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Being Tough Enough for Russia: Local Self-Storage Operators Face a Multitude of Lacks and Challenges

The nascent Russia self-storage market is hindered by a host of challenges, including bureaucratic regulations, a lack of quality real estate, and limited financing options. Yet, the demand is there for ambitious developers willing to overcome obstacles.

February 15, 2014

5 Min Read
Being Tough Enough for Russia: Local Self-Storage Operators Face a Multitude of Lacks and Challenges

By Christopher Bond

The nascent self-storage industry in Russia remains highly fragmented, with operators of various quality and sizes, all primarily based in Moscow. The first operators began to appear in 2009 on the back of the world financial crisis, which was felt acutely in the region because all bank lending comes from the West. Financing was nearly impossible to receive (and remains so), but the predicament provided opportunities for investors with equity cash to purchase or rent properties. In 2010 and 2011, several self-storage operators emerged including my company, Samosklad, as well as Citi-Box, Redbox and Skladovka.

Russia is an extremely challenging operating environment with stifling bureaucracy, corruption, and poor regulations and control. However, with a population of approximately 15 million, Moscow has potential for self-storage growth and consolidation. The major problem lies in the inability to source and build good properties. Again, a lack of financing also inhibits industry growth.

A Samosklad facility in Moscow
Lack of Real Estate  

Due to a hangover from Soviet days, real estate (the warehouse sector in particular) is loosely governed, and legislation remains vague and uncertain. Basic tasks such as establishing title ownership, getting permission to build, and receiving electricity and water is a tremendously fraught and time-consuming process. As a result, the market is hindered and cannot grow.

Over the last 15 years, there has only been a market for large, class-A warehouse/distribution centers of at least 100,000 square meters, but these are all on the outskirts of Moscow, away from living accommodations. The market for smaller warehouses1,000 to 5,000 square metersthat can be renovated or redeveloped by self-storage operators doesnt exist. Any such properties are primarily in industrial zones, with limited access and visibility and a lack of documentation.

There are only about 100 self-storage facilities in Moscow, compared to 500 to 600 in London, a city of similar size. Existing operators have to make a difficult decision between redeveloping existing buildings or building from the ground up. Obviously the key is timing, how quickly they can see their money invested and the building opened.

Samosklad facility interiorAt Samosklad, we made the decision to open four to five facilities by renovating old warehouses. Once a cash flow was established, we planned to build light-construction buildings. However, the latter can be problematic due to the above mentioned bucreuacracy and lack of good land plots.

One of the key principles of our business strategy is the acquisition or long-term lease of buildings. Many operators lease buildings for  a mere 11 months. If you sign a contract for longer than a year, it has to be registered with the tax authorities. In Russia, 95 percent of office, residential and warehouse space is rented on short-term leases to avoid paying taxes.

Due to the historic nature of Russia and the fluctuating market of the last 20 years, many building owners are too nervous to make a long-term decision, as market economics and inflation can be difficult to predict and understand. Obviously, signing such a short-term lease agreement is incredibly risky, and a few self-storage operators have been forced to shut down when owners reclaimed their properties for their own use.

Lack of Funding

The second biggest problem for self-storage development in Russia is a lack of financing. There are extremely high interest rates, between 12 percent and 20 percent. There are also tough lending rules, even to the point of a bank specifying how the borrower can invest the loan, whether it be in a property purchase, building, mezzanine investment, etc. Each individual payment has to be approved by the bank.

A Samosklad retail areaEven with two freehold properties on our balance sheet, Samosklad has been unable to secure financing in Moscow. At this stage, weve been equity-financed by our shareholders. Many institutional and private investors have shown interest in purchasing a stake in our business model, which has a strong cash flow and has never failed in any market.

Customer Base and Facility Operation

The self-storage customer base follows that of the European market, with roughly 15 percent business customers and 85 percent individual customers. Russians love to store and hate to throw away their beloved goods. Due to the problems described aboveand frequent property-renovation delaysindividual renters stay for an average of six months. At Samosklad, 95 percent of our business customers have been with us for three years.

Marketing primarily takes the form of context advertising through the major Internet portals, although operators with visible buildings spend less.

Facility administration is time-consuming due to the sheer volume of documentation involved with operating a retail business in Russia. Samosklad employs one extra accountant per each facility, for example.

As of September, there are approximately 10 self-storage operators in Moscow, all ranging in quality. Some conform to local regulations for fire prevention, taxes, etc., but many do not. As the market grows, were likely to see consolidation, with the large, well-financed operators coming to the forefront.

Christopher Bond is the director of Samosklad Self Storage. The company opened its first facility in 2011 and currently operates three facilities in Moscow. Samosklad plans to open 20 to 25 facilities by 2018. For more information, visit www.samosklad.ru .

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