A changing map of the logistics properties – Property Watch 2006/3

A successful property project has three main features: good location, good location and good location. This statement is particularly true in respect of market segments where cost efficiency is the main requirement, and where a major effect on cost levels is exercised by the accessibility of the property. Eston International examined whether there are possibilities to conquer new areas, in the case of logistics properties.

A specificity of the logistics properties is that the developers are able to respond to new needs emerging on the market within a very short time (merely 4-6 months), therefore, the competition is tough. It is enough to have a look at the map of Budapest’s logistics market to see that most of the developers try to implement their projects in the neighbourhood of the main traffic routes – such as the motorways M1 and M5 –, and to benefit from the advantages offered by the circular road M0, connecting these. This is what determines the southern-southwestern dominance of the modern logistics parks, while in the northern areas of the capital city, developers’ activity is sensibly lower. Here, developers are more cautious because of the lack of M0, in a market segment where the increase in costs can be measured very exactly, on the basis of the route used, i.e. the kilometers run. In accordance with Eston’s survey, in the northern region of the capital city’s agglomeration, both on the Pest and Buda sides, significant interest is observed towards logistics facilities, at the same time, appropriate offer is obviously limited. Those who are interested in warehousing opportunities have many times grown too big for their present sites, due to their success in business, but their operations are linked to towns and villages in the north. That is, companies looking for storage in this neighbourhood shall ponder the following: before the date when the concerned track of M0 is built, they make a compromise in respect of a more difficult access to the site, or they undertake the additional costs of maintaining a more distant base.
M0 hid
From the northern border of the capital city, through the Hungária annulus, one can access the already existing portion of M0 driving 40-60 km. According to a quick calculation, for a medium-size business, able to afford, due to its turnover, to hire a modern logistics facility and providing deliveries of goods on a daily basis, with several trucks, the abovementioned additional route costs a minimum of 8.4–12.5 million forints, every year. In the additional costs, affecting competitiveness as well, in addition to expenses on gas oil and the truck’s wear-off, one has to consider the additional time required for the time spent in city traffic (mostly time spent standing) and the missed deliveries, as a result of that, the wages of the drivers and the deterioration in the efficiency due to the limited time driven.

That is, location is far from being a subsidiary issue and, according to the survey, this criterium can be eased mostly only in the sense that developers can achieve successes also in the areas that are not trendy yet, due to the cost efficiency requirement of the industry (see the portion of M0 that was not built yet).

An example for investments launched in less trendy areas is the East Gate Business Park [EGBP] in Fót, a project implemented on 36 hectares, developed by Wallis Property, known as one of the investors of the successfully sold Harbor Park in South Buda. The road network connections of the area selected were already good, but the other developers did not come to this area yet, on this basis, they also expect a real boost to come only with the continuation of the annulus and the construction of a northern bridge on the Danube. The cautiousness of the competitors might be an advantage for EGBP: if an appropriate regulation is developed, warehouses meeting market needs can be implemented, but with a good timing and its unique local experience, it shall have an opportunity to develop its project into a decisive logistics investment of the area. The developer of the logistic project calculates, of course, with the advantages offered by the M0 annulus, to be built further in the future, nevertheless it is remarkable that it launched the first phase of the project, expected to cover a total area of 150,000 square meters, already this year, that is, two halls were put into operation already in September. (From among the turnkey buildings, this hall of 7,000 square meters was built according to the individual requirements of Volánbusz, while a warehouse of 10,000 square meters was built with general specifications – on the basis of speculation.)

That is, the map of logistics keeps changing and, meanwhile, developers with higher risk endurance may become successful by satisfying the local needs, while those who put stress on more security (i.e.: fully accomplished infrastructure) will get into a stronger competitive position among themselves. Still, talking about the example of the M0 annulus, decisive for the market’s development, the construction of the road enhances the interest of the property developers in the northern areas, but the local demand is present since years, that is, the emergence of modern facilities in the offer shall bring about a fast rate development of the region.

Background information
The most important lessees of logistic parks are professional freight forwarders who win orders of the manufacturers and traders in tenders, and the basis for a competitive bid is the lowest price. A token for lower prices is a strategic location – and of course, an advantageous property lease fee, but the importance of the location often slackens price competition between property developers. This also is an explanation why the lease fee of transformed or re-developed warehouse properties within the city limits mostly exceeds the fees payable for large-size, modern facilities, because a shorter distance for transportation allows a higher property utilisation fee.
In the first half of this year, expansion was moderate both in terms of offer and demand on the market of modern warehouse properties. This was justified by a drop in the number and volumes of the logistic tenders. Therefore, the lease records of the previous period are not expected to repeat, nevertheless, the ratio of contract extensions is expected to increase. In addition to a relative decline in needs for the largest areas (above 15,000 square meters), there is a permanent inflow of queries about 1000–3000 square meter premises on the market, that is, the developers are compelled to be more flexible in the design of their projects.
In accordance with the low-key demand indicators the lease fee offers for modern warehouse properties continue to decline, ranging now between 4.2–4.8 €/ sqm. In this trend, we do not expect any changes before the end of the year.

The analysis has been published in the freshest issue of Property Watch.