Shayla Walmsley previews the coming battle for 'tremendous opportunities' in European logistics.
It does not take much reading between the lines to gauge Blackstone's plans for the European logistics market. After last month appointing AMB's Mo Barzegar chief executive of the European logistics subsidiary it set up last year, the firm – which was not giving interviews on the move – talked of "tremendous opportunities" in Europe and contrasted its 91 European assets with its vast US portfolio.
Up to now, Blackstone has been building up its regional portfolio piecemeal. But the speculation is that it will take on Prologis, the largest European logistics provider, which sold it 13 UK assets last February for €242m.
It comes after a claim last year that as much as 90% of the market would change hands in the short term. There have been high-profile new entries for sure. The Norwegian oil fund's entry into the European logistics market via its €1.2bn acquisition in December of 50% of a 195-asset Prologis PEPR portfolio made it the largest European private capital provider for logistics.
"Publicising the Norges Bank transaction was like ringing a bell," says Guy Jaquier, chief executive for private capital at Prologis. "It was a large bet that made other investors take notice that this was a smart time to buy."
Yet he says the 90% figure is way of the mark – not least because Prologis and its partner investors own significantly more than 10% of the market – and they're not selling.
Not that there is a shortage of potential buyers, even apart from Blackstone. "After wringing their hands over the euro, [investors] see a market with no new supply and reasonable amounts of demand," says Jaquier. "Values have been bumping along the bottom. It's a good time to buy."
There are primarily two reasons for this pension fund and insurer focus on logistics. The first is long-term income-based return. IPD data suggest that, in terms of long-term income return expectations, the lowest year for income return at least equalled the highest years for retail, office and residential. Excluding capital growth, investors in IPD's pan-European logistics index over the past 10 years would have seen an annual return of 7.3%.
"If they had reinvested that income return back into the market, then they would have doubled their investment over the 10 years," says Greg Mansell, IPD head of research for the UK and Ireland.
Moreover, logistics does not look much like anything else. These assets are less influenced by their immediate surroundings than office or retail. In the UK, for example, logistics performed in the otherwise moribund Midlands as well as London.
Yet one of the potential risks for investors is its macro exposure. In a note on German logistics, fund manager Henderson pointed to the likelihood that logistics in markets with the strongest macro fundamentals would outperform. Pari passu, continued flat or negative growth in the euro-zone will likely penalise the sub-sector – although investors' focus on Germany and other Northern European markets reflects the fact these are international rather than national hubs.
If a combination of market maturity and macro factors drives logistics performance in specific markets, the ratio is difficult to unpick in practice, says Mansell. Liquidity and consequent relative stability in larger and more mature markets comes against what he describes as the "overarching influence" of economic growth.
A perhaps more significant constraint is that logistics investment is a scale business. Prologis has no plans to add to its two major European logistics joint ventures. (In addition to the extendable 15-year agreement with Norges, it has another with insurer Allianz.) Nor does it have immediate plans to add more European logistics funds to its two existing vehicles.
But for investors smaller than the NOK3.7trn (€506bn) Norwegian sovereign wealth fund, the only option will be to invest via blind pool funds in an environment where it still takes a Blackstone to raise a fund of significant size. Blackstone may indeed provide. But so might Henderson, which sees niche potential in the UK market as an income play. A UK-focused fund to add to its German and French vehicles is a "definite possibility", says a spokeswoman.