Acquisitions and joint ventures are reshaping the European logistics sector and creating dominant, multi-platform players. Mark Faithfull reports
Boosted by an increasingly global supply chain, the proliferation of e-commerce, new supply routes and a gentle improvement in manufacturing, the industrial logistics sector has been enjoying a renaissance over the past 18 months. Coupled with an increasing determination by players in the sector to create more extensive logistics platforms, the sector is being enlarged, sliced, diced and reshaped and a number of major collaborations and acquisitions have been at the heart of that transformation.
James Markby, director head of European industrial and logistics investment at CBRE, says that those deals have propelled transactions in 2013. “Over the past couple of years we have seen logistics acquisitions and sales of around €8bn to €8.5bn, but at the half-year point this year we were already at €6.6bn, with the latter part of the year typically busier. But it is also notable that quite a bit of equity has been raised for existing funds too,” he says.
One such notable deal involved the formation of a joint venture between UK-based Segro and Canada’s Public Sector Pension Investment Board (PSP) called Segro European Logistics Partnership (SELP). The venture was seeded with a portfolio valued at €974m, including 1.6m sqm of grade-A logistics space across 34 sites in France, Germany, the Netherlands, Belgium, Poland and the Czech Republic.
The new venture will have first refusal on logistics land retained by Segro in these markets, which totals 170 hectares. As part of the deal, PSP Investments is committing equity of €303m for a 50% share. The Canadian group has also agreed to provide a further €62m to fund the development of a land bank of 84 hectares in Poland, Germany and Belgium. This offers potential for a further 390,000sqm of modern logistics space. The partnership is also being financed with medium-term debt of up to €390m.
“The transaction is the first step in building what we expect to be a strong long-term relationship with PSP Investments as we seek to take advantage of the growth and consolidation opportunities in the continental European logistics market,” says David Sleath, chief executive of Segro. “It will further position Segro as one of the leading providers of logistics space in the region and strengthen our ability to meet the needs of our multinational customers.”
Andy Gulliford, CIO at Segro, adds: “There is a very interesting supply/demand imbalance in logistics. For investors, perhaps it hasn’t been the most exciting market because there is not a lot of capital appreciation but, conversely, it’s a very strong income play, essentially offering a high-income return, which also makes it a defensive investment.”
Gulliford points out another positive characteristic: long leases relative to those in the retail sector, for example, retail. “You also have a fairly wide range of potential tenants, from 3pls [third-party logistics providers] to retailers, plus a variety of manufacturers,” he says.
“It took a few years for the over-supply to be absorbed, but now it largely has and, at the same time, new development has been constrained by a lack of finance.”
Segro’s tie-up with PSP Investments came just a few days after Brookfield Property Partners took control of UK-based logistics developer Gazeley. The vendor was Economic Zones World (EZW), a subsidiary of Dubai World.
Gazeley’s portfolio of large-scale logistics warehouses and distribution centres currently totals 524,000sqm of space to let and the company also holds a substantial land bank of 1.3m sqm with a further 1.1m sqm held under option agreements.
Brookfield Asset Management has pledged to pump significant funds into expanding Gazeley. Brookfield managing partner David Brush said there was no limit to what would be invested to deliver on plans to expand Gazeley from a developer and trader of warehousing into a full-service logistics asset manager.
Brush said Brookfield was attracted to Gazeley because industrial property yields had not compressed as much as shop and office yields, and he added that many occupiers in Europe were looking to upgrade their warehousing facilities. Most of Gazeley’s existing properties are in France and Germany, but the company is targeting more UK assets similar to the deal in March to develop a 65,000sqm shed for department store retailer John Lewis at Magna Park in Milton Keynes.
In September, the Prologis European Properties Fund II (PEPF II) accepted final capital commitments to reach the €450m equity cap for the offering, including €125m of additional capital committed by Prologis. Approximately 70% of the equity came from new investors and almost half of the €450m has been deployed into acquisitions from Prologis and third parties.
“The strength of the equity raise reflects the fund’s high-quality offering and the attractiveness of the European logistics market,” says James Green, managing director, global client relations at Prologis. “European logistics asset values are poised for sustainable growth with favourable supply-demand imbalances and positive rental-growth expectations.”
Philip Dunne, president of Prologis Europe, adds that Europe still has substantial scope for growth. “Europe has four-and-a-half times less modern logistics product than the US, yet has a larger population and economy. It is inevitable that we will see a period of consolidation and development, and, increasingly, logistics is being seen as an asset class on its own, with e-commerce an important element of that,” he says. “Scale is becoming increasingly important. The ability to take multinational customers to all markets and to provide the right sort of platform for them is critical and investors are better understanding what that means, so long as you have the right product.”
Dunne says the market imbalance has been corrected and performance in certain European markets is strong enough “for us to bring through a couple of speculative schemes”, helping to start generating new supply, albeit with uneven dynamics across markets. “Germany has been a little soft but is definitely picking up; Northern Europe as a whole is geared from growth from here on. On top of that there has been little or no new institutional-grade supply over the last five years and as a result that bodes well for rental growth,” he says.
There are also companies building positions in the market. LondonMetric Property, a UK real estate investment trust (REIT), recently bought two distribution warehouses in Bedford and Birmingham for £51.7m (€60.6m) and £10.1m respectively, reflecting a combined net initial yield of 7.2% for an Argos distribution warehouse and a WH Smith distribution centre. Following these acquisitions, the LondonMetric retail distribution portfolio comprises five distribution centres with a combined portfolio value of £165m, representing 14% of the recently enlarged group portfolio.
Andrew Jones, chief executive of LondonMetric, says: “The retail distribution sector is continuing to benefit from strong occupier interest as retailers’ multi-channel strategies continue to evolve. We regard this as a key area for growth within our core portfolio and aim to capitalise on this dynamic further.”
Henderson Global Investors has also launched an Industrial Income Fund. The fund is a partnership between Henderson and Centurion Properties. It hopes to raises approximately £100m from investors with a strategy focused on multi-let industrial assets that offer diversified short to medium-term income streams in locations with sustainable tenant demand and underlying land value. It will target a net distribution yield of 6.5% per annum and an IRR of 8.5% on invested capital over the five-year life of the fund.
Andy Schofield, director of research at Henderson Property, says: “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. This has created an opportunity to take advantage of a sector where the paucity of buyers has resulted in a historically large disconnect between prime yields and those offered by good-quality secondary assets. Our recent experience demonstrates that this disconnect in value is overplayed and that compelling risk-adjusted returns, driven predominantly by sustainable income, is likely to make UK industrials the most attractive UK property sector over the next seven years.”
Stefan Wundrak, director of research, property Europe at Henderson, says these strong characteristics continue to support industrial as a sector. “It’s a market driven by income return, while we have seen income fall quarter by quarter in sectors such as offices and retail. Investors looking for an alternative have been attracted and yields are still 100-200bps off those sectors,” he says. “Obviously you have the e-commerce story, although that remains small, overall, in the industrial sector, but it is attracting new money, which is very welcome. Manufacturing is still below pre-crisis levels but has been strong in Germany and Poland, while Northern Italy has seen lower demand but has not been as bad as perhaps you would think.”
Wundrak stresses that the important thing is to look for good-quality assets. “From an investment point of view, fortunately, good-quality buildings from 20 years ago should still have the characteristics to make good investment-grade stock, but it is a different story with sub-standard stock,” he reflects. “Possibly only areas such as Munich have the sort of demand that would enable the letting or sale of such buildings.”
Legal & General Property merged its Industrial Property Investment Fund (IPIF) with the Falcon Property Unit Trust (Falcon), having successfully entered into an amalgamation agreement. The amalgamated IPIF fund will continue to be managed by Legal & General Property. Falcon’s estate comprises 36 multi-let estates and over 280 units, with a value of around £794m, holding over 13.6m sqft of space, let to almost 1,600 tenants, across 121 estates. The enlarged IPIF will therefore have close to £900m of industrial assets, making it the largest UK industrial specialist fund.
Bill Page, business space research manager at Legal & General Property, adds: “The recovery in manufacturing is picking up pace and there is some yield compression from quite a high base, but logistics remains a stable and attractive high income option.”
He also believes that the wider range of requirements and end-users is helping to boost investment confidence. “With e-commerce you have a market in change and that’s not something that happens very often. To some extent, retail’s pain is logistics’ gain. We have a situation where the property industry is be`hind the curve and it’s a strong change factor,” he says.
Dunne says that the e-commerce sector is changing the logistics market. “We are seeing a change in strategy with a mix of larger regional distribution centres, smaller centres in important locations and then parcel hubs for local distribution,” he says. “The location needs of the e-commerce sector are developing quickly and this is all accretive to demand in the logistics sector. The other dynamic is the increase in returns from online shopping and the need for reverse logistics and this, in turn, means logistics centres need to be closer to urban populations.”
Gulliford also believes e-commerce has provided a net gain and adds: “Of course what the increase in e-commerce has done is not just create extra demand but change the shape of that demand. You have a wide variety of requirements, from mega-centres through to regional and local hubs. There is no single right way of doing it, although we are seeing an increasing need to be close to urban centres.”
It may well be that 2013 is seen as a pivotal year. Omni-channel retailing has established its presence, manufacturing is enjoying a gentle uptick and some speculative finance is entering a market in desperate need of fresh supply.
“If you believe in the changes driving the industry, then you can see that the logistics real estate sector needs to find quicker ways of bringing its offer to market,” says Markby. “Currently, e-commerce represents no more than 10-15% of the industrial sector, but I feel certain that next year that will be more like 20-25%.”
Significantly, the major players have aligned their businesses to create scale, which has not only boosted this year’s transactional levels but will surely attract others to the table.