Lithuania improves professional logistics

  • 2006-05-24
  • By Kristine Kolosovska [ Bridge Capital ]
With the development of professional logistics services in Lithuania, the demand for new logistics infrastructure has grown in tandem. The primary demand for third party logistics services comes from large multinational companies operating in the local market. They usually require high quality premises equipped with modern stock control and management systems.

Still, a majority of outsourced logistics services in Lithuania still boils down to simple transportation and vehicle-park rent. Gradually, the market is beginning to realize the benefits of logistics outsourcing, including reduced costs and capital expenditures. In its turn, it shapes and induces modern logistics centers development in Lithuania.

For several years now the most significant logistics and warehousing facilities launched in Lithuania have been established by specialist real estate developers and managers. Both local and international investors have begun to show an interest in the industry due to the dynamic economic situation in the country, higher yields and good growth opportunities.

Typically, before any construction works begins, a tenant for renting the lion's share of the space to be developed is present. This not only reduces uncertainty related to warehouse developer investments but also commits a future tenant to certain cash flows necessary to attract bank financing of the construction. Such custom-tailored solutions are easily adaptable to future tenants' business and expansion needs at a lower cost than in an already existing facility.

The quality of the tenants plays the key role. As a rule, investors are interested to work with well known tenants with good reputations and solid experience in operations.

In some cases, such as YIT Kausta's Kaunas FEZ logistics center or MG Valda's Graiciuno warehouses, this practice determines that larger warehouse complexes are developed in stages as prospective tenants pile on. Fully developed new warehousing projects rarely exceed 20,000 's 25,000 square meters. The terms of lease contracts become longer. Long-term lease contracts in excess of 10 years are not uncommon on the market. Again, the investors are seeking stable cash flows in excess of required rate of return, not the large immediate profit.

Growth of land prices in cities and transport route proximity is one of the key factors driving the logistics property rent yields. As commercial properties on town borders continue to appreciate and investments into bypasses of residential areas materialize, more and more professional developers direct their funds toward assets outside the town limits to reduce the required investments and avoid traffic-related problems for future tenants.

On the other hand, many of Lithuania's professional warehouse developers and managers have interests in the office and retail property market segments and benchmark the returns on investments in the three commercial property groups against each other. As a flood of institutional real estate investor funds to the market has in many cases pushed office and retail property yields below 8 percent, the warehousing property yields followed suit. Yields of 9 's10 percent annually are not uncommon. A well-structured tenant base with long-term western-standard lease commitments may warrant an even lower yield.

Kristine Kolosovska is head analyst at Bridge Capital.