At the threshold of breakthrough or collapse: what’s going on with warehouse logistics in Ukraine

The Head of warehouse real estate in Retail&Development Advisor consulting firm Fedir Arbuzov tells about the lack of quality warehouses, market structure, increasing rental rates, and development prospects of this sector. 
The market of A and B-class warehouses has reached 2.6M sq. m, and 2M sq. m are in the capital. In comparison, warehouse real estate is much larger in Poland – over 21M sq. m. Meanwhile, e-commerce’s dynamic growth has resulted in a higher demand for warehouses and significantly demonstrated the lack of quality storage facilities. Does the country need new offers or is the current demand artificial? What is waiting for the market in the nearest future? What is a real recoupment of construction? The Head of warehouse real estate in RDA Fedir Arbuzov has answered these and other questions in his interview to RAU. Fedir Arbuzov is a manager with a 14-year experience of work in this niche, standing at the origins of A-class storage facilities’ appearance in Ukraine. 
What is the overall performance of warehouse logistics in Ukraine?
Quality warehouse logistics market came into being in Ukraine in 2006 when international developers built their first A-class storing facilities 12 m in height with leveling floors and heating. Early in my career in DTZ consulting firm (currently Cushman & Wakefield) in 20008, I saw the similar moment. Warehouses’ vacancy was almost zero, and potential tenants reserved quality premises still in construction stages. Now, vacancy is only 0.3%. This is critically low.
Rental rates stared from 10%-11% EUR for a square meter, plus transaction costs. Hence, storage facilities' construction was profitable since payback was only 4.5 years versus 10-12 years in Europe.
The capital region has always determined warehouse real estate market's conditions. Quality storage facilities were in Kyiv and its suburbs. As a result, from 2.6 million sq. m, 2 million sq. m are in Kyiv and the region.
This year, too few squares were commissioned in the market of quality A-class warehouse complexes in Kyiv region. Only the second phase of LK Makarivskyi with an area of 14,454 sq. m (ADF developer) was opened and rented once put into service. In addition, new premises of a warehouse complex with an are of 17,000 sq. m from FM Logistic were opened for the company's personal needs. It is planned to put the sport complex Almaznyi (13,000 sq. m) into operation during the fourth quarter of this year. However it has been already rented by prior arrangement.
What caused the current lack of warehouses and low vacancy?
First, it is connected with electronics trade volumes' growth. The point is that it doesn't need stores since goods are transferred directly from warehouses. Modern buyers don't want to wait for the goods' delivery from China. So, large reserves are crucial. After talking to key players from FMCG, pharm, auto, moto goods and other key niche players, I can say that the lack of storage areas is over 250,000 sq. m now. It means that a new offer of a warehouse will be accepted for the next half year.
Are all types of warehouses or their specific categories in short supply?
There is a serious deficit in dry and temperature-controlled storages. For example, one restaurant chain couldn't find free space in several hundreds meters and temporarily stored perishable goods in refrigerated trucks.
There is a deficit in warehouses for medicines since they are usually constructed for a specific client rather than for speculative purposes. Large distributors and importers like BaDM or Optima-Pharm have already bought dry storage facilities and refurbished them. For example, last year, Optima-Pharm bought a logistic complex Omega-2 with an area of 32,731 sq. m from Dragon Capital in Brovary. Luckily, this business' margin allows solving storage-related issues relatively easily. 
Actually, a so-called end user from any branch of industry will be ready to pay high for the object relevant to its plans and requirements. For instance, it happened to Kopylov Logistics Park located in Kopyliv village, Kyiv region. ATB needed logistic space to develop its network to the west.
What are real rental rates and how are they different from the claimed basics? 
To date, the A-class base rental rate in Kyiv region is $6 without considering transaction costs (1%) and VAT. However, that fact is that many rent spaces under long-term contracts signed 3-5 years before with fixed rental rates and their indexations. That's why some tenants pay below market that is currently $4-$5 for sq. m. Considering these agreements' ending in the nearest future, and the lessor set the price, retailers will have to accept new rates.
Construction is more expensive in the city. That's why the base rent rate is $7 per sq. m. However, tenants have already reserved a non-operational Almaznyi warehouse complex with an area of 13,000 sq. m. Rent rates are higher in temperature-controlled warehouses, starting from $10.
How will rent rates' growth affect the market? Who will be hurt the most?
Some have already felt uncomfortable on occupied spaces. They have to look for other locations at higher price brackets. This price increase will affect 3PL-operators first (they share 20% of the market) with lower margin that end users have. They provide retailers with storage, assembly, and shipping services. If the margin was 15% at the dawn of this business, it fell down 5% in some cases. 
However, it's possible to rent a more ordinary warehouse, isn't it? 
Transition from A to C-class warehouses will be challenging for goods (no heating, some items may leak) and clients. An important for e-commerce so-called in-city logistic is developing. Since there are no spaces to construct A-class premises in Kyiv, many old industrial buildings are redeveloped. For example, new flooring is made in all plants, walls are insulated, and facades are beautifully covered with trapezoidal profiles. 
The SAN Factory-2 in Korabelna Street is a bright example. There, the SkyLine Development company has undertaken three stages of redevelopment in 13,000 sq. m, 9,000 sq. m, and 4,000 sq. m. Previously,  Avtek Logistic also built 9 A-class office-logistic complex in Pshenychna Street with an area of 28,500 sq. m.
Developers have to construct new warehouses under such a low vacancy, don't they?
That is partly true. The first who constructs new facilities can rent them out  to maximum benefit. I guess that the main working principle should look as follows under the circumstances: “Count everything seven times and start digging right now!”
The  Dragon Capital company is very active. It is one of the strongest players in the market that announced “E40 Industrial Park” project implementation 27 km far from Zhytomyr (Kolonschyna village, Kyiv region).
Besides, the Amstar American investment company will construct a $170-million logistic complex in Hurivschyna village in Kyiv region. First line's construction with an area of 38,000 sq. m has started this August. Its completion is scheduled for the third quarter of 2022. Finally, the ADG company is going to build a warehouse complex “Makarivskyi” with an area of 25,000 sq. m in Kolonschyna village in Kyiv region. The third and the forth lines' commissioning is announced for April-May 2022. The total area of scheduled objects will occupy 600,000 sq. m.
And what is happening to land bank, and what's the real price for land designated for industry? 
The price for a hectare of land was at an historic low in 2019-2020. Even now, after the market's revival, it's possible to find a plot of land from 10 hectares adapted to logistics 30 km far from the capital for $600 per hectare. Speaking of smaller plots from 2 to 10 hectares, their price may fluctuate in the range of $1,000-$2,000. Much depends on the location. That's why it's still real to acquire a good plot at an affordable price until major investors' purchases ratchet up prices. 
In comparison: the price for a hectare of industrial land reached $5,000 when private foreign investment companies entered the Ukrainian market on top of speculative interest in 2005-2006. They were attracted to logistic development ROI and rent rates of 10 EUR. However, rates fell down $6 after devaluation and many objects' appearance in 2008. So, warehouses' vacancy has grown up to 25% to 2010. Then, rates dropped by $2-$3 and ROI stretched over 25 years, compared to earlier 4,5 years. Of course, those trends made the construction uneconomical. 
It appears that warehouses' construction is profitable again, considering current rent rates. What are the costs and ROI?
Now, A-class facilities' construction costs nearly $550 per square meter. It is 25%-30% higher than last year. It deals with imported building supplies and equipment that have become more expensive worldwide. Land value entails no discernible effects on the price per square meter (nearly $12 under $600 per hectare).
The cost of engineering is more important. Warehouses with an area of 100,000 sq. m need approximately 2MW, and the price will depend on spare capacity that should be enough to rig power to the location.
We have services like capacities' audit in a specific location and nearly 1,000 plots from 1 to 100 hectares owned by our collaborators. 
ROI requires more time because of increases in construction spending. It was 8 years when the rent rate was $8 per sq. m and before materials' prices growth. Now, the rent increased up to $7 is necessary to fit into this period. 
The market doesn't indicated any increases, does it?
Not significantly, but it's about time. Considering all factors mentioned above, the first who invests in warehouses construction may benefit much and cream off. Everybody needs warehouses now, and a lessor rocks the market. Of course, 8 years means 12% of annual ROI. However, lessors prefer to work with 14% in Ukraine. Still, it's possible to consider rate's indexation that will reduce the term of ROI to 6 years.
Which format of objects will be in demand in the market?
It deals with warehouses with a column spacing of 24х12 meters and working height of 12 m. They are fitted with leveling flooring capable of withstanding up to 7 tonns of load per sq. m. They are also equipped with fire detection systems, smoke detectors, and zenithal lanterns. Docks (gates) are required based on 1 dock on 500 m. Heating and ramps are also mandatory. 
What are your projections of market development in general?
More developers involved in warehouses construction will appear. Retail development is favorable since all sectors note turnover growth. Local logistics will be even more important. The already rented Almaznyi administrative-logistic complex is the bright example. So, all objects scheduled for opening in 2022 (over 100,000 sq. m) will find their clients before commissioning. That's why, the market won't be overcrowded during the next two-three years. Of course, it will enhance warehouse construction's yield. 
Source: rau.ua