Ukraine’s warehouse developers had better get a move on.
The warehouse and logistics market weathered the pandemic gracefully as more people ordered groceries from home and pre-pandemic trends favoring e-commerce accelerated.
After vacancy rates dipped to 0.8% in 2019, developers rushed to add 85,000 square meters of warehousing and logistics property in 2020, the largest increase since 2014, according to Cushman & Wakefield, a real estate firm.
But the current supply of roughly 2 million square meters of warehouse and logistics space is still not enough to meet demand as large retailers increase their inventories and go digital and e-commerce continues to grow. Low rents and a lack of proper debt financing, however, are discouraging developers.
Global trends in e-commerce may give the market the push it needs to develop faster, but for now, “the warehouse market is in a bad place from a commercial real estate perspective,” says Nataliia Sokyrko, head of industrial and logistics brokerage at CBRE Ukraine, a real estate firm.
Rising Demand
Despite the downturn last year, demand for warehouse space went nowhere. In 2020, firms in Ukraine leased 160,000 square meters of new warehouse space, according to CBRE Ukraine.
Large supermarket chains and logistics companies clearly needed more storage to meet offline demand: more than three quarters of all new leases were linked to these types of companies.
Vacancy rates have therefore plummeted to around 1.8% in the Kyiv metropolitan area from 2.9% at the beginning of the year. Vacancies next to highways are near zero, an obvious sign of high demand and a dire lack of space, according to CBRE Ukraine.
And companies want more space. Cushman and Wakefield says that a third of all lease transactions in 2020 in the Kyiv metropolitan area were pre-lease agreements for warehouse and logistics space.
A significant amount of pre-leases point to a low availability of existing stock and warehouse space. “The problem isn’t that there is no interest or demand, it’s that there’s nothing to buy right now,” said Dmytro Pasenkov, head of industrial and logistics at Cushman & Wakefield.
And decreasing vacancy with nowhere to go is a problem for tenants facing upward pressure from developers taking advantage of low availability of space.
Dragon Capital, Ukraine’s largest investment firm, purchased the 21,500-square meter Arctic logistics complex from Oschadbank last year. After acquiring the complex, warehouse space accounted for 48% of Dragon Capital’s commercial real estate portfolio.
Supplying the market
To meet the demand, more warehouses are in the works. According to Cushman & Wakefield, another 75,000 square meters are planned for 2021. There are also plans to add nearly 300,000 square meters of warehouse and logistics space, but some of those projects may not cut the ribbon until 2025.
The majority of new projects in the pipeline are also specialized. Retail giants Rozetka, Nova Poshta, and Epicenter K are building custom warehouses to meet their specific logistical needs.
Last year Epicenter K, Ukraine’s largest chain of home improvement and gardening stores, repurposed 20,000 square meters of property at their Viskozna Fulfillment Center from retail to logistics.
Retail giants need the space to grow. But build-to-suit development leaves little in the way of speculative warehouse development — smaller 20,000 square foot warehouses that could be built and rented out quickly.
Potential developers are wary. Low rents over the past several years have dampened aspirations to build in the absence of debt financing. This wait-and-see game developers have been playing has caused a lack of supply, and in the meantime, rents have been steadily increasing — an inconvenient situation for tenants.
Rents in other parts of Europe are similar, and actually lower in some cases, but unlike in Ukraine, those developers have access to cheap money. Without debt financing, construction is costly for Ukrainian developers. When it costs them $500 per square meter, developers are uninterested in using their own money to develop, especially if they haven’t secured lease agreements.
Potential tenants, for their part, are wary of entering into agreements with developers, unsure whether or not the developer has the financing.
To add to that, building in Ukraine runs up against several regulatory and legal obstacles. Getting permission for construction in Ukraine can be a long process because of bureaucracy and its many rules. Installing proper utilities is often also a problem.
Total investments in warehouse real estate amounted to a measly $4.3 million in 2020, an 86% decrease year over year, according to CBRE.
Not all developers are so shortsighted. Dragon Capital, one of Ukraine’s largest investment firms, just purchased the 100,000-square meter Amtel Complex outside of Kyiv. In total, Dragon Capital owns nearly 400,000 square meters of warehouse and logistics properties.
The firm is also planning a 200,000-square meter E40 industrial park outside of Kyiv.
There’s a risk they will monopolize the warehouse and logistics market, but on the other hand, they have the expertise and resources to educate the market, according to Sokyrko. “Lease agreements were very weak before Dragon Capital came along. They are providing some standardization and methodology in leases,” she says.
Growing with digital world
An educated warehouse market will be crucial as e-commerce grows and larger retailers continue to go online, requiring bigger and more quality warehouse space.
E-commerce shows no signs of slowing down in Ukraine. The Payoneer Global Seller Index put Ukraine on the list of top 10 countries with the highest year over year e-commerce revenue growth.
Online retail sales soared by 41% in 2020, exceeding expectations by almost three times, according to EVO, a leading marketplace company. Online grocery sales alone increased 107% in 2020 from the previous year. Euromonitor International estimates that the share of e-commerce in total sales is poised to reach 11% of total sales in 2025, up from 8% in 2019.
In other parts of the world, like in the United States or Britain, those shares in 2020 were closer to 14% and 23%, respectively.
This all means there is nothing but room for growth in Ukraine. As e-commerce expands, large retailers and e-merchants will need more space. According to CBRE, online retail typically needs three times as much space as traditional stores, because internet shoppers expect a wider variety of goods.
The rise of e-commerce will only encourage development, according to Marta Kostiuk, head of research and development consultancy at Cushman & Wakefield.
And there are already positive signs that investment will increase. International institutions like the European Bank for Reconstruction and Development have revamped their real estate efforts in Ukraine. The presence of international financial institutions is crucial in changing the risk perception of Ukraine among investors.
The bank is extending a $12.5 million loan to Dragon Capital for the refurbishment of a 9,000-square-meter office building in Kyiv and the acquisition of two warehouses in Kyiv and Kharkiv with a total 26,000 square meters.
“There is a lot more recognition of the market than before,” Kostiuk said. “If you don’t want to develop residential real estate in Ukraine, then you’re looking into logistics.”
