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| Metamorphosises of industrial real estate |
| Property Times #16 |
The situation at the capital real estate market has developed so, that both internal and external investments basically are directed on construction of shopping centers, office and inhabited complexes. The sector of the industrially-warehouse real estate lags behind a little, having collided with a number of actual and stubborn problems. The price politics in sphere of the industrially-warehouse real estate has also undergone to essential changes. The situation is commented by Anatoly Osadchy, General director of joint-stock company "Polesye": «For last years mechanisms of commercial real estate participation in projects have undergone some changes. Today foreign investor wants to realize project independently, without involvement of a local partner. Investments in form of monetary contributions and securities have increased. Unfortunately, investors still invest in more profitable for today projects – construction of business- and shopping-entertaining centers. The city, besides offices and shopping centers, needs the hotel, industrial and logistical (warehouse) real estate.»
The supply not always satisfies demand
Alexander Zarembo, director of institute " Ukrpromproect ", motices that industrial areas in Kyiv have a high demand: «And not only because these manufactures may be improved, reoriented but also because such a territory may be transformed into territory for construction of habitation, offices, trading and entertaining complexes. However there isn’t enough supply. There is a demand for such objects at suburbs too, but it is smaller for profitability there will be another».
On the average the prices for industrially-warehouse real estate rise on 15–20 % a year, and demand holds on growing. Lyudmila Druzenko, director of Golosiivka branch AN "Blagovest", notices: «If in February of the last year special demand was on premises of 200–300 m2 area, in March the range of preferences has increased up to 1 thousand sq.m. Prices of warehouse have increased on the average on 5–7% from the beginning of the year».
In spring, according to the expert, activity of investors raised – «in January potential investors, both domestic and foreign, only held consultations on search for the commercial real estate objects, and in March a concrete search for the objects interesting to them started». It is necessary to note that according to the general results of 2004, the prices for industrial premises in Kyiv have grown on 15–30 %. If in 2003 an illiquid premise could be bought for $100 for 1 sq.m., in 2004 its price made already $150–200 for 1 sq.m. For the last year industrial and warehouse premises which had to be reoriented under the trading areas, and also those which can be used simultaneously for a production cycle, warehouses and shops, have risen in price on the average on 30 %. For today the price of industrial premises and property complexes varies in a range of $150–600 for 1 sq.m. And the greatest a demand in Kyiv have not very large premises. «Cost of such objects is $1 thousand for 1 sq.m. », – ascertains L. Druzenko.
The reasons of prices increase are connected with the growth of small and average business (shortage of areas is observed) and investment appeal, reorientation of industrial-warehouse premises to the trading, trading-warehouse and administrative needs and with increase of rent rates for the industrial-warehouse real estate.
Experts predict an essential growth of demand in this segment of real estate market in 2005 and some change of its structure. «Construction of new large and average industrial objects in Kyiv is inexpedient to be planned because the basic preference of customers is reconstruction of already available objects. And their reorganization in small industrial objects for the city needs and reorientation them into non-productive ones prevails. It would be desirable to emphasize that only 10 % of the industrial real estate of Kyiv and the region is being sold by destination; 60 % of objects, mostly office buildings, become offices of the closed type; 30 % become a platform for construction of shopping centers. In some cases even construction of habitation is provided», – notices Stanislav Shulga, the assistant of "Slav-Invest" company project manager.
He also predicts growth of demand for production assets of direct use which is caused by integration of small and average business. Demand for the industrial real estate is fixed on objects with area of 1,5-2 thousand sq.m. And as for metric areas from 2 thousand sq.m., they mainly will be reoriented for warehouses as at present there is a deficiency of warehouse the Kyiv market.
Today the majority of customers, according to experts, look for sites around the city within a 30-kilometer zone, placement in which enables to provide delivery of raw material and export of production. Within the limits of these requirements develops a great demand for property complexes of 1-2 thousand sq.m. with a ground area more than 300 sq.m. located in a suburb of Kyiv. On sale, certainly, there are complexes of 4-5 thousand sq.m. with prices of about $1,8-2 million.
Who is the investor?
Investors for real estate objects are the domestic and foreign companies. The most essential inflow of foreign investments is from Russia, the USA, Germany, the Great Britain, Benelux and Baltic countries, and also from the island countries which have offshore zones on the territory. 70 % of investments into industrial objects construction are whether domestic or those which in due time were taken out, and now are being reinvested into domestic economy.
More precise representation about prospects of the industrial real estate market can be given by the dynamics of investment investments into the national economy for the last years, and into capital in particular. According to the official data annual gain of direct foreign investments (DFI) is observed. In 2004 their scope in Ukraine’s economy has grown up on 23 % and by January, 1st, 2005 reached $8 billion 353,9 million - informs the State statistics committee. «According to the official data, for the last five years inflow of foreign investments has made about $1,5 billion. Annual increase of foreign investments scope for Kyiv makes 20–22 %», – A.Osadchy notices. In his opinion, first of all, activity of the investor depends on economic stability and investment politics of authorities. «The Kyiv authorities have realized that to transform Kyiv into a really European capital, usage of only "city" means is obviously not enough. In cabinets of the mayoralty the mechanism of foreign capitals attraction has been developed. It is difficult to say how correctly built it is, but as the figures show, it works effectively », – says A.Osadchy.
Foreign investors do not hurry to risk investing in Ukrainian economy including the industrially-warehouse real estate. «The existing investment climate causes presence of a small number of foreign investors in the country. Undoubtedly, as the investment risks decrease more and more large investors will be coming to Ukraine as a result of economy improvement», – S.Shulga considers.
What interferes to investors?
For 2005 experts predict decrease in investments in comparison with the previous periods. In S.Shulga's opinion, the main difficulties which interfere with development of the given market segment, is instability of the legislation, instability of economic sphere, corruption, the high taxation, problems in definition of a precise property right mode, a low level of the net profit, difficulty in holding negotiations with authorities, political sphere instability.
Participation in any project is a certain risk for the managing company. We have our own system of selection of potential projects by such criteria, as object purpose, competence of the Client, maintenance of financing from the Client, a risk level in the project, maintenance of the project with resources of the managing company, unique characteristics of the project. We do not participate in those projects, in which risk of interaction under the project with the given concrete Client is above our expectations.
Making comments on situation, the expert also has noted that all these factors have led to the state intervention to the investments sector, and as a result – to conflicts with private investors. Absence of investments insurance system, monopolization of economy and restriction on operations with land trade also negatively influence the level of direct foreign investments. The scope of investments flow out from Ukraine can decrease if Ukrainian legislators approve to consideration new amendments to the laws on taxation and privatization. Many of the proposed changes in the tax laws should promote reduction of "shadow" business and creation of predicted tax system.
Director on development of company " Skeleton " Taras Kolomiets notices, that intensity of investments attraction is also influenced «with complexity and incomprehensibility of Ukrainian legislation, order of investments registration and passages through allowing instances for foreign investors». Domestic investors also "pass" through these difficulties, but they are adapted to the market and have already saved up the capital for development of this real estate segment.
One more prominent aspect is an issue concerning privatization. It is one of the main ways for foreign businessmen who search for opportunities for new investment to Ukraine. In 2004 the estimated scope of the means which were gotten from privatization made more than $1,3 billion.
«The previous government promoted a new long-term National program of privatization for 2003-2008 which, predictably, should stimulate inflow of investments to the country. The program provided national inventory of state property, creation of registers of all organizational-legal forms businessmen, and also development of mechanisms of effective tenders carrying out and profit distributions. That is authors of the reform provided that on the contrary of how itwas earlier, 25 % of privatization incomes would be used on restoration of the privatized basic property funds», – S.Shulga says.
In connection with the situation which has developed in the capital construction market, foreign investors have taken a waiting attitude. And domestic investors are not especially aspired to finance construction. In A.Zarembo's opinion, «sharp necessity to start working by clear, transparent rules, with observance of the letter of the law, first of all, has ripened. Designing and construction is interesting enough and influential field of activity. So, that for today it became a tool in political strike».
As always there isn’t enough land.
In 2005 the industrially-warehouse real estate continues to experience serious difficulties. First of all, it is deficiency of construction sites suitable for construction of logistical and industrial complexes, stagnation of industrial manufactures, increase of prices for land and real estate, and also some changes in laws, concerning privatizations and taxation system.
Most "labour-consuming" for the investor is an issue of getting land areas for there remains not too many sites in Kyiv suitable for creation of logistical complexes and industrial manufactures, and it is not cheap. « Demand much exceeds the supply both in Kyiv and the nearest suburbs. Investors began to understand: not the real estate object which in due time can collapse represents value, but land which is firm. Cost of the land in Kyiv is approximately twice above, than on the average across Ukraine. «Kyivzem » estimates the capital ground even higher – sq.m. of land in Kyiv is on sale at 30-35 times more expensive, than on the average above the country. Thus the land price in 2003, according to Kyiv city administration, has increased in 1,7 times in comparison with 2002 – from 407 UAH up to 683 UAH per sq.m. Development of the land market also shows that fact, that practically in each average real estate agency today up to 20–30 % of a turn make transactions with land both in city, and in suburbs», – S.Shulga notices.
To demolish, reorient, build new
Capital authorities see the solution of the problem of free sites shortage in industrial manufactures carrying out of the city boundaries, reconstruction and condensation of old microdistricts, development of construction at the capital’s suburbs. According to statistics, the most expensive and best-selling sites are in Pecherskyj district, the cheapest – at Trojeschina.
«The industrial object is doomed to be reoriented if it is located in a crowded place, near the underground or a traffic intersection», – is assured. S.Shulga In the expert’s opinion it is caused, firsly, by interest of authorities in it, secondly, by high cost of land and a manpower in the capital, that makes the manufacture organized in suburb more profitable, thirdly, development of the industry conducts to integration of floor spaces, and as consequence, their construction demands greater free ground areas. Industrial complexes situated with the city should be reoriented into commercial real estate of other directions. The most perspective in this situation seems creation of trading, office or office-warehouse real estate on their base. It is also confirmed with successful examples of new business- and shopping-centers situated on territory of former industrial enterprises.
Worn out industrial areas will disappear from Kyiv map and office, inhabited and shopping-entertaining centers will appear on their places. « Four capital factories are already considered as platforms for nonindustrial construction– «The Bolshevik", "The Radar", "The Arsenal" and "Kyivchimvolokno» which capacities the mayoralty plans to transfer over the city limits. Housing and trading-office complexes are to be constructed on their places. Shopping-entertaining centers are promised to be opened on the territory of gearbox plant (crossing of Borshchagovska and Industrial streets), which became the first victim of industrial areas compulsory migration, and also on the place of factory "Jynost", – has noted S.Shulga.
The same destiny also waits for the majority of reconstructed administrative buildings constructed in 50–60th, and the future – in industrially-warehouse new buildings. Industrial complexes should be built in surburbs of a megacity or in general behind the city boundaries. Manufacture placement outside the city unequivocally is more favorable to the investor, even because cost of the ground, and rapproachement of raw and human resources will promote it.
«The full production cycle of an enterprise is its advantage, but not lack. From the financial point too. In fact it is known that with a complex approach investor always appears in better advantage place, rather than in case of creation of separate industrial sites», – considers A.Zarembo.
Region direction
Modern technologies demand new design solutions of buildings and constructions of industrial objects, that is difficult to realize within the limits of old buildings and engineering infrastructure of the object. Therefore it will be expedient to deduce the large industrial Kyiv enterprises onto new territories. But it is necessary not to forget, that all expenses on carrying out the industrial areas will be layed down on shoulders of the investor interested in purchasing land within the city boundaries.
Issue concerning industrial areas to suburbs and behind the city boundaries A.Osadchy has commented as follows: «Construction of industrial complexes in suburbs of Kyiv is favourably enough for investors. Firstly, industrial areas’ carrying out is stipulated by city authorities. Secondly, the investor, having transferred manufacture to suburb, gets expensive land in the capital and, having constructed on it the demanded real estate, as a result receives greater profits. As all necessary infrastructure is, if not on the site where new manufacture will be constructed, then in immediate proximity. The Kyiv region – a populated area with a high level of infrastructure development – is very perspective for development of the industry. Besides, Kyiv is a huge commodity market that is important for development of the industry"." The investor when constructing industrial complexes in suburbs of the capital gets advantage in transport issue, placement of a parking and has a land reserve for the further enterprise development what is impossible to say about the city centre», – Konstantin Anisimov, director of "Lindab" company marks. One of aspects of successful realization of industrial and warehouse real estate projects – a rational organization of technological process, usage of modern materials and construction technologies. At the present stage, Alexander Palamarchuk the deputy director on marketing Open Company «Modern Technologies of Constructions» considers, the investors developing objects in Kyiv and regions do the rate on modern construction technologies and materials. Expensiveness of financial resources declines investors to use technologies for quickly constructed buildings for reduction of construction terms allows to lower expenses for repayment of the credit considerably. Also success of project realization in many aspects depends on competence and professionalism of contractor organizations.
Profitability of construction of industrial and logistical complexes in suburbs of the city, in T.Kolomiets' opinion, also depends on concrete business. «Business-plan, where the most important factors of manufacture accommodation would be described and calculation of economic feasibility of this or that variant of accommodation would be made, is needed», – he marks.
At the same time, absence of a necessary infrastructure in regions and suburbs of the capital threatens the investor with additional financial charges that increases times of objects payback. «When redeeming real estate objects for warehouses or small manufactures the investor has a set of problems connected with creation of engineering and transport infrastructure. All these problems he have to solve independently after the object is bought», – marks S.Shulga.
«The investment of means into industrial construction in Kyiv, certainly, in the near future will be more favorable than in other Ukrainian regions. But, quite possibly, manufactures in regions where the ground, labor, raw material is cheaper, after a while will be more expedient to develop», – A.Zarembo is assured.
About prospects
Many domestic and foreign investors are interested in industrial areas of the capital. The Kyiv authorities also consider them as an opportunity to involve investments. Many territories of enterprises working unprofitably are planned to be reoriented through exposing at investment competition. Calculations show, that the means enclosed in re-equipment and the means needed for construction of an enterprise from "zero", are approximately equal. If earlier they invested in quickly payback objects of the commercial real estate, nowadays investors are ready to invest in objects with longer times of payback. The purpose of such investments – is strengthening of own positions in the Ukrainian market.
For today it is possible to speak about national focused investments into the sphere of industrial and logistical real estate. The majority of development and investment-building structures consider an obligatory inclusion into their interests the sector of industrially-warehouse real estate.
«Domestic investors have a desire to invest into our manufacture. It is not too profitable business: its profitability makes about 13–15 %, and at astable economy these are low figures. But in case of stabilization of an economic situation the industrial real estate can quite count on even greater interest to it both of domestic and foreign investors», – says A.Zarembo.
S.Shulga estimates formation of demand for objects of this real estate segment as follows: «I think that by 2008 will be already observed such a factor as absence of supply within the city boundaries and excess of demand in a 30-kilometer zone of Kyiv. Possibly, construction of the industrial and warehouse areas up to 2008 will be mainly reorientation; for 2008-2015 –boom of new objects construction».
«Today Kyiv in this segment borrows 30 % of the Ukrainian market. However its share will decrease a little because of the expensiveness of land and labor», – marks T.Kolomiets. «In genera it is possible to predict an active development of industrial and warehouse construction segments. It’s difficult to name concrete tempos now because the market of new industrial buildings just starts its development. Potentially it is tenfold growth of scopes and, accordingly, demand in the nearest 7–8 years. There are several reasons for it: carry of manufactures from the EU countries, active construction of industrial objects by the Ukrainian companies (existing ones do not meet modern requirements of business leading any more) and development of the warehouse real estate», – predicts T.Kolomiets.
Foreign investors are just looking narrowly at our market of the industrially-warehouse real estate. They will be thinking for 2-3 years more - consider market operators. «Unfortunately, the share of foreign investments into the industrial real estate is low for the present. A principal cause is the low rating of the country as a whole, that means the high risks connected with long-term investment. And in fact any, in particular industrial, real estate does not assume fast return of the enclosed means », – says A.Osadchy.
Nevertheless, the expert marks positive shifts in this sector: «Today western investors estimate the market of Kyiv and Ukraine as a whole as one of the most perspective markets of the East Europe. Heightened interest to the Ukrainian stand at international investment forum MIPIM in Cannes testifies to it».
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