Pavel Yakimchuk, Partner and Head of Construction Project Management Department at Commonwealth Partnership, spoke to Spot about the current situation with warehouse facilities in Uzbekistan and why foreign investors are hesitant to invest in this real estate segment.
The warehouse real estate sector is at a point of potential growth. We forecast accelerated development in this segment over the next 5-7 years. This is confirmed by both our current projects and the market demand we are observing.
CMWP has been operating in Uzbekistan since 2018, and it was around this time that the groundwork for a quality warehouse real estate market began to emerge. Demand for such facilities has started to form in the last 2-3 years, as more international companies have begun to consider the country as an alternative platform for locating and expanding their businesses. Retail companies entering the Uzbek market require logistics and warehouses, which also significantly stimulates demand.
Compared to other sectors, residential construction in Uzbekistan has a long history; houses were built even during the period of a closed economy. This real estate segment has entered a phase of stabilization: key players have emerged, products have been defined, and there are no expectations of explosive growth. The office segment, on the other hand, started later but has been active for the last 3-5 years. Explosive growth is also not expected in this segment.
Demand for high-class warehouse real estate will persist in the coming years, driven by the macroeconomic situation. Uzbekistan has demonstrated positive GDP growth since 2017, and the economy is opening up. Foreign investments and international players are entering the country.
Industry is developing in parallel. Industrial companies drive the development of logistics and retail, and retail attracts international brands. This is complemented by a positive situation with human capital. Uzbekistan is poised to become a regional leader in terms of its young, economically active population.
Modern Warehouses Needed, But Only Old Ones Exist
In Uzbekistan, warehouses are primarily represented by medium- to low-quality facilities. A significant portion is a legacy of the Soviet era, such as decommissioned industrial enterprises that were not originally designed as warehouses. The internal logistics and technical organization of these buildings are unsuitable for warehousing operations. They may lack adequate ceiling height, column spacing, or docking equipment, rendering them incapable of meeting the expected level of logistical operations.
Furthermore, engineering systems are often absent. While warehouses are relatively undemanding in this regard, tenants have minimal expectations for ventilation, fire safety, automation, and lighting systems, which cannot be provided in the existing dilapidated structures.
While there are some new facilities, they are already in use. There are no vacant spaces on the market, and consequently, demand exceeds supply. Retail companies, which traditionally prefer to lease warehouses, are forced to consider building their own. This is despite the fact that retail companies dislike tying up capital in CAPEX.
Commonwealth Partnership has received several inquiries for modern warehouse spaces in Uzbekistan. I must say that fulfilling a request for 10,000 sq. m. is challenging because there are no corresponding offers on the market. Uzbekistan is undergoing active expansion by international players, and the lack of high-class warehouses could hinder market development.
According to our research, Tashkent currently has approximately 700,000 sq. m. of warehouse and industrial facilities and 8 industrial zones. The stock of quality warehouses, by our estimates, is 157,000 sq. m., comprising only Category A and B warehouses. The average rental rate is $3.3 per sq. m. per month for dry storage and $5 for cold storage.
Four Factors Slowing Development
Firstly, local developers have limited experience in warehouse construction. Many solutions considered standard in developed markets are new to Uzbekistan and require expertise to implement. Partnerships with international companies help avoid mistakes, thereby accelerating and reducing costs.
No developing market can succeed independently. For instance, American, British, and European companies brought their expertise to Eastern European markets. This is a significant advantage, as the market can adopt experience within a few years, which took other countries 20-30 years to accumulate.
Secondly, regulatory frameworks for warehouse construction are lagging. There are no strict and clear requirements established in more developed markets. For example, there are currently no clearly defined regulatory requirements for fire suppression systems in high-rack storage warehouses. Each new project in Uzbekistan is a unique undertaking. Constructing a warehouse that is correct from an engineering and client expectation standpoint is quite complex.
The third factor is the land situation. It is difficult to find a vacant plot that meets the required parameters; land is either allocated for residential properties or has been withdrawn from circulation.
The fourth aspect is the lack of statistical data for foreign investors. They are unsure how to calculate profitability or guarantee investment returns, and consequently, they approach warehouse projects with caution.
Investors Need Data
Investors calculate returns either from completed sales transactions or from long-term rental rates. Such statistics are practically non-existent for Uzbekistan at present. Collecting this data requires long-term figures and implemented projects that validate the numbers.
It is also important to consider that there are two types of warehouse projects. The first is for the end-user. A company selects a site and builds a facility for its own use, defining the engineering systems, adding office space, etc. The second type is a speculative warehouse, where a developer builds a facility for lease or sale without knowing the end-user at the initial stage.
Consequently, two types of costs arise. The cost of a building constructed by a company for its own use is often higher due to the client's specific requirements. Projects currently being implemented in Uzbekistan largely fall into this category.
There are virtually no speculative spaces in the country. However, in global practice, the market is oriented towards the cost of speculative properties. As a result, it is difficult for investors to assess the objective average cost of warehouse space.
For developers, the warehouse sector is currently promising. In other sectors, entering the market would mean competing with major players. Furthermore, the residential and office real estate markets are quite saturated.
It is understood that the profitability of properties varies. Theoretically, residential real estate is more profitable, but achieving that level of profitability requires finding the right plot, building a sought-after residential complex, selling it, and so on.
I believe developers see the potential in the warehouse sector. However, as it is a relatively new direction, a clear demand needs to form, and companies requiring modern warehouses must enter the market. It can take a whole year from recognizing the need to making a decision. Currently, the situation is that developers see the potential but are not yet ready to commit to projects.
The government can assist the market by simplifying land use procedures. Overall, we observe that the government is actively stimulating economic development. In Uzbekistan, a developer can quite promptly gain access to energy resources, capacity permits, and construction permits. While each project is studied in detail, artificial obstacles are not created.
Regulatory documentation is also somewhat simpler in Uzbekistan. The country allows the use of foreign design solutions, provided they are locally adapted. This enables the immediate application of best international practices.
The Green Agenda: Much Needed, But Not Everyone's Interest
Topics of the green agenda, sustainability, and energy saving are currently relevant. Warehouses are often certified according to international green standards, but this is not yet being done in Uzbekistan.
A green certificate imposes significant requirements on building materials and equipment. Its presence is important for owners planning to attract international tenants or foreign investors. International companies care about the facilities where they locate their businesses and where they invest.
Regarding energy saving, I want to highlight the role of solar energy, although there are challenges here too. Solar energy is easy to "collect" but difficult to "store"; accumulating collected energy is a costly process. In our projects, we use solar power plants that cover the increased energy consumption of warehouses during peak periods. Peak consumption occurs on hot days and is related to intensive air conditioning and ventilation. Thus, in hot weather, we accumulate the maximum amount of energy, which is immediately used to cool the warehouse premises.
Source: Spot.uz
Photo: Istock
