By Shakko Hen
Self-storage in Russia is in its infancy. The concept was introduced in 2010 with a few poor-quality facilities in undesirable areas inside the Minsk Beltway. Currently, there are 12 operators in Moscow with more than 500,000 square feet in 25 facilities, excluding Mobius, which offers container storage at seven facilities. There are also two self-storage facilities in St. Petersburg and three others under development.
It’s expected that the Russian self-storage market will follow trends of other emerging markets and expand rapidly over the next 10 years. At this stage of development, establishing market-brand knowledge and maximum market penetration is critical to ensure long-term market dominance. Without a doubt, the market will develop one or two brand leaders and a tier of lower-division operators. Within a five- to eight-year period, consolidation will occur in the market, particularly because new sites are difficult to source and secure on acceptable terms.
A Growing City
With a population of 12 million to 14 million, including unregistered migrants, Moscow is the largest city in Europe and the sixth largest in the world. From an economic perspective, Russia’s gross domestic product (GDP) has been stable over the past three years, and is predicted to grow at around 4 percent to 4.5 percent per year, some three times that of the United Kingdom or the United States.
Moscow’s population has doubled during the past 50 years, with the city itself having expanded around 20 percent in the same period, significantly increasing population density. Plans released by the city’s mayor in mid-2011 for a “metropolitan federal district” predict the city will double in size again over the coming years. Population density is currently around 8,500 people per square kilometer, in comparison to London, which stands at around 550.
Although Russia’s inflation is currently at an all-time low of around 3.5 percent, historically high inflation and a general lack of trust in the banking system have deterred the population from personal savings in favor of consumer spending. This mentality has continued despite the lowering of inflation and improvements in economic stability.
This trend is apparent when one looks at comparative retail sales with the rest of Europe in 2011. It’s safe to say that Moscow is by far the largest retail district in the country, and a high proportion of this spending is being conducted within the city itself.
Moscow is not only a thriving economic center, it also represents Russia’s center for the arts. This mix of economic success and cultural elements has drawn many to the city to live and work. This increase in population has had detrimental effects upon infrastructure in the short- to medium-term, and despite the local authorities' plan to increase the capacity of 19 highways in 2012 alongside ongoing projects to increase road capacity and embracing park-and-ride facilities, Moscow still suffers from severe traffic congestion at almost any hour, day or night. It’s truly a 24-hour city.
Recent legislation has limited construction in the historical center of the city, with a move to concentrate the expansion to the southwestern outskirts; this lack of central supply has placed pressure on housing prices.
Despite the global downturn, house prices in the city have stayed relatively consistent within the past three years and had good growth in 2011, with forecasts predicting 10 percent growth in 2012 and as high as a 20 percent increase for the high-end housing market and city-center apartments.
Moscow’s Commercial Property Market
As with many large cities across the world, Moscow has been affected by the economic downturn. However, the rise in the supply of commercial property, and retail in particular, in the last decade demonstrates the confidence investors have had in the city over this period and the strength of consumption.
Moscow’s shopping-center stock amounted to 34 million square feet in 2011, five times its 2002 level. Total office stock in Moscow has increased by more than 450 percent since 2002, reaching a peak of more than 139 million square feet in the first quarter of 2012. Moscow’s warehouse stock reached 88 million square feet by the same time, almost six times more than in 2002.
This growth in supply has created more opportunities for investors and boosted overall activity in the real estate market. As the quality of construction has increased during this period, the supply of grade-A investor stock has also risen.
In 2011, Moscow’s total real estate investment volumes reached a record $5.8 billion—a considerable increase in volumes from seven years earlier, when volumes were at around $240 million.
Economic Effects on Moscow Self-Storage Demand
A high spending rate and increased consumer consumption, combined with restrictions on development of the central city and heavy traffic congestion, have had a physical effect on the population.
These combined elements have placed significant pressure on storage within city apartments, housing and commercial property, which in turn has created a high demand for storage alternatives throughout the city.
Moscow has approximate 14 million inhabitants, and with St. Petersburg's 5 million inhabitants, it forms the largest potential market in Europe. The influx of 30 self-storage stores and 10 operators in three years proves the likelihood of a successful result.
However, for many of the current operators, these figures are frustrating and could have been doubled. The demand for self-storage space is very high, yet supply for suitable facilities remains low. The old infrastructure and lack of warehouse facilities in the city, along with unsettled property titles, are the main hurdle of the current operators and, at the moment, create the only competition of the industry—finding a suitable facility.
However, self-storage operators who are open for business are finding success, reaching 90 percent occupancy within a year of opening. Even though the industry is new and only 5 percent of customers are familiar with the concept of self-storage prior to renting, the fill-up rates can reach 4,500 square feet a month, and self-storage is popular with household and business customers.
The 95 percent who are not familiar with the services are really happy with what they get, especially after new, clean, heated self-storage facilities replace the old-style garages in the city of Rakushi.
The rise of self-storage facilities is just in time, as hundreds of thousands of these old-style garages have been removed and demolished by city authorities over the past two years and are now banned in the city.
Although the industry originated in the United States, it was introduced to Russia decades ago by U.K. expats living in Moscow. It has since been implemented by Russian real estate developers, food-chain stores and other local entrepreneurs, attracting few Western players from Holland, Italy and the United Kingdom.
Most offer a typical Western self-storage facility: neat and clean premises, well-secured, heated and lit with 24/7 access. However, only two of the 10 operators are using solid fit-out material designed and manufactured in the U.K., mainly by Storage Future and Steel Storage. The rest use a local supplier.
More than 80 percent of the marketing budget is applied to Internet search engine optimization, and 70 percent of the clients are moving in after searching the Web for self-storage space. The rest are word-of-mouth and walk-in clients.
The latest demographic study by Safe Box shows customers come from as far as 12.5 miles from the facility. Such distances can take an hour or two in Moscow's traffic, which emphasizes the lack of nearby storage facilities and the strong need for them.
Despite the challenges, there is a largely unmet demand in the Russian self-storage industry. With a thriving Russian economy, it’s expected the self-storage industry in the country will expand at a rapid pace over the next several years.
Shakko Hen is the Russian partner and founder of Safe Box, which operates one facility in Moscow. He was educated in Canada, obtaining an MBA in business management. Hen speaks five languages including English and Russian, and is integral to the day-to-day operations of Safebox. Prior to joining the company, Hen was a sales manager for his family business, operating leather tanneries in Georgia, Italy and Russia. He’s also experienced in the philosophy, politics and culture of Russian business. For more information, visit www.safe-box.ru.
The chart and corresponding map offer a glimpse into the Russian self-storage market.