Internet shopping is not only affecting retail. Mark Faithfull looks at the need for logistics centres and ‘dark stores’
The logistics sector may never have been the poster boy for the real estate market. But a favourable imbalance in supply and demand, together with soaring requirements for distribution space from retailers and online-only vendors, has generated strong income growth and sucked up vacancies. Consumer behaviour supports the contention that things can only get better.
At a time when mainstream retail property requirements have been negatively affected by omni-channel retailing, logistics centres have found themselves experiencing strong demand from retailers and third-party service providers, which handle the distribution for retailers. Rising and stable income is also being protected by a dearth of available finance for new, speculative construction.
According to Jones Lang LaSalle (JLL), European retailers will need up to 25m sqm of extra logistics space over the next five years, including mega sites of over 100,000 sqm, specialist distribution centres and smaller, local delivery depots. In its report, ‘A New Logistics Real Estate Landscape’, JLL says that around 3m sq. of specialised space will be needed for dedicated e-fulfilment centres, dealing solely with online demand (see box, identifying logistics that supports multi-channel retail).
“While traditional retailing is still driving demand for retail infrastructure, the growth of online is fundamentally changing the size and shape of distribution centres and where they are located,” says Paul Betts, head of EMEA logistics and industrial at JLL.
Karel Stransky, director of industrial and logistics for Colliers International corporate solutions, concurs. “With e-tailers now shipping directly to consumers, this is changing the design requirements for facilities,” he says. “In coming years, we will see both online and multi-channel retailers rethinking their strategies, resulting in continuously changing and evolving warehouse and distribution requirements.”
Indeed, the increasing demand for logistics space by e-commerce suppliers and retailers has helped the sector become better understood as an asset class, according to Philip Dunne, president Europe, Prologis. “If you look at a mature market like the US, there are four times as many logistics buildings there as in Europe,” he says. “From an investment point of view, logistics remains a relatively young business in Europe and there is certainly the scale for strong potential growth.”
Such opportunities have started to attract attention. Rockspring Property Investment Managers, advised by JLL, recently bought the Paris Oise Logistics Park, to the north of Paris, for €78m for its TransEuropean Property Limited Partnership V fund. The 142,313sqm of warehouse space is multi-let to tenants including DHL, C&A and Etam.
Wells Fargo provided Blackstone with £54.3m of financing to buy seven warehouses in core markets across the UK, with a further £13m in mezzanine finance put up by LaSalle Investment Management. Blackstone also intends to expand its European logistics offer by acquiring assets in Germany, the Netherlands and Italy, while establishing a greater presence in Poland. “We favour newer and larger assets because they tend to be better constructed, are more energy efficient and have features which help preserve their value,” says Jonathan Lurie, managing director at Blackstone. “What we are seeing is more institutional-grade stock being built.”
Meanwhile, Henderson Global Investors is engaging with investors on the launch of a UK industrial income fund in partnership with Centurion Properties. The fund is targeting €115m from investors in a first close before the autumn, with potential to double the capital when it reaches a second close.
“The events of the last few years mean that many of the players that usually dominate the sector are hamstrung by a combination of legacy issues and the scarcity of bank debt,” says Andy Schofield, director of research at Henderson. “This has resulted in a historically large disconnect between prime yields and those offered by good quality secondary assets. This disconnect in value is overplayed and compelling risk-adjusted returns, driven predominantly by sustainable income, are likely to make UK industrials the most attractive UK property sector over the next seven years.”
Lack of development finance is common across Europe. AEW Europe is another looking to expand its operations into Germany and the Netherlands. The company will also target Poland once it has established “critical mass” in the two new Western European markets.
“For us the future is not about diversifying into many markets but about creating strong national portfolios,” says fund manager Vertupier. “If you have a number of buildings, all in good locations, then you can provide flexibility through short or long leases, relocation of occupiers or reconfiguration of sites to allow one occupier to grow and another to downsize. This also provides the investor with reassurance that you do not simply create a vacancy but can redistribute occupiers around your portfolio.”
However, Vertupier warns that even with the lack of speculative development, investors should not rely on significant capital appreciation. “Logistics is really an income play,” he says. “Investors should look for strong income growth and reliability. In my view we will see yields further decrease because of the lack of supply. So the time to invest in logistics is now.”
The dark side of the boom
A number of the grocery chains are building so-called dark stores – sophisticated store-style warehouses inaccessible to consumers – which they use as distribution hubs for home delivery orders rather than processing them through their regular stores.
French and UK retailers have been at the forefront. In the UK, Tesco is expanding its network. It already has four online-only stores in London with more openings planned for locations with access to the M25 motorway. One in Crawley will open this year, and one in Erith, near Dartford, will open within the next 12 months. Tesco is also looking for sites in the Birmingham and Manchester areas.
Ken Towle, online food and internet retailing director at Tesco, says the retailer’s dark stores are now in its top-10 sites by revenue and that Tesco aims to have “tens but not hundreds” of dark stores, marking a significant expansion of its online infrastructure.
The major French grocers have already opened a number of such stores and Auchan
has also invested in Chronodrive, which operates warehouse-style, edge of town units which only offer click-and-collect. In a further enhancement, shoppers can order from a limited assortment of around 500 goods using on-site touch panels.