Equity is flowing into the logistics property sector in Europe, but investors have to rise to the challenge of working with occupiers to optimise supply chains.

Equity is flowing into the logistics property sector in Europe, but investors have to rise to the challenge of working with occupiers to optimise supply chains.

There is no doubt that the European logistics property sector is in vogue with investors. That message came across loud and clear in CBRE's latest Investor's Intentions Survey, according to Richard Holberton, CBRE's director of EMEA research.

Holberton was commenting during PropertyEU's European Logistics Investment Briefing in late January.

The briefing heard that investors looking to access stable returns from the logistics sector face two significant challenges. The first is the lack of available product due to the virtual standstill in development activity after the financial crisis. However, this issue may begin to work itself out as development activity, initially built-to-suit and then followed by speculative development in some markets, begins to pick up.

The second issue is more complicated: the need for a rapid updating of supply chains to meet the new demands created by both online retailing and cost-optimisation for all suppliers of manufactured products and other goods. For online retailers like Amazon the challenges are getting product from large distribution centres to urban last-mile parcel centres. Similarly, companies in Central Europe that make parts for the German car industry increasingly use advanced network planning to get their products to the carmaker precisely when needed.

Holberton: 'Very far-reaching supply chain issues apart from anything else make it more important for investors to understand what occupiers are doing, thinking and what is driving their behaviour in a period of not a particularly rapid economic upturn.'

Panellist Mo Barzegar, president and CEO of Blackstone's European logistics platform Logicor, agreed that reconfiguring of existing supply chains to make them more efficient was a key consideration for real estate investors. A large percentage of existing logistics space is not up to the challenge. 'if you look at Europe a significant amount of supply is outdated, with just 15-20% of the existing stock considered to be modern.'

Logicor manages almost 3 million m2 of space across five European countries. 'Obviously we are partners with our customers and have to understand their needs on a country, regional and global level. Clearly they want more flexibility.'

Barzegar pointed to the third party logistics (3PL) segment which accounted for 25-30% of the business. These 3PL providers, he said, are facing shorter service contracts of about three years, requiring an investor like Logicor to be comfortable with the re-letting possibilities of a location in order to accept a shorter lease term. 'Some of our more sophisticated operators have taken the view that for the more strategic locations they can and should take a longer term deal because they are able to backfill this whether through longer back-to-back contracts, taking a little bit of risk or through multi -user facilities.'

Fellow panellist James Markby, head of European industrial & logistics investment at CBRE, pointed to urban parcel delivery, which is a rapidly growing niche within the logistics sector. 'Some of the biggest operators are looking to expand and part of the challenge for the developers and investors is not providing one or two sites across Europe but rather multiples of 10. That is leading to big competition and one of the biggest issues is the higher rents due to the higher site density compared to the rest of light industrial and standard logistics. I think we are going to see the emergence of specialist investors who understand those operations.'

For more, see the presentation and videos from the latest PropertyEU European Logistics Briefing.