Where can investors look for strong returns? In the warehousing market there are some interesting sectors with ongoing reorganisation and expansion providing opportunity for enhanced returns for landlords with strategically important assets. BNP Paribas has predicted growth of e-retailing, courier services and waste companies. Of these sectors, e-commerce stands out as the fastest growth area as a result of retailers realigning their supply chains to match new shopping patterns. The Interactive Media in Retail Group (IMRG) e-retail index has grown 6,600% from 2006 to 2010 and the UK e-retail sector grew at its fastest rate in two years during May 2011, with sales up 22% year-on-year. E-commerce is expected to contribute 20% of a mature retailer's turnover by 2014, with sales totalling over £58bn in 2010 alone (iForce 2011). The growing need for fulfilment centres will shape the logistics market. As retail shifts from shops to the internet, warehousing is expected to benefit.
However, the sector does require some understanding of e-commerce, with operators seeking to combine existing retailing practice with value-added, internet-enabled processes, and to price home delivery appropriately. Delivery logistics will therefore be key, with operators seeking short distances between stops, in order to improve efficiency and reduce costs, concentrating on more densely populated cities.
E-retail-focused logistics operators are more sensitive to location than those catering to the normal replenishment-focused distribution centres. The location of the carrier service has a direct effect on delivery windows.
E-retailers also have more variable workforce demands, with seasonal effects in ordering requiring access to a flexible labour market. With little storage required, their profits are generated from throughput, with larger units not always desired and space accommodating order picking considered vital. A larger, fluctuating workforce means occupiers are more in need of parking rather than yard space.
The growth of e-retailing operators should significantly increase demand for 40-70,000m2 warehouse units around major conurbations. Food retailers will be particularly active around population centres, because of the sensitivity of fresh produce to speed of delivery. The restricted supply of land and limited existing stock in these areas might lead to some competitive rental growth.
Most institutional investor interest is focused on storage and distribution, where value lies in the ability of the facility to handle and process fluctuating volumes of goods efficiently. "As such, the performance of logistics real estate tracks national economies more closely than any other asset class," says Philip Dunne, president of Europe, ProLogis.
Dunne sees investment returns continuing to move upwards as the global recovery gets under way. "There has been a significant over-supply of logistics space over the past two years," he says. "But core markets are now tightening as the spare capacity gets used up. There is a relatively benign economic background in Europe and a strong background in Asia, with the Chinese economy going full steam ahead. Interestingly, global shipping volumes have now recovered to pre-crisis levels."
However, notes a mixed picture in the US: "They are in recovery, but it will be a slow recovery."
Generally, he says investors globally have become picky about logistics assets: "Typical of what they are after is warehousing facilities in the super-prime core markets, which are new or recently built. However, there are signs of investors potentially going slightly up the risk curve in terms of location, quality of building or customer."
This has now become more of a necessity because many investors in core locations are unwilling to sell, so new capital is frustrated. But Dunne adds: "What you don't have much of at present is value-add or opportunistic investing - for example, older assets that need some investment and or improvement in quality of lease and terms."
Nevertheless, Dunne says that market conditions worldwide are improving. "There are, however, regional differences," he says. "In Europe, for instance, Germany, France, Poland and Sweden are showing strong recovery and growth, while the likes of Spain, Italy and Hungary are performing less well."
Meanwhile, as the global recovery moves up a gear, the world's two most populous nations - China and India - are becoming the next frontiers for investors in logistics real estate.
Over the next 10 years there will be a huge increase in third-party logistics (3PL) in India, with providers offering a one-stop shop of integrated operation, warehousing and transport services, according to Sonny Lulla, chief executive, Infrastructure India (II).
"The level of 3PL is a fraction of what it is in Europe and the US," Lulla says. "And service quality levels from third-party providers are so unpredictable that it has been difficult for a true 3PL to step in. However, dedicated warehousing zones with road and rail connectivity which are currently being developed in, for example, Chennai and Bangalore, would provide ideal sites for third-party outsourcing."
India's chronic underinvestment over decades has given developers scope for new projects, says Alastair King, chief executive, Eredene Capital.
Besides international trade, India's ports - Mumbai is the biggest container port; other large container ports include Chennai in Tamil Nadu and Mundra in Gujarat - deal with vast amounts of internal freight, because the road and rail systems are so chaotic.
Eredene itself has 11 projects in its portfolio and is currently building a large container terminal in the overflow port for Chennai.
"We see great opportunities in the container logistics trade," says King. "In India, the containerisation rate - the percentage of trade that is containerised, out of the total which could be - is 60%, compared with 90% in Western Europe. But with Indian GDP growth of 9% a year reflected by a rise in imports, its container industry is set to grow by 15% pa over the next five years."
This under-capacity has now been recognised as a priority area by the Indian government, which has relaxed some restrictions. Notably, developments by 100% foreign investors will be allowed over the next few years, without requiring a local partner.
A further incentive, says King, is the availability of debt financing. Much of the Indian banking system is state-owned, and as government policy is to make infrastructure investing a priority, debt financing will be more readily available, he says.
Eredene has also been investing in Indian logistics parks.
"Logistics is a lower-risk way to play the India growth story," says King. "However, the big challenge is inflation, which is now around 9% and will lead to a rise in debt costs."