Stores for stores

Those who should have been interested neglected it back in 2006, but the logistics sector came to life in 2007 in Romania and is expected to explode in the next few years – as well as in the other new EU entrant, Bulgaria – fuelled by the boom in retail

Matei Roman, Nathan North

Looking back at the history of the industrial sector in Romania, it is clear that the true beginning of the market was in 2006, and it continued to develop impressively last year. The early part of 2007 was very promising, with the sector evolving considerably in the first half of the year in terms of leases and the delivered phases of many different projects. The second half of the year continued this trend, although at a reduced rate. Delays were a common occurrence due to the imbalance between the large number of new projects and the insufficient number of professional contractors. “This is a sign that the market is in some ways still in its early stages,” says Laurenţiu Cătălin Hanu, business development manager for developer CTP Invest in Romania.

Even so, 2007 brought to the market over 240,000 sqm of new industrial space, almost four times more than the previous year. The supply came from both new phases of existing developments, such as Cefin Logistics Park or Mercury Logistics Park, as well as from new facilities, including Bucharest West, ProLogis Park and A1 Business Park. “The reason for the undeveloped market is simple: the Romanian market was for a long time underestimated with almost every product entering the market through distributors – before Romania become an EU member,” claims Andre Hofer, managing director of Eyemaxx Real Estate, an Austrian company which intends to develop ten logistics schemes in Romania in an investment of EUR 1 bln.

In 2007, things changed and many important international companies appeared on the Romanian market, with demand continuing to be dominated by logistics companies, followed closely by retailers. In fact, retail will soon take the lead, according to Costel Alecu, head of Regatta’s industrial and retail division. The largest transaction in the history of the sector took place last summer, between Carrefour and Austrian investment fund Europolis, a lease of 45,000 sqm of space in Cefin Logistics Park. This year, however, the market is more difficult, with the main transaction being for space in Mercury Park on the A1 motorway close to Bucharest. This took place between Dumagas Transport and Heitman, the owner of the park, which is being developed by Helios Phoenix. The transaction was for an area of 10,200 sqm in a facility where most of the space has been leased to Minimax (14,000 sqm).

Playing catch up

The impressive growth in the retail sector has fuelled demand for industrial space and many companies have started to relocate or expand their warehouses into the new logistics projects. In 2007 take-up for warehouse space almost doubled compared to the preceding year, with 234,000 sqm leased throughout the whole year. Whilst 2006 was dominated by logistics companies, in 2007 retailers began to gain ground and noticeably reduced the gap. The first half of 2007 was very active in terms of leased square metres with 163,800 sqm of industrial space taken up before the summer. With the market still in a period of growth, the average size of individual transactions also increased, up to 6,000 sqm, which was more than double compared to 2006. “New malls are being delivered and the competition in retail is growing all the time. Retailers cannot have goods delivered just once a week, and this will lead to an inevitable boom in the warehouse sector,” continues Mr. Hofer.

Last year was in any case spectacular, compared to previous years, bringing four times as much industrial and logistics space than in 2006, when only 61,300 sqm was delivered to the market throughout the entire year. Thus, at the end of last year the total stock of industrial space in Bucharest had doubled, reaching 500,000 sqm. The total supply could have been even higher, but several large projects had to delay their delivery to 2008 because of the ongoing crisis in the construction sector.

Approaching zero

With the strong demand immediately absorbing almost any new industrial space, the vacancy rate in the market was close to 7.78 pct at the end of the year, but may rapidly go towards 0 pct as most of the space available as of December 31st 2007 was under advanced negotiations. For now the main customers are logistics/transportation companies, but giant retailers such as Carrefour, Minimax, Cora and Kaufland will change the mix over the next few years. Another important group of clients for industrial parks are automotive companies. Ford’s suppliers have entered the scene after an agreement between the American company and the Romanian authorities to locate auto parts factories in city of Craiova, and they are now looking for sites to build these. “Unfortunately, there are not that many industrial projects close to Craiova and the prices for land have exploded. So they are forced to find spots in south of the city close to the Danube, in the small cities like Calafat, Drobeta or Caracal,” explains Mirel Voicu, a real estate broker in Craiova.

What lies ahead

In the current global economic climate, financing projects may become a problem. “The banks are not willing to offer credit just for a good design; they need to study the numbers more closely, but that can be a good thing,” concludes Eyemaxx’s boss in Romania, Andre Hofer. But with demand still outstripping supply and driving the vacancy rate towards zero, and with construction costs expected to continue to grow in 2008, average rents will probably remain stable (by the end of 2007 - EUR 2,5-6 in Bucharest and the surrounding districts), with a slight increase for small to medium requirements and slight decreases for very large tenants.

The view from the agents...

The boom in shopping centre development throughout the CEE region over the last few years has naturally brought with it an increase in the demand for retail warehousing. Yet precisely measuring the growth in retail warehousing is no easy task: some deals are directly signed with retail companies, while many retailers are supplied through logistics providers. When we also consider that retailers can be supplied with packaging and parts for assembly from warehouses with a combined function, it becomes even more difficult to distinguish strictly retail from logistics or light production.

Nevertheless, Beata Hryniewska, head of the industrial and logistics agency at Jones Lang LaSalle’s Warsaw office, points out that: “It is safe to assume that most of the warehousing in the EU countries which joined in 2004 is now being used to supply retailers. The biggest deals in the history of Polish warehousing were the recent H&M and Leroy Merlin leases – both for over 50,000 sqm of space.”

Location, location, location

However, the markets of the newer EU members, Romania and Bulgaria, are at a different stage of development. Should we expect the same pattern to emerge in these two countries as happened with the 2004 intake? Beata Hryniewska feels that although the markets of the two countries are currently smaller at the moment than those of the more established members, such as Poland and the Czech Republic, “they will probably develop in a similar way. But one advantage that the latter two countries have is their central location, which is much better for distribution centres. For example, Polish centres also often supply the Czech Republic, Ukraine and even Germany.”

Adriana Dragomir, a research analyst at King Sturge in Romania, is in broad agreement about the likelihood of retail warehousing taking off in the new EU countries. According to her, the current situation for the distribution of the different types of warehousing in Romania is that “manufacturing is predominant within the large industrial parks established in former traditional industrial locations in the regions, whereas in Bucharest retail and manufacturing are rather equal in proportion, with a trend towards retail dominating.”

Closer to home

Beata Hryniewska is of the opinion that there is still some way yet to go in terms of the evolution of the retail warehousing market in the region: “In Poland and the other CEE countries, this market is still relatively young, so I think the trend for growth in retail warehousing will continue for the next 3-5 years, especially considering that shopping centres in secondary cities are still opening up.” But what will the near future bring? “We should see the number of both distribution centres and localized warehousing continuing to grow; and if a secondary city achieves a critical mass of retail, then more local warehousing will appear. This depends on the particular client and their needs, but with the cost of transportation increasing, some retailers are likely to want to optimize their costs in this way,” Ms Hryniewska adds.

Go, stall or stop?

However, for those EU countries which acceded in 2004 there was a much more benign global economic environment than for the new members. In Adriana Dragomir’s view, the conjunction of international factors – the mortgage crisis, the credit crunch, political conflicts and rising fuel prices – makes the practice of predicting trends much more hazardous: “The evolution of this market may be more rapid, may be delayed or may even stagnate or stop. For instance, the real estate market in Romania started its development with a delay of several years compared with its neighbours. But, at least in terms of prices and yields, the evolution has been more rapid, following the same trend.” ν