Nobody, says everybody, is going to make the same mistakes as the Klondike gold rush of 1897. Two ships that year docked in San Francisco and Seattle carrying miners returning from the Yukon with bags of gold. They started a rush north of prospectors nicknamed “the stampeders”.
Eastern Europe is often described as Europe’s Wild East, with claims to be staked on cheap land and the covenant strength of distributor demand more valuable than that Alaskan gold. It is hard to look at developers and funds, like the stampeders, going east today and not wonder a little about whether they will make the quick riches they claim.
Bucharest is the latest to become like the Klondike’s Dawson City. Helios Eastern Europe has opened its first office in the Romanian capital. A joint venture between Helios Properties and European distribution specialist Delamode, it has plans for €250 million of distribution/ industrial development, with finance provided by Eurohypo. Giles Scott of Helios Eastern Europe says: “The Eastern European market remains relatively undeveloped, yet the demand for product is strong, offering massive growth potential and great returns.”
Meanwhile, US development giant ProLogis has begun development of its first industrial facilities in Romania. The company has acquired 69 acres (28ha) of land west of Bucharest along Romania’s A1 motorway, the country’s primary transit corridor. Plans for the site, to be called ProLogis Park Bucharest A1, show six buildings totalling more than 1.7 million sq ft (157,700 sq m) of industrial space.
“Over the past several years, the central and eastern regions of Europe have emerged as strategically important areas for industrial distribution,” says Walt Rakowich, president and COO of ProLogis. “Our company has been successful in anticipating this trend, and now has market-leading positions in Poland and Hungary as well as one of the largest industrial platforms in the Czech Republic.
“We’re pleased now to be entering Romania, where we see a combination of robust demand for state-of-the-art facilities and a shortage of high-quality supply. As such, we believe this transaction will deliver real benefits both for customers with European operations and our investors.”
ProLogis’s initial investment will consist of land acquisition, infrastructure improvements and construction of two distribution centres comprising 609,000 sq ft (56,600 sq m), with completion of the first facility planned for the second half of this year. Total investment at the park is expected to exceed US$80 million.
It’s not just Romania. Speculative construction is at high levels in Poland, says UK-based property consultant King Sturge. Elsewhere in Eastern Europe, speculative construction is still at low levels, although generally there has been an increase in schemes where there are pre-agreements with occupiers.
ProLogis, for example, has 11.8 million sq ft (1.1 million sq m) of distribution space concentrated in the Polish cities of Warsaw, Bedzin, Piotrkow, Poznan, Sosnowiec and Wroclaw as well as Prague and Budapest.
Demand for distribution warehousing is stronger in Central Europe than in Germany, Italy, the Netherlands, Belgium and Denmark. But that’s not saying much. Over the past five years, according to King Sturge, prime industrial rents in Central Europe have fallen an average of 30 per cent.
They fell 11 per cent in the last year. The greatest declines have been in Prague, Budapest and Warsaw, which has the lowest prime rents in Europe of 40 euros per sq m a year. Average vacancy in Central Europe is 7.7 per cent whereas in Western Europe it is just 5.5 per cent. Yet ProLogis market officer for Romania Muler Onofrei notes that vacancy rates for modern industrial buildings are about 2 per cent in Romania.
Despite the nasty sucking noise of rents going down the plughole, prime industrial investment yields have fallen by more than a point and a third in Central Europe to eight or nine per cent, according to King Sturge. This indicates strong demand from investors. These yields are within sight of the 5.5-7.5 per cent of core and stable markets of Western Europe.
Another UK-based property consultant, NAI Fuller Peiser, is involved with a specialist logistics fund which wants to address the lack of supply of warehousing and distribution facilities in the Ukraine. The Primeros Group of Property Funds has been set up in Jersey in response to the recent flood of investors to the eastern European commercial property market.
The Funds are administered by Equity Trust Services, part of the major international trust group Equity Trust. These property funds offer investors a well-structured way to invest in different spheres of the developing and previously untapped property market of Ukraine. The Primeros Property Fund LP will primarily invest in a portfolio of property in Kyiv with the initial focus of buying and developing existing properties which can relatively quickly be converted into income producing business centres.
Primeros’s business plan is impressive: Kyiv is in an area that has a 97 per cent occupancy rate. The derived combination of rental income and portfolio asset growth is expected to produce investment returns over the eight year life of the Fund which are far superior to similar funds in Central or Western Europe.
Ukraine has, says NAI Fuller Peiser, chronic shortages of warehousing and office buildings despite high demand. It claims: “It has been estimated that there is less than 25 per cent of required warehousing space available on the market.”
The Primeros Logistics Fund will thus invest specifically in the development and leasing of up to 350,000 sq m (3.75 m sq ft) of purpose built warehousing and associated office facilities in Kyiv and across Ukraine.
And perhaps NAI is right. Perhaps it is going to make money out of Eastern Europe. In the Klondike, those who survived the perilous journey mostly found disappointment once they reached Dawson City. Locals had already claimed all of the gold-bearing creeks and claims of gold for the taking were grossly exaggerated. The only people to strike it rich were the merchants and profiteers who took advantage of those who hoped to get rich quick.