INTERVIEW: Segro consolidates platform across the ‘spine’ of Europe

Segro, the listed European logistics REIT, is currently engaged in consolidating its platform across the UK and continental Europe after boosting its joint venture with Canadian pension group PSP Investments to €1.7 bn in the past 18 months.

The focus is on new developments, according to Andy Gulliford, Segro's chief operating officer. ‘We’re very careful about new acquisitions, the pricing is pretty much up there so you need to exercise discipline. We have completely reshaped the portfolio in the past couple of years and now we have a growth agenda.’

The number of new investors buying up logistics assets in Europe has mushroomed in the past six to 12 months. 'We are very cautious,' Gulliford said. 'We are selling more than we are buying. We are moving away now from a focus on standing stock to our development programme.'

Earlier this year Segro acquired 90% of Vailog Srl, a major logistics developer in northern Italy, from the majority shareholder FBH Spa for €39.6 mln. Segro said the transaction will allow it ‘to establish an immediate strategic presence in the Northern Italian big box logistics market with opportunities to grow additional scale through development’.

Since it was founded in 2003, Vailog has developed over 1.5 million m2 of logistics space in Italy, France and the Netherlands, working with investors including Deka Immobilien, AEW and Hines. The Vailog portfolio contains property assets valued at €104.8 mln including €39 mln of completed assets totalling 45,400 m2 of logistics space in Bologna, Milan and Paris. Segro estimates the transaction should allow it to build a presence in Italy of 500,000 m2 of assets under management within the next five years.

The standing assets acquired will likely be offered to the Segro European Logistics Partnership (SELP) joint venture with PSP, as will newly-completed developments.

Growth markets
Segro currently sees Italy but also Spain as growth markets, Gulliford said. ‘The Italian market is coming back and we’re seeing some new logistics development in the north of the country. In Spain the focus is on Madrid and Barcelona, these are both tight markets where we would feel comfortable taking the development route. This is a new tack for us, but we feel the time is right. We’re now looking to broaden the portfolio up but when we pick locations, the focus is on cities not countries.’

Development is a theme that runs across Segro’s portfolio, Gulliford said. In the UK the company is focussing on developments in locations where it feels ‘comfortable and knowledgeable’, he added. ‘We have launched a sizeable speculative programme at the smaller end of the spectrum at our sites at Park Royal near Heathrow and Slough Estate where we’ve seen an acute shortage of supply. We’re now also looking for pre-let developments in France, Germany, Poland, Spain and Italy.’

In Germany, the focus is on light industrial urban projects in the major cities of Berlin, Frankfurt and Dusseldorf. ‘We’re looking at developing units of 500-3,000 m2. We’re not doing any spec development for the great big sheds.’

The themes on the continent are the same as in the UK, he added. ‘The demand drivers are ecommerce and convenience retail. Convenience stores need lots of replenishment and fresh produce…that means local distribution via small vans. It’s all playing to the same phenomenon.’

Gulliford also sees growth markets for onshoring of manufacturing where speed to customer and market and quality of production is key. Automotive and pharmaceuticals are two examples, he added: ‘The opportunities are primarily at the high end of the market.’ Central Europe is well-placed in that context, he added. ‘The labour force is well-educated, labour rates are pretty reasonable and it has good access to the market.’

Market is becoming polarised
A major feature of the current logistics market is that it is becoming more polarised, Gulliford said. ‘Logistics sheds are getting both bigger and smaller. But we do both big and little sheds. That’s part of our heritage.’

Ecommerce giant Amazon has pioneered the move to very large sheds of 100,000 m2 or more, twice as big as the norm. But sheds of between 20,000 and 50,000 m2 have become more common, Gulliford said. He pointed to a complex for UK retailer John Lewis in Milton Keynes which comprises a total of 2 million square feet, or 900,000 square feet (roughly 90,000 m2) for each. ‘That’s the way it’s going. Large XXL sheds and mega campuses have become the order of the day.’

At the same time, demand is growing for last-mile delivery centres at the smaller end of the market, he added. In London, for example, a growing number of industrial sites are being displaced by new multifunctional projects such as Nine One Elms and Old Oak Common, Gulliford added. ‘Our estates are well-placed in the capital cities where we have access to longstanding sites.’

A similar trend is visible on the continent, primarily in Germany, he said. For example, many local authorities and municipalities in cities such as Munich and Stuttgart are not interested in expanding their logistics and light industrial locations. ‘Thanks to our existing estates we already have planning consent for facilities on the smaller end of the spectrum. This is a huge competitive advantage.’

Another trend that Gulliford has signalled is that some retailers are starting to take their specialist delivery inhouse. Third-party logistics players (3PLs) ‘definitely’ have something to offer in terms of specialism and the location of their distribution hubs, cross-dock facilities and returns areas, but a good customer interface and delivery is essential for a retailer’s brand protection, he said. ‘Delivery may not be a primary activity for retailers but if that goes wrong somewhere along the line it will have repercussions. It will be interesting to see where that ends up. We already see some of the winners making sure they are building properties closer to their customers.’

Access to technology
In that context, access to the technology is also key, Gulliford said. ‘Companies like Geopost and DPD have invested in technology to make the parcel delivery process as efficient as possible with forward warning and tracking systems. Profitability is shot if you have to deliver a parcel twice.’

In addition to southern Europe and the larger core markets, Segro is currently engaged in a major push in the northern part of the continent, particularly the Benelux where it focuses on the main spine running from Amsterdam’s Schiphol airport through to Rotterdam port, Tilburg and Venlo in the Netherlands and Antwerp, Brussels and Ghent in Belgium.

Segro’s geographic strategy is broadly similar to larger competitors like Prologis and Goodman, Gulliford conceded. ‘We also focus on the UK, the southeast (and the Midlands) and in France we have locations along the spine of the country from Lille in the north through Paris to Lyon. Our geographic strategies are not all that different.’

The London-listed company is also active in Poland. ‘The Polish market is quite competitive, rental levels are undergoing some pressure so we don’t expect real rental growth there in the near future. In that sense, the UK is way ahead in terms of recovery and growth. We’re already seeing 4-5% rental growth in prime parts of our London portfolio.’