future supply,
particularly since it is not unlikely that these projects will
stay at their present stage for long periods of time.
DEMAND
The number of companies deciding to move their logistics centres outside the city limits to the
ring road is constantly increasing. This trend is the result of several factors: land cost changes,
transport abuse inside the city limits, fuel and wage expenses, and the trend for large companies
to consolidate their dispersed premises.
An increase in the demand for larger built-to-suit projects with an
area of 20 000 sqm or more has been seen in this half year
(primarily among such companies as Jysk, DHL, and Girteka).
In general the demand for large warehouse facilities is being
generated by large international companies, which have not been
affected by the local market fluctuation. Such companies are
pursuing a long-term strategy in the Latvian market, have approved
budgets,
and are using the market recession to gain future advantages. At the same time, the demand for
premises of up to 1000 sqm has also increased due to the declining turnover of goods and thus
the more frequent need for smaller warehouse facilities. On the other hand, the demand for
premises with 5 000 sqm has fallen because the enterprises which had generated the demand in
this sector have moved to the small-scale category.
RENT RATES
Rent rates for industrial premises, as predicted by Colliers in 2007, demonstrated stability or a
minor decrease during the 1st half of 2008. Typical monthly rent rates for new warehouse
premises in Riga District ranged from 4.5 to 5.3/sqm/month and higher inside the city limits.
Rents for outdated warehouses were twofold less and varied depending on the size of the
premises and the area. Colliers International forecasts a rent decrease of 10% on average (in
some cases, 20%) during the next 12 months. An average rent of 4.8-5.0/sqm/month seems to
be a reasonable price for high quality premises on Riga’s ring road.
VACANCY
At half year 2008, the average weighted vacancy rate had increased 2.5 percentage points to
7.6% (compared to 5.1% during the 1st half of 2007). Despite the increase in the average
vacancy rate, the absorption level is high considering the rapid increase in the supply (75% of
st
year 2007 total absorption rate was absorbed in the 1 half of 2008). Although some projects
encountered difficulties in attracting tenants, the expected demand is high enough to keep
average vacancy rate below 10% in 2008.
TENDENCIES AND FORECAST
- Further development of multi-stage large industrial and logistic projects is expected.
- The development of thirdgeneration industrial parks is providing industrial complexes with the
necessary business solutions and advanced technologies that they need to help conserve
resources and reduce self-costs.
- Stable demand for modern warehouses has been created through the replacement of outdated
stock, the rapid development of retail trade, the attraction of international companies, and the
rise of forwarding and third-partylogistics (3PL) companies.
- There is a tendency for the creation of logistic hubs around Riga including in the cities of
Kekava, Olaine and Jelgava.
- The trend for speculative development both inside and outside Riga is expected to
decrease, giving place to built-tosuit developments. This strategy is becoming more widespread
especially among large companies.
- A large number of tenantdependant projects, which have not been started, exists.
- The relatively large increase in the supply will cause a decline in rent rates.
Lithuania Industrial Market
OVERVIEW
Lithuania’s slowing economy and surging inflation as well as the negative expectations for the
future that the country’s inhabitants have will undoubtedly influence the warehouse market.
Growing energy resource prices and waning consumption will unavoidably impact two principal
groups of warehouse tenants, i.e. transport and logistics companies as well as retail chains. It is
likely that the changing situation in the global petroleum product market will create vacancy
growth in the warehouse market where logistics and transport companies lease over 40% of the
total warehouse area in the market.
SUPPLY
Several new projects were completed during the first half of 2008 and the existing logistics
centres continued to expand. In Vilnius District, the warehouse market grew by 7.1%, and at
the beginning of June 2008 amounted to 290,000 sqm of new modern warehouse space. The first
stage of the Kaunas Logistics Park was completed with the opening of the central logistics
terminal belonging to the Senukai retail chain. The construction of warehouse projects was also
completed in Klaipeda’s Free Economic Zone with two new warehouses opening there during the
first half of 2008.
The biggest supply of new, modern warehousing facilities remains in Vilnius (290,000 sqm,
growth – 7.1%), with Kaunas in second place (160,000 sqm, growth – 77.7%), and Klaipeda in
third (84,000 sqm, growth – 48.5%).
DEMAND
There have been no significant changes in the
structure of the tenants at the warehouse facilities.
The two most prominent tenant groups centres and
logistics, transport, storage, and distribution service
providers.
In respect to leased area, warehouse facilities with
500 – 1,500 sqm and 2,000 – 5,000 sqm are the most
popular but there are still large companies on the
market looking to lease warehouse space of 10,000
sqm or more. At this point such companies can
choose from among several projects as the majority
of the developers are looking for tenants in order to obtain financing and start building their
planned logistics centres.
RENT RATES
As was predicted, there were no significant corrections
in warehouse rent prices during the first half of 2008.
The average rent price in new warehouses remained
unchanged at 4.9 – 5.2 EUR/sqm in Vilnius, 5 – 5.2
EUR/sqm in Kaunas, 5 – 5.2 EUR/sqm in Klaipeda, and
4.4 – 4.8 EUR/sqm in Panevezys. Contrary to the
predictions, the asking rent price for warehouses
increased in comparison to that at the end of 2007. The
asking rent price in new projects under development is
as much as 6.08 – 6.37 EUR/sqm. In the opinion of
Colliers International, however, such prices are hardly
attainable both at current market conditions or those of the coming year. Colliers International
sees these rates as including a large margin for negotiating and marketing strategies rather than
the expectations of developers in respect to the potential growth of rent prices.
VACANCY
The warehouse vacancy rate in Lithuania’s separate regions evolved differently over the first half
of 2008. Vacant warehouse space appeared in Vilnius after the “Vilniaus Duona” bread company
moved to a built-tosuit object. Vacancy rates remained unchanged in Kaunas District during
the first half of 2008 but reached a soaring 18% in Klaipeda. A high vacancy rate in this region
was partly caused by a project completed but not fully leased in the middle of the
year. The 9% vacancy rate registered in the end of 2007, however, leads to conclusion that the
existing storage facility demand has been satisfied in Klaipeda.
The fact that most companies, which provide logistics services, sublease their leased facilities is
not taken into consideration when analyzing warehouse vacancies. If subleased space is taken
into account when calculating vacancy rates, they would increase significantly in Lithuania’s
warehouse market.
TENDENCIES AND FORECASTS
- The situation in Lithuania’s warehouse market is not uniform: while the market in the Klaipeda
region can be considered to have reached maturity, the warehouse markets in Vilnius and
Kaunas are still in the development stage.
- Retail chains are not cancelling their plans for developing builtto- suit projects. If the projects
are developed, the vacancy rates in Lithuania’s warehouse market will unavoidably grow.
- The increased interest rates and stricter financing requirements imposed by the banks are
regulating the real estate market: the growth in supply has slowed and the market is being
‘protected’ from a surplus of new projects (low-quality projects and implemented by
inexperienced developers).
- The developers and warehouse project owners have begun active lease campaigns: several
real estate intermediary agencies are simultaneously used to find tenants for the same project.
- New warehousing facility projects are being developed only after an anchor tenant or several
smaller ones have been found. If such tenants are not found, the announced completion date
for the projects is often postponed. Sometimes a project’s development is halted due to
financing problems.
- The declared asking rent prices in planned warehouse projects are significantly higher than
those set in the existing fixed contracts.
- No large logistics parks are being created in Lithuania at this time. Planned large-scale
warehouse projects often stop after the initial development stages. Warehouses with 20,000 –
30,000 sqm are constructed with further planned development of the project halted.
- Despite of the economic situation and its deteriorating investment attractiveness, Lithuania’s
market is still being ‘discovered’ by new foreign developers. It is likely that they will take over
projects ‘halted’ by local developers.
Belarus Industrial market
OVERVIEW
The situation in the local market for modern warehouses underwent no fundamental change in
the first half of 2008, with no new complexes or even small properties entering the market.
The higher returns on office and retail properties are attracting more attention from investors. As
a result of this, Minsk, for instance, has a number of operating hypermarkets, several under
construction and some more being designed but no distribution centres as such. Retail operators
have been saying that they might as well start building modern distribution centres themselves.
However, during the aforementioned period, the Belarusian market has seen some events that
should have a positive effect on the warehouse sector in the long run. One of these was the
formation of a special government commission chaired by the deputy prime minister, which is
expected to come up with a plan for developing the country’s logistical system.
May saw the conclusion of the nationwide competition to select the strategic investor for the
transport and logistical centre to be developed on a 122 hectare tract in the vicinity of the national
airport. The winner was KMK Logistic in cooperation with Belgium’s Antwerp Development
Company, which committed to invest more than one billion euros in the project. Other companies
including Al Qudra and UAE said they were willing to participate.
This is the second large project to be announced, the first being the Prilesye Logistical Centre to
be built by Iran’s Kayson.
SUPPLY
There were no additions to the warehouse supply in the first half of
2008, with the Novinki Logistical Centre, which was completed in
2007, remaining the most recently built facility. According to available
reports, the logistical centre has been operating successfully and is
filled to capacity, which only further emphasizes the actual supply
deficit and the huge unsatisfied demand for high-quality properties.
Most of the storage spaces on offer are old warehouses built in the Soviet era or premises which
originally served a different purpose but were later converted to warehouses. Only an
insignificant part of the old warehouses have undergone repairs to improve their quality.
The supply of modern warehouses is expected to increase in the short term. In addition to the
above large transport and logistical centres, a number of planned smaller projects are currently in
various stages of construction or design.
The chart illustrates the dynamics of the warehouse supply in Minsk and Minsk District. Since
there has been no large-scale warehouse construction in recent years, the chart is based on
existing warehouses (some 100 000) for sale or rent, which are in relatively good condition
following repairs. Some facilities less than 5 000 square meters in area were covered by the
overview for the same reason.
As can be seen from the chart, there will be no fundamental change in the modern warehouse
market around Minsk prior to the completion of phase one at the Prilesye Logistical Centre in
late 2009.
DEMAND
Because Minsk’s commercial real estate market is currently undergoing a dynamic growth phase,
investors are paying more attention to more profitable property segments. Until recently,
warehouses have been of very little, if any, interest as investment objects. Only some Belarusian
food, wholesale, and retail companies have been building new warehouses to meet their own
needs. Belarusian law requires those selling alcohol to own at least 1000 square meters of
storage space. The players in that market have preferred to buy completed warehouses.
There is significant demand for storage facilities from companies selling building materials and
rolled metal products. These companies require railway access and large open spaces.
On the whole, insufficient new warehouse construction has resulted in a supply deficit.
Companies in need of warehouses will buy or lease almost any suitable room available.
The bulk of the demand comes from companies seeking small warehouses up to 300 – 500 sqm
in area. However, up to ten orders per month are received from companies requiring premises
with 1000 or more sqm. A number of consumers are interested in storage facilities with 4 000 – 6
000 sqm. With supply increasing and rent rates decreasing, forecasts of a demand for
larger facilities make sense as many companies prefer smaller facilities mostly because of the
lower rates.
WAREHOUSE RENT RATES
The rates for dry, heated facilities inside the city limits have reached 8 – 11 euros per month per
square meter and the selling prices in the secondary market, 750 – 900 euros per square meter.
The increase in rent rates was driven to a large extent by the gradual shutdown of several plants
and industrial parks in the city, which, given the absence of new construction, only aggravated the
supply deficit. The situation will only escalate midterm, as there are plans to shut some 30
industrial parks and plants down or move them outside the city limits.
At the same time, it must be noted that Belarusian companies that own modern warehouses,
such as BLT Logistic or JV Dominik, employ more advanced pricing practices, charging tenants
per pallet slot, rather than per square meter. Under this pricing system, rent rates, when
recalculated per square meter, are even higher, reaching 13 – 14 euros per month per square
meter excluding VAT.
There are no plans to construct any new projects in Minsk or Minsk District in 2008 in order to
drastically increase the supply of modern storage space, so further rent rate growth is expected.
VACANCY
Given the existing deficit of storage facilities in Minsk, there is almost no vacant supply available.
Vacancies appear during the periods when rent rates rise but these are normally filled within one
or two months. Those remaining vacant for long periods include some irregular storage areas
such as rooms that are located in old multi-story warehouses and accessed via well-worn freight
elevators that experience frequent breakdowns, which does little to attract potential tenants.
This type of facility, even if in a good condition, is not always adequate for the operating
requirements of most businesses.
It must also be noted that modern warehouses, which provide storage space on a temporary
basis and charge per pallet slot, have become popular with consumers despite higher rent rates
when recalculated per square meter. Companies that quickly move stored goods find this an
expedient solution.
TENDENCIES AND FORECAST
- The warehouse supply deficit will persist in every class.
- Continued closures or relocations of industrial parks and plants will lead to a decrease in
storage space inside the city limits.
- The new warehouses to be opened in 2008 cannot fill the supply deficits.
- The construction of large logistical complexes will start as the winners of the 2007 – 2008
tenders begin to develop the land allocated by the government.