The countries of Eastern and Central Europe have achieved a huge amount – politically, socially and economically in the 15 years or so since the collapse of Communism. When the Berlin Wall came down, there was a naïve assumption by some in the West that the countries of Eastern and central Europe would quickly forget their centrallyplanned past and rush to embrace capitalism at its most red-blooded.
But while they remain promising areas for growth, unravelling 50 years of history is not an overnight task. Old attitudes die hard and, as recent events in Hungary have shown, politics in the region can still be difficult and can occasionally bite the unwary. And as the Germans found, even in trying to rebuild the relatively compact former East Germany, rebuilding a complete national infrastructure is a very long-term project.
Still, for those willing to take the risks, the potential rewards are great. Justin Meredith, a partner at property consultants Atisreal, says that with the exception of Poland – a relatively stable and mature market – it’s the private investors rather than the funds that are leading the way in property development in the east. Conditions in many countries may not be quite stable enough to attract the big institutions, but there are good returns to be had, he says.
So far, retail has spearheaded development in cities like Kiev, and other old-established towns, he says. ‘All the big retailers, like Marks & Spencer, want to be there.’ However, it is a chicken-and-egg situation. ‘The shops may be there, but how are they going to get the goods into them?’ There is little in the way of modern transport infrastructure, and few specialist distribution sheds. ‘So there’s a choice of either using old buildings, or building new ones quickly,’ says Meredith.
However, it can be hard to deliver new buildings to the specifications required. The specialist skills, equipment and materials needed to construct large distribution sheds are often in short supply in many – though not all – countries of the East.
Beyond the availability issue of sheds, thereremains the problem of poor infrastructure. While some new highway construction is going on, especially in the more developed countries such as Czech Republic, Poland and Hungary, most roads are two-lane – and in addition vast distances can add to transit time. Airfreight or express parcels may be an option, but only at a high cost. Shipping and rail services are likewise limited.
Another characteristic of many Eastern countries is the great divide between town and country and, often, between the capital city – where the bulk of the wealth tends to congregate – and the rest of the country. It’s a two-tiered market.
Assembling very large sites for, for instance, automotive supplier parks can be tricky. Land may be cheap, but because of the way it was privatised in many countries after the end of Communism, land is often held in a myriad of private hands and it can take time to assemble it all. This has also been a factor in the slow progress of many major highway construction projects.
‘It doesn’t help,’ says Meredith, ‘that there’s still an intense distrust of any officialdom’ – and that, it appears, includes logistics property developers.
On the plus side, land and construction labour costs are low, though it can be tricky to find large cranes and other specialist construction equipment in some places. In Poland, adds King Sturge research associate Petra Blazkova, the problem is being exacerbated by the brain drain that has tempted many construction workers to better-paid jobs in the West. ‘This could start to push up costs,’ she says.
At the moment, most land for distribution sites is bought rather than leased, says Meredith. ‘The market is too embryonic for a leased property market to have emerged yet.’
Planning restrictions do exist – in fact, this was a feature of the old planned economies – but in practice cause few problems, as planners and developers have a common interest in concentrating development near available transport facilities. So far, most development has been on ‘green’, former agricultural land; few people have yet tackled the problem of cleaning up the East’s many contaminated former industrial sites. In many cases, these tend to be in the wrong places as far as logistics is concerned.
Michael de Jong-Douglas, senior vice-president for East Europe at logistics property specialist Prologis, says that there is no substitute for being there. ProLogis has its own offices, staffed almost exclusively by nationals, in its target markets of Poland, the Czech republic, Hungary and Romania. ‘It’s important that you don’t try and run everything from London or Paris,’ he says.
Monika Bukowska, research analyst at Arlington Securities, agrees: ‘You do really need to be there. If you’re not, you won’t get to hear about opportunities that arise.’
Prologis has just opened its first distribution park in the northern Polish port city of Gdansk, and also has developments in Budapest, Bucharest and elsewhere. Regional hubs are beginning to emerge, he continues, that can serve more than one Eastern European country as well as linking to the West. A prime example is the Katowice region, which is close to the Czech border and also on the Germany-Poland motorway. It’s also attractive because it is a major centre of population and a big industrial area.
Blazkova believes that the Konin region is opening up following the completion of the motorway linking it to the German frontier. This is an interesting development, she says, not least because it could steer some of the development potential away from the Katowice axis. Konin will also be, in time, astride the motorway eastwards from Gdansk.
In terms of size and build quality, there is nothing to distinguish the sorts of properties that Prologis develops in the East from those in most western European countries. Around 20-30,000 sq m is the norm, although because it is a growing market, customers usually want to be able to move into bigger properties fairly quickly, so it is useful for logistics parks to have a mixture of available sizes.
Douglas has also experienced some of the land assembly problems referred to by Meredith at Atisreal, though he adds that there are few other planning issues. Assembling enough land is timeconsuming, and it is no use being in a hurry. ‘That is one of the advantages of having your own team of people locally. You also need good due diligence and a good lawyer.’ On the plus side, land is available freehold and there are few strings attached.
Alexander Forst, business development manager for northern and eastern Europe at French-owned logistics operator, Gefco, stresses the importance of having the right contacts, especially in Russia. ‘It’s still actually very difficult for a private enterprise to purchase land. Slovakia is easier though, possibly because they want to encourage investment to replace heavy industry.’
Bukowska adds that bureaucracy can be slow, although construction itself can take as little as four months. In fact, it’s paperwork rather than bricks and mortar that cause most delays in developing properties.
So far at least, governments in East Europe have not started to force property companies to develop ‘brownfield’ sites, though Prologis has carried out a couple of such developments of its own volition in Poland.
While there is plenty of land available in most parts of Eastern Europe, some of it at very competitive prices, sites do have to be carefully selected, he says. ‘You need enough land, it needs to be close to motorways, but it also needs access to labour, and that can mean be accessible by public transport.’ Many workers in the East still don’t own cars.
Prologis has also noted the tendency for sites around the capital cities to be developed first, though that is slowly starting to change, with other major centres like Katowice and the Gdansk-Gdynia conurbation starting to come to the fore.
Monika Bukowska, at Arlington Securities – which has just launched a fund specialising in Poland, Czech Republic, Slovakia and Hungary – says that regional logistics hubs are slowly building up, following the initial phase of expansion, which concentrated mainly on capital cities. Another significant development is that while until a year ago, therewere no European regional distribution centres in the East, Lego – of toy building bricks fame – has bitten the bullet and sited the whole of its European distribution operations at a DHL facility in Jimy, near Prague, under a five-year contract. It is Lego Group’s largest in Europe and, by early 2007, every brick destined for Europe, Asia, Africa and South America will pass through the Czech Republic. Eventually, the 60,000 sq m facility will create 600 jobs.
The other appeal of central Europe is as a ‘near sourcing’ location for Germany. ‘Interest in this has not been quite as great as we’d expected, but there is now some pick-up in activity,’ says Bukowska.
New motorway construction is spearheading the development of logistics regions, she says. For instance, the planned Kiev-Hungary motorway should reach Hungary’s eastern border by 2012. ‘What’s happening in Hungary is very interesting,’ she adds. ‘With the growth of the car industry in Budapest and Gyor, they’ve had to bring workers in from the Czech Republic.’ In fact, parts of the central European countries are showing signs of overheating, and there will be a gradual move of manufacturing capacity eastwards, Bukowska predicts. The logistics industry will follow, possibly in about a couple of years’ time, she argues.
Hungary, while it was something of a logistics axis for the old Eastern Bloc – it had the largest and most developed international haulage industries – has not quite lived up to its logistics potential in the post- Berlin Wall era, adds King Sturge’s Petra Blazkova. ‘In fact, one problem Hungary could face is competition on its border as Romania starts to become more attractive. Timisoara, Oradea already have quite a history of industry and labour costs are around €70 a week compared with perhaps €300 a week elsewhere.’ She predicts that Romania could enjoy a ‘honeymoon’ period of around 18 months following it joining the EU on January 1st, with the red tape removed and before higher labour costs kick in.
Keen prices
Poland has also struggled a little, partly because it lacks motorways, continues Bukowska. Here, a lot of the development has been concentrated on the Warsaw Lodz (pronounced ‘Woodge’) areas and in the south-west, centred on Katowice and Krakow. Lodz is beginning to attract business that previously would have gone to Warsaw. There’s also been a lot of logistics property development in Poland, so prices are very keen, which again has increased interest in the south-west.
In the longer term, Poland should develop a more comprehensive motorway system than it currently possesses and Lodz could eventually find itself at the crossroads of north-south and east-west routes, though completion may not be until 2010 or beyond. Completion would bring the area within hours of, say, Berlin or the Czech Republic. But for the moment, ‘Poland is still very undersupplied with motorways, even compared with the other countries in the region,’ says Bukowska.
There is some competition between different regions – for example, development of the Krakow- Wroclaw-Katowice corridor is putting some pressure on the Czech Republic. Of the four countries in which Arlington specialises, the Czech Republic is probably the most developed, though it is also becoming slightly expensive. Here, there has been a lot of interest in areas beyond the capital cities. The brewing town of Pilsen for example is developing as a centre for servicing Germany.
Slovakia, meanwhile, is emerging as ‘the Detroit of Europe’ with VW, Peugeot and Kia already set up there. Heavy competition in the car industry could force more of the major manufacturers to up sticks from their long-established heartlands in Western Europe and set up in central and eastern Europe, Bukowska believes.
The East of Slovakia and far south of Hungary could eventually be affected by the emergence of Romania as an economic powerhouse, though that is probably still some years off.
Property costs do vary quite widely throughout the region, and within countries, or even cities. Some of the prices being quoted for developments next to major airports such as Prague and Budapest are not so very different from those in Milan or Paris, though those in the East European hubs tend to be better located relative to the airport than those in the often sprawling complexes that have developed around major air hubs.
While the former Eastern Bloc countries are often portrayed in the media as some sort of free market boom region, old habits die hard, says Forst of Gefco. On many counts – for instance, the number of days it takes to set up a company – the East still tends to lag behind Western Europe, he argues.
There is also a tendency to gloss over the many infrastructure problems that remain, especially roads and warehousing. In some countries, good quality warehousing is either hard to come by, or very expensive he says. ‘Prices in some markets, such as Poland, are more normal now, whereas five years ago they were three times Paris levels.’ Nevertheless, the question must be asked: Why should prices be on a par with Paris, when all other costs tend to be lower?
But it is perhaps the motorways where the most glaring infrastructure gaps can be found, says Forst. Even in former East Germany, where the Federal Government has poured in billions of Euros, you don’t have to venture far off the main routes to find very substandard regional roads – and the situation in East Germany is far, far better than in all the other former East Bloc countries.
In Russia, the situation is even more marked. As Forst points out, investment outside Moscow and one or two other big cities like St Petersburg is minimal. He points out that poor transport infrastructure could be a danger for all the eastern countries, especially now that some of the labour cost advantages are beginning to be eroded. There is a danger that Asian countries could steal much of the East’s business.
The difficulties have deterred the logistics industry from investing, though. Gefco, which is a subsidiary of the French-owned PSA car giant, is investing in the region again, however. It has reopened a 20,000sq m Polish facility and plans to open a similar-sized depot in Moscow in July next year.
Jeremy Davidson, deputy managing director of NYK Logistics Europe, says that his company is active in the Czech Republic, Poland, Hungary and Russia. In the first-named, the company now employs 550 people and operates 80-90 vehicles in a business that has been built up from scratch in the past 5-6 years.
Development of a modern logistics sector has been driven both by consumer demand – supermarket chain Tesco is one major customer, for example – and by the needs of the growing manufacturing sector, for example cars or electronics.
‘We go where our customers want us to,’ says Davidson. There is little difference between the sort of logistics facilities that would be provided in the East and those in more established markets. ‘We also find that construction costs are pretty similar and we’re also very happy with the quality.’
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