A major economic rebound and steady growth of key industrial indices for the sixth consecutive year in the country have brought the issues of modern logistics to the agenda, forcing government and business executives to take a new approach to tackling the problems of acute deficit of transportation and logistic facilities in major Russian cities.

St. Petersburg and its outlying regions are not exceptions. Indeed, real and concrete steps are being taken at the highest political and corporate levels to find solutions to these problems with the urgency they require. Addressing these issues last year, Leningrad Oblast Deputy Gov. Alexander Brakhno noted that the development of modern transportation infrastructure and large logistic centers is a priority for both his region and the city of St. Petersburg. “Terminal logistic complexes remain one of the most important elements in the general scheme of transportation of goods, optimization of routes and creation of added value to goods and services in our region.”

According to data compiled by the St. Petersburg City Hall’s Directorate for Inventory and Appraisal of Real Estate Assets, the total number of separately standing warehousing facilities in the city is 3,308, which offer over 4.2 million sq. meters of storage spaces. Warehouses in residential buildings offer an additional space of about 700,000-800,000 sq. meters, bringing the total space to about 5 million sq. meters. However, the proportion of this total meeting international standards has continued to remain infinitesimally small, lagging far behind the surging demand for prime-quality facilities in the city. For instance, according to the report, Class A facilities accounted for just about 3 percent and Class B for 4 percent, while Class C accounted for the lion’s share, or about 79.8 percent. Class D, which includes warehouses in residential buildings, accounted for 13.2 percent. “However, due to lack of wide experience,” says Nikolai Vecher, the director for real-estate development at PSB Invest Group, “it is rather difficult to exactly define which concrete category of the generally accepted classification one can allocate a particular property.”

Signs of concerted efforts to boost the number of logistic facilities in the city and outlying regions are visible everywhere. One of such facilities is the $17-million complex under development in the Lomonosov district in the Leningrad Oblast which is being bankrolled by Astros C.A. Alers International S.A. and SBI BMI, the Belgian agency for international investments. Similarly, Subway Group, an international holding, is currently building a $7 million, 3-hectare logistic terminal for fruits and vegetables in the St. Petersburg’s suburb of Shushary, while Modul, a transport-forwarding company, plans to build an auto-rail logistic complex capable of handling about 10,000 containers per month. Modul CEO Alexander Altshuller said the project is expected to cost about $5 million-$7 million. “The capacity of our Varshavsky Terminal is about 30,000 containers per month. This facility is currently working at full capacity, and is often overloaded. That is why we took the decision to build a new, modern terminal that will satisfy European quality standards.” In all, there are plans to build about 18 warehousing facilities — some of which are expected to be Class A — in St. Petersburg, according to investment programs announced in 2004, which put their delivery dates tentatively in 2005-06.

Nevertheless, demand still outstrips supply

This drastic increase in volume of newly built facilities and an equally high number of projects in the pipeline notwithstanding, the demand for prime-quality warehousing and other logistic services in St. Petersburg and outlying regions currently far outstrips the supply of these assets. “The demand for warehousing facilities in St. Petersburg is clearly higher than the existing supply of these assets in the city,” said Dmitry Zolin CEO Bekar Consulting, which provides appraisal, analytic and consulting services on the St. Petersburg’s real-estate market. This view was also reflected in a similar report compiled by Swiss Realty Group, which showed that demand overshot supply of warehousing facilities in 2004.

At the moment, the demand for warehousing properties in these regions is being partly satisfied by transforming old production buildings as development of logistic facilities — as a special form entrepreneurial undertaking — is still at the embryonic stage in St. Petersburg. And, unlike Moscow where the development of new, modern logistic complexes is being bankrolled by property developers as a form of investment projects rather than for personal use, the opposite is the case in St. Petersburg, where owners/or direct users of similar projects bankroll the cost of their development. In other words, built-to-suit projects are currently in vogue in St. Petersburg. An example of modern warehousing assets is the Pulkovo industrial zone.

The highest demand for warehousing facilities was recorded in St. Petersburg’s Moscow and Kirov districts. “In terms of areas, the mostly demanded are warehousing facilities with areas of about 1,000-1,500 sq. meters. Better still, if these facilities are one-story buildings in good conditions and about 5-7 meters high, have good, leveled floors and are capable of holding huge loads,” Zolin added. “Such properties are mainly sought by medium and large companies in the metal and timber-processing industries as well as trading companies involved in retail operations.” Similarly, there is also a rapidly growing interest in leasing logistic complexes, which combine production and warehousing facilities with office prime-quality spaces. The most popular of these complexes include Ostrov Business Park, Business City and Mayark. Rental rates in these properties range from $48 to $84 per square meter per annum.

Experts, however, have expressed concerns that limited supply of facilities meeting international quality standards coupled with the increasing high demand for larger storage and processing spaces from clients is expected to keep asking rents for warehousing services at a very high level. According to Bekar Consulting, production and warehousing facilities accounted for 18 percent of all real-estate-leasing transactions concluded in the first eight months of 2004, or about 11 percent higher than similar data in 2003. The equivalent increase in the price value was 24 percent, and 14 percent in the sales-purchase sector.

However, prices might drop a bit if some of the ambitious projects in the pipeline are delivered in the second half of 2005 and early 2006. Besides, real-estate experts expect the rising interest in “built-to-suit” facilities, which stems from acute deficit of ready spaces as well as increasing rates of individualization of tenants’ requirements for warehouses and their parameters, to help mitigate price explosions in the industry.

Diversification into logistics

In their run to tap the abundant opportunities opening up in the industry, several companies in St. Petersburg have changed their core businesses to provision of logistic services. For instance, disposable goods-retail giant Yevropak Trading House, which has invested a huge amount to acquire, repair and transform a building on the Vasiliev Island into a warehousing facility fitted with modern loading and offloading machines. The newly upgraded logistic center is expected to push the company’s sales up by over 30 percent, from about 200 million rubles in 2004. Though the exact details of the investment have remained a closely guided secret, experts have put the market value of the property at about $4 million.

A similar step was taken by Porter, a beer-distributing firm, has restructured its business in such a way that, instead of selling beer, it now offers logistics for its distribution — a system, which, according to the company’s management — equally favors both breweries and trading companies. Consequently, the company’s turnover has increased significantly, with the management forecasting doubling the figures in the non-too-distant future. However, in an interview to a local newspaper, Porter’s Logistic Services Director Pyotr Sermyagin, said Russia has yet to join the global trends in the development of modern logistic facilities. “The current global trend is the development of system of logistic complexes where all [groups of] producers of a particular class of goods are served from one center,” he said. “This practice, however, has yet to gain popularity in Russia.”