LOGISTICS WATCH Tracking megatrends

Furthermore, the ‘robust’ performance of the sector during and immediately after the pandemic and its subsequent show of ‘resilience’ in the last 18 months, are likely to support Swiss Life Asset Managers’ place in the sector for the years to come.

‘In 2021-2022, there was very high demand in the market, so if you bought something during that period, you might now be facing readjustments in value, given the very fast and sharp rise increase in interest rates, and given the overall view of real estate,’ Pfeiffer acknowledges. ‘Yet in terms of the fundamentals and looking at the different sectors, logistics remains still strong. Occupational metrics in our portfolio are incredibly high, we have experienced high rental growth, and see high demand from occupiers for more space.’

In the face of all this growth, what are the downsides? ‘In the Dutch market we achieved a CPI increase of over 10% last year, which is a great outcome, but going forward we need to see if the tenants are able to sustain these indexations.’ Pfeiffer confirms.

Megatrends in sheds
Pfeiffer states: ‘Supporting our portfolio, we identify four megatrends; ecommerce, deglobalisation and reshoring, urban logistics, and industry 4.0.

‘Ecommerce dynamics are levelling out at the moment. They went down, then went up, and are quite stable now. Yet going forward, I believe in the sector and that we will see an increase in demand in ecommerce, maybe not in the next year, but after 2024.

‘Deglobalisation is an interesting phenomenon. The disruption to worldwide supply chains caused by global events encourages more European companies to move outsourced production and supply operations back closer to domestic markets. As a result, inventories will increase while smaller, decentralised production capacity is built up. Reshoring is hard to measure; you can look at volumes of stock or the inventory of a tenant, but there have been so many different contributing factors, including Covid-19 and the war in Ukraine.

‘Urban logistics, meanwhile, is an ongoing trend. Everyone wants goods same day or within 24 hours. Limited supply is being driven by a desire for locations close to city centres. Urban planning expertise relating to logistics space integration within mixed-use districts is becoming increasingly important. That is going to be crucial to fulfil demand.

‘Finally, ‘industry 4.0’ is the other megatrend. There is a shift away from speculative mass production to smaller, demand-driven production close to customers – a ‘think local – act local’. However, labour forces are quite an issue across the industry, as it’s hard to find employees, and retain them; wage inflation is another factor.

'Furthermore, we are seeing more and more requests for cutting-edge IT equipment, and for high tech fit-outs, with the expansion of automation, in part to combat staffing issues. It’s important to see that robots can work alongside humans. Overall these megatrends give stability to our investment thesis.’

Geographical focus
The Swiss Life Asset Managers Real Estate Fund ESG European Industrial & Logistics currently focuses on Germany, France, UK, Benelux, Austria, and Switzerland, although for Pfeiffer, not all markets currently have the same weight.

‘The evolution of the markets over the past year means our focus has shifted a little,’ he confirms. ‘Broadly speaking, the fund focuses on key European countries. These are the countries we mainly have offices in so that if the tenant needs something, we are able to quickly and efficiently meet their needs.

‘Currently, we are focusing more on Benelux, France, and the UK, rather than Germany, where we are already heavily invested. The German market is still characterised by a lack of transparency with regards to pricing, while we see the UK is one of the most transparent markets of all. The UK is interesting too for the current readjustments in prices and in our view, it offers attractive value.

'We were paused in that market, but we want to invest there again now. In Benelux, more precisely in the Netherlands, we are invested, and we intend to invest more. We still see some potential although the market does have its perks. For example, a significant amount of environmental topics are coming up. These in part play out in our favour but have to be monitored.’

Another country where Pfeiffer says Swiss Life Asset Managers is encountering a strong focus on environmental, social and governance (ESG) matters is France. ‘France has become one of the leading markets for ESG targets,’ he notes. ‘Our fund is an SFDR Article 8 fund and we need to apply certain rules. But there are regional variations. In the Netherlands, for example, there are different EPC restrictions compared to other countries. We have a net positive warehouse in Amsterdam, in the light industrial category, that we bought last year.’

Despite most markets now seeing a perhaps predictable softening in prices, Pfeiffer notes that one European market is the exception. ‘We’ve been seeing a curious phenomenon in Austria. Whereas we have seen a decline in values everywhere else, in Austria, there has been a small increase. Now, the key market there is basically Vienna, but that all means that demand is quite high and values have stayed firm or risen a little.’

Appetite for diversity
From big boxes to small city units, it is clear that institutional appetite has evolved in recent years. What kinds of logistics assets does Pfeiffer prefer to target?

‘We are invested in logistics, as well as light industrial, production, storage, manufacturing and also life sciences. We are currently developing a life sciences scheme in Hamburg, which will be occupied by a specialist in in finding and developing treatments and making them available worldwide,’ he notes.

While not all logistics operators consider life sciences part of the industrial scene, Pfeiffer sees an opportunity to classify many tenant types in this sector as light industrial occupiers. In turn, this gives access to a landscape of higher rents. ‘While the equipment is usually supplied by the tenant, so the contract tends to be shell and core, the fit out also tends to be more expensive.

‘Overall, I like the diversity offered by light industrial. You can often grow with the tenant, and sometimes there are different businesses combined under one roof. Tenants greatly appreciate the interaction with each other at these properties and often leads to a high level of loyalty and a long dwell time of the tenants. In addition, the dependence on a single tenant is reduced. As the business expands, you can often charge higher rents. Life sciences still achieve the highest rents,’ he confirms.

One occupier type the firm wouldn’t currently consider for the fund is that of data centres. ‘They are not the right fit for our fund, but they are on the Swiss Life Asset Managers radar,’ he confirms. ‘You do need to look closely at their energy consumption and come up with environmentally friendly solutions. We might consider them in the future. Other sub-sectors we are looking into include self-storage, where the rents are very different again, and it’s a very nice niche. But it all depends on what we can find on the capital markets.’

The ESG challenge
As Pfeiffer notes, ESG is a key focus for the fund and the firm. But that doesn’t mean that the battle has entirely been won. ‘We have assets in our fund which are less energy efficient at the moment, but we are making the necessary efforts to improve the ESG credentials.. There’s a lot of interest and cooperation from our tenants in this area, particularly connected to energy matters.

'Last year, when energy prices reached an all time high, some of our tenants asked if we could install photovoltaic panels on their roofs. We look at all our assets, and targeting those with the lowest EPC ratings, examine what we can do to make them more sustainable.

‘We’re not just looking at the E; we are also very attentive to the S factor. For example, we recently took a concrete platform that wasn’t being used on an asset and transformed it into a park for the tenant. The G is about corporate governance and regulation, and I’m satisfied we are doing all we can in that area.’

He added: ‘We don’t have a lot of certified assets in the fund at the moment, although we do want to certify a few. We are focusing more on understanding our assets better, than on obtaining labels for certification’s sake. Overall, I think we are at a good level across the portfolio, but we want to be excellent.’

The fund hasn’t been pursuing many developments, apart from one which is currently in progress, with a target completion of 2024. ‘Taking into account embodied carbon, it is good to work with existing assets, but it’s not the only way. It may beeasier to build something from scratch on a green field with different ESG characteristics.

'However, this has a different impact on embodied carbon and the environment. which however has a different impact on embodied carbon.. In the Netherlands, for example, there are leasing regulations connected to the EPC of an asset, while in Germany, all new builds have to include e-charging points for tenants.’

Pfeiffer confesses that on a personal level, he is a ‘huge fan of ESG’. He adds: ‘It can be tricky, and there are certain types of industrial assets which are hard to make ESG compliant. But we see lots of potential and enjoy working alongside tenants on achieving these goals.’