Generali Real Estate hasn’t always been associated with logistics properties, with most of its portfolio typically invested in offices and with a significant presence in retail and residential.
Yet the real estate arm of one of Italy’s most important insurance companies has been active in big boxes since the mid-2000s.
The firm bought the Parcolog logistics development business in France from Blackstone in 2005 for around €215 mln, and this move both bolstered the firm’s confidence in the sector and its appetite for developing such assets.
After growing its logistics business for some years in Italy and France, in 2021 the firm brought in Pierre-David Baylac, current head of logistics at Generali Real Estate, with a mandate to further expand its activity in the sector.
Today, Baylac tells Logistics Watch, that it’s the development side of the business which still really excites him and continues to represent opportunity, even in the current market cycle.
‘A lot of development was done in recent years by private equity players who were seeking to assemble portfolios and then sell them to institutions like us,’ Baylac notes. ‘But a lot of that was done on a basis of big leverage and big expectations. That’s not our approach. And rather than waiting for someone else to develop the asset for us, it makes much more sense to get in earlier in the cycle.’
Baylac reflects that Generali’s early moves in France helped make the firm a well-known name there in the logistics trade, as Parcolog was considered ‘one of the big players, alongside Prologis and AEW, developing big boxes there at that time.’ After developing logistics parks all across France for over a decade while expanding its logistics credentials in Italy, Baylac perceived on his arrival that it was the right time to look at other geographies.
One of the first things he did after joining the business was spearhead expansion into Poland, firstly by picking up a core logistics park developed by 7R near Gdansk, and then by buying a development project MDC2 Park Kraków South, in the heavily undersupplied Kraków area. ‘We acquired the Polish projects at attractive yields,’ he notes, ‘but have continued to flank core acquisitions with some development’.
Referring to the Kraków deal, he notes: ‘MDC2 was a great “young” developer to partner with, and in fact after successfully letting the first building to a major medical tenant, we have now started work on a second speculative building, having honed the layout and specs that tenants like.’ He notes that Kraków is still a rapidly expanding market, with just 2% vacancy and rents on a steep upward trajectory.
While some of Generali’s peers have not only sworn off deals in recent months but steered clear of developing assets, Baylac is still deeply optimistic about this approach, rather because of the current climate.
‘Like other investors we have been scoping for deals,’ he says. ‘In the overheated 2021 markets, things started to look a bit expensive, while in 2022 we were waiting for price discovery. In the meantime, we carried on developing, which gives us an element of certainty.
‘When you develop, you control the outcome, which is important if you are going to hold an asset for the next ten years.’ The firm has not even been put off by construction inflation, with Baylac underlining that they went right back into developing in Poland shortly after war broke out in Ukraine. ‘Today, construction costs are starting to go down a little and we think that the worst is behind us.
'Moreover, development and construction firms are more open than ever to collaborating. Developers with land on their books need to keep working, but they also have significant uncertainty around exit cap rates. At the same time, development financing is extremely hard to find. So we can be the missing piece, and at the same time, create the kind of long-term product we’d be happy to hold.’
A couple of months ago, Generali delivered a prime logistics asset in Corbas, Lyon, to the tenant, completing a deal which has started 12 months earlier with the acquisition of the development project. The scheme, acquired from French developer PRD, comprises a total area of nearly 13,000 m2 (over 10,500 m2 of storage area and more than 2,000 m2 of office space) and was designed by the architecture firm Soho.
Thanks to features such as a high-performance building envelope, recovery and reuse of rainwater, attention to greenery, plenty of natural and LED lighting and a photovoltaic power plant of the roof, Its environmental achievements include BREEAM Very Good and ISO14001 standard. In addition, the least 80% of the construction site waste was recycled.
Like most – but not all – of the firm’s logistics deals, this asset has been added to Generali’s pan-European GRELF fund, which currently equates to some €900 mln of assets.
‘The Corbas deal is exactly the kind of transaction we like,’ he notes. ‘It’s an extremely constrained market, typified by strong rent increases and pretty unbalance supply dynamics. We liked the quality of the asset and the business of the tenant.’ The asset is leased to Sterne, an international supply-chain specialist which focuses on premium transport, including time-critical and tailor-made shipping.
Looking forward, Baylac thinks it likely that Generali will continue to expand in France, Italy and Poland, but the firm is also looking to makes its debut in Germany, and add to its single digit holdings in the Netherlands.
‘Germany is Continental Europe’s most expensive market and development is difficult there,’ he notes. ‘But we are closely monitoring the situation.’ While he concedes that the Dutch development business is an even tougher nut to crack, he identifies some interesting moving parts to the market.
‘Of all of Continental Europe, it’s probably the territory which is seeing the fastest repricing for logistics,’ he notes, suggesting that it’s closest to a kind of Anglo Saxon pragmatism about decreasing values. ‘There are also a couple of interesting dynamics at play. From January 2023, the government raised the transfer tax at an awkward moment, which had a negative impact on the cap rate.
'In addition, there is a transfer tax exemption on new developments, lasting only six months after completion. I have a sense that this has forced a certain amount of rational acceptance around pricing, effectively to avoid the 10.4% tax on new projects. For that reason and others, we are continuing to explore the Netherlands for potential deals.’
He concludes: ‘Whatever your impressions of the current outlook it is very different to the global financial crisis. Then, demand vanished as speculative stock flooded the market. There has been a lot less speculative development due to regulation this time round, and demand is still holding for the existing stock, so it remains a healthy asset class.’
