Tuesday 13th Nov 2018 - Logistics Manager Magazine

Eastern rush

Kühne + Nagel has given the logistics property development market the kind of news it wants to hear. It has signed a lease on a new 19,000 sq m warehouse at the Zagreb Business Park. Situated on the Zagreb-Slovenia highway at the Sveta Nedelja junction, outside Zagreb, warehouses there are constructed to an institutional standard with 12m clear internal height, ample docks and modern offices. Letting agent King Sturge reports strong interest in the remaining 40,000 sq m of phase one of the development. Phase two will provide a further 45,000 sq m of warehouses.

The deal comes at a time of restructuring for K+N”s local operations. The company has elevated its former South America manager Bob Mihok to regional manager of its new Eastern Europe Region, starting on 1 April 2008. K+N calls Eastern Europe ”one of the Kuehne + Nagel Group”s key growth regions”. The company has 75 locations there and in Russia, more than 600,000 sq m of warehouse space and a staff of approximately 4,500 – regional HQ will be in Vienna.

To back up this activity, K+N is doing its own deals in Eastern Europe. In the spring, it won the Danone contract for the operation of its new distribution centre for fresh dairy products in Chorzów in the south of Poland. K+N already manages Danone”s other national distribution facility, near Warsaw. The contract was implemented upon completion of the new ProLogis Park in Chorzów in April 2007, where Kuehne + Nagel manages the 4,000 sq m warehouse Danone has leased in the Katowice area to serve the growing consumer market in the south of Poland.

On the other hand, Marcol Group and Challenger Financial endured woes as Dutch logistics company Rynart went into liquidation, leaving Marcol holding a 67,000-sq m baby called Rozalia Park in Biatorbagy near Budapest, Hungary, and a Challenger subsidiary keen to find a new tenant for the 56,000 sq m sale-and-leaseback it did with Rynart earlier in 2007.

Yet property adviser Cushman & Wakefield says Hungary remains healthy for logistics property developers and landlords. Rental growth dropped by 6.2 per cent in 2006 and by 2.5 per cent over five years to 2007 to a monthly average of €4.50/sq m/month. However, yields for industrial property in Budapest moved in to 6.75 per cent during 2007 from 7.25 per cent in 2006. Hungary, it says, has a development pipeline of 200,000 sq m and a vacancy rate of 11 per cent.

The logistics development property market is hungry for news such as the K+N deal in Croatia, which in turn depends on news such as K+N”s Danone deal. What property people do not want to hear about is Rynart.

Whether it wants it or not, Eastern Europe is getting an extra logistics development boost. The credit crunch turned on its head the traditional view from financiers that the economic bust starts with investments in emerging markets turning into dogs. There is now desperate pressure among listed international developers to maintain current levels of profitability. And in the world of logistics development, the straw many are grasping is Eastern Europe.

Look at the handful of development companies not making gloomy prognostications. Any of them in profit with deals under their belt or assets in Eastern Europe are pointing to the fact that the tragedies of sub prime are largely irrelevant there. Eastern Europe”s economies may avoid those tragedies but the upshot for logistics providers is a rush of new space to the market expected over the next two-five years.

Aspirations are concentrated on the central European area that includes Poland, the Czech Republic, Slovakia, Hungary, Romania and Bulgaria. The Baltic states of Estonia, Latvia and Lithuania have less interest for developers as do the Balkans: Slovenia, Croatia and Serbia. Towering behind all of them is mother Russia, a graveyard for corporate ambition yet still dangerously attractive.

US logistics developer Panattoni has opened for business in Poland and plans deals in the Czech Republic next. Its logistics A-list customers include H&M, Norbert Dentressangle, Coty Cosmetics and Dascher Logistics. Its Polish operations in 2006 consisted of 13 sites with 167,224 sq m of space.

Automotive logistics company CAT LC Polska has leased almost 5,000 sq m in Panattoni Park Pruszków, where it is establishing a cross-dock platform for CAT”s domestic distribution activity within Central and Eastern Poland. The beginning of operations is planned for March 2008.

The park itself will be delivered at the beginning of 2008. It will comprise two buildings with a total of 67,000 sq m of space, close to the A2 motorway. Colliers International advisor Maciej Cieliczko advised CAT LC Polska during lease negotiations.

UK-based developer SEGRO has also done deals that will fan the acquisitive flames of developers across continental Europe. In 2006, it let more than 20,000 sq m of space at its Strykow site to an American packaging company and a Polish retailer. In Poznan, 10,500 sq m went to a UK healthcare firm.

Buildings at Europolis Real Estate Asset Management”s Poland Central logistics & business park in Wola Bykowska are also going up. The 120ha site will provide lettable space of more than 500,000 sq m over the next 5-7 years. The first building, totalling 43,200 sq m, was delivered in August 2007. Europolis currently manages 35 projects in Austria, Czech Republic, Hungary, Poland, Romania, Croatia, Russia and Ukraine.

Poland is the country everyone talks about as the bellwether for the health of Eastern Europe, though those two words take in an area so enormous it is hard to take a single temperature for it except in terms of wider occupier or investor appetite for space.

Thanks to its boom in the economy, the rising value of foreign investments and its convenient geographical location at the intersection of transport routes linking Western Europe and Russia as well as the Balkans and Scandinavia, Poland has the most dynamically developing warehouse market in Central and Eastern Europe. That”s the conclusion of research by property consultant Cushman & Wakefield.

At the second quarter of 2007, the modern warehouse space stock in Poland amounted to 3.16m sq m. Nearly 54 per cent of the total stock was located in Warsaw, which means a decrease of six per cent compared to the fourth quarter of 2006 and a dip of more than 25 per cent compared to the end of 2004.

The capital city”s share in the country”s total stock is falling due to the booming development of regional markets. Poznan, Wroclaw, Upper Silesia and Lódz appeared on the map of modern warehouse space in 2005, followed by Kraków and Tricity in 2006. Investors are also showing interest in Bydgoszcz and Szczecin (the first modern facilities will probably be constructed in these regions as early as 2008).

The development of the regional markets is affected mainly by the development of the road infrastructure. Developers are looking for land near large agglomerations or in the proximity of the existing or planned motorways. Upper Silesia and the region of Central Poland draw considerable benefits connected with the construction of motorways (A4 and A2 motorways respectively, and the intersecting A1 motorway). The A1 will be completed in 2010, running from Tricity through Torun, Stryków, Piotrków Trybunalski, Czestochowa and Upper Silesia, to the border crossing to the Czech Republic in Gorzyczki. Due to the poorly developed road infrastructure and low purchasing power, the eastern part of Poland still has no modern logistics parks.

Occupiers are beginning to feel a pinch from a rise in rents. In the first half of 2007 rental rates for modern warehouse space increased on average by 10-20 per cent compared to 2006, depending on the location of space leased. Prices are expected to rise further in the forthcoming quarters on account of the rising prices of investment land and construction costs.

Developers are having it tougher, however. Since the beginning of 2006, prices of investment land in Poland have increased on average by 100-150 per cent, depending on the location. The highest price increase was noted in the regions of Warsaw, Poznan, Wroclaw, Upper Silesia and Gdansk, and in the surroundings of Stryków.

Speculative space
At the end of the second quarter of 2007 there was 1.1m sq m of modern warehouse space under construction in Poland, of which 74 per cent was speculative space and the remaining 26 per cent was built-to-suit/design-and-build space in the 10,000 sq m and upwards size range. The demand for speculatively constructed schemes is usually generated by companies leasing small and medium-sized space, 3,000-10,000 sq m, which expect a quick building delivery.

Leases for nearly 635,000 sq m were signed in the first six months of 2007 alone, says Cushman & Wakfield. Logistics operators made 44 per cent of these. The market share of logistics operators has been steadily increasing for years, because more and more companies are opting for outsourcing warehousing and logistics services in Poland.

Funds are active. Logistics developer Helios has teamed up with US pension fund California Public Employees” Retirement Scheme and LaSalle Investment Management to build, it reckons, property with a value of €1bn. Together, they plan developments across central and Eastern Europe.

There are property funds stalking Russian logistics space, such as Heitman Russia Property Partners, a seven-year fund with $150m of equity backed by $50m of GE Real Estate”s money. Most of this will go into developments.

All this activity has been good for occupiers. Rents were once sky high. Now they have stabilised in core Poland, Slovakia, Czech Republic and Hungary to around €3.50/sq m/month. Developers are grubbing around for land in regional centres away from the main markets within those countries. But people talk about the countries of Eastern Europe as if security of tenure is as well-heeled as it is in the UK or USA. Are they fooling themselves?

European logistics location finder
Where”s the best place in Europe to put your warehouses? King Sturge looked at a number of models for warehouse location across Europe. It modelled a requirement for a single European warehouse, a three-warehouse network and a large number of warehouses. It factored in property costs, wages and the relative increase in journey times to key markets. It acknowledges that all requirements are different and network structures are influenced by a range of factors including, product characteristics (eg value/volume), demand points and order lead time. However, it looked at a wide range of established locations based on transport infrastructure and access to population and industry.

According to King Sturge, for a single pan European warehouse requirement that allows you to service the UK, you should be looking in either the Prague area of Central Europe or the traditional Benelux locations such as Brussels. Because the UK is an island, it slews the results. If you alread, or plan, to service the UK from the UK – King Sturge recommends Birmingham – the centre of gravity for you continental European warehouse shifts east, for example: Prague, Katowice, Brno or Bratislava.

With a three warehouse network, King Sturge says you should consider the UK, Poland and France as your principal locations. A larger number of warehouses will further decrease distribution costs but inbound costs, additional inventory and loss of economies of scale need to be considered.

King Sturge goes further and identifies potential growth areas for warehouse locations in Central and Eastern Europe. These include:

  • Upper and Lower Silesia, Poland (A4 highway) and parts of north-south A1 highway;
  • In Czech Republic, D1 and D5 highways plus new D11 highway and D8 highway and Brno-Olomouc-Ostrava (new D47 highway under construction). DHL has taken 424,000 sq ft (39,400 sq m) of space in the Czech Republic from Prologis at ProLogis Park Prague-Jirnyon (the D11, 20 km) east of Prague
  • Gateway port locations, which offer opportunities for port-centric logistics, and multi-modal inland hubs.

More information at www.kingsturge.com