LOGISTICS WATCH 'Why be anywhere else?'

CEO and founder of the firm, Alistair Calvert, explains that it felt like the right thing to do in the face of significant uncertainty around interest rates and the repercussions for asset valuations.

‘We terminated discussions on all transactions last April, bar one or two ongoing developments,’ he says. ‘New investment remained on hold all year, through to the first few months of this year. However, we are now very active.’

For Calvert, changes in pricing in logistics assets have been largely driven by macroeconomic factors, although there has been a little softening due to certain occupier dynamics. ‘The big headline is that values have been decreasing in a very material way because interest rates have gone up. That was fairly predictable, a lot of people knew it was going to happen, and we certainly saw it coming more than a year ago.

'The issue then has been around fair value, and where that lies if interest rates rise by say 3%. Where do yields then need to go to get fair value? Well, they may not go up by 3%, but they have gone up by a good proportion of that, so we are nearing more acceptable levels.’

Negative factors
In terms of evolving occupier trends, Calvert highlights a shifting e-commerce landscape. ‘While many e-commerce occupiers took a lot of space during Covid, the sector as a whole has taken a bit of a breather over the past year or so. While we are starting to see the first signs of life of e-commerce coming back, if there was a negative, it would be that the occupational market isn’t quite as competitive as it was,’ he adds.

‘A lot of that is because the wind has been knocked out of the e-commerce sector to a large degree. Yet vacancy rates are still extremely low and take-up is still really robust, so the underlying fundamentals remain strong, arguably stronger than any other asset class.

‘There has been one change, in that if we built a warehouse a year ago, we had multiple tenants competing for the lease significantly ahead of our underwriting assumptions. That’s not the case now. Other than this, valuation decreases is really a macroeconomic issue rather than an issue with the asset class.

'The fundamentals are still stellar, it’s just that interest rates have gone up. We still see 2% vacancy in logistics, strong rental growth, and replacement costs above capital values. What else would you want to do with your money? A little bit of the shine may have been taken off, but we believe it is still an underpriced asset class.’

One aspect which is still complicating the outlook is construction costs, Calvert says. ‘Construction costs have remained stubbornly high,’ he notes. ‘We are still building, and have just starting on another development in Barcelona, Spain. But it surprises me that prices haven’t softened more in the construction space.

'Many elements of the cost inflation are unlikely to ease much. Labour costs, for example, are not coming down very quickly, and ultimately the core, sticky inflation has worked its way through all parts of the construction industry. It’s difficult to see how that will improve in the current climate.’

Transaction ambitions
Last summer, Clarion Partners Europe secured new discretionary institutional capital commitments of €882 mln, creating additional acquisition capacity of up to €1.8 bn. Despite this flood of capital, Calvert and his team were happy to sit on the sidelines of the transactions arena until the time felt right to return.

When they did, Clarion made a perhaps unexpected reappearance in the UK market, acquiring two distribution warehouses in the UK totalling 40,733 m2 for £52 mln (€59 mln) from Johannesburg-listed REIT Equites Property Fund. The deal, which completed in March of this year, marked the first by Clarion in the UK since 2016.

Matthew Tatlock, VP, Clarion Partners Europe, commented at the time: ‘This was a rare opportunity to acquire two highly reversionary, tenant critical distribution centres, strategically located within two hours' drive time of the UK's key metropolitan areas. With vacancy rates in the region at near historical lows, and the speculative development pipeline subdued due to ongoing inflationary pressures and rising financing costs, the rental growth story remains highly compelling.’

Located on Peterborough Gateway industrial park in the East Midlands, the single-tenant properties, built in 2018 and 2019, are both EPC A rated and have received a BREEAM 'Very Good' certification. The first totals 28,124 m2 and is leased to a fully owned subsidiary of Danish transport and logistics firm DSV for a duration of 10 years with 5.4 years left.

The second property has a total area of 12,609 m2 and is leased to a subsidiary of Danish medical device developer and manufacturer Coloplast for 10 years, with 6.3 years remaining. Both leases are subject to upward only open market rent reviews.

Peterborough Gateway is an 73-hectare logistics hub with over 370,000 m2 of modern warehouse space just off junction 17 of the A1 motorway, with 85% of the UK population within a 4.5 hour drive by truck. A mix of national and international mix occupiers, including Urban Outfitters, Oatly, Lidl, and Amazon, are based on the location.

Says Calvert: ‘Our view is that the UK repricing happened more quickly because there were more moving parts. I believe that prices moved because they were more stretched to begin with, partly due to the mistakes of Liz Truss’ short-lived government, and partly due to the makeup of the investor market. You ended up seeing a lot of very motivated or distressed sellers from different pockets and sub-sectors within the market.’

And while the speed of repricing that occurred in the UK was unique for those reasons, Calvert thinks it is following to a certain degree in Europe. ‘We feel that the rest of Europe won’t have the same number of routes for distress that the UK market had. You saw pension funds that had margin calls and had to sell, open-ended and retail funds that were forced to liquidate assets due to redemption issues. A number of REITs were forced sellers too. But we foresee that the capital that is coming into the UK now will absorb it over the coming year or so.’

He adds: ‘We are also working on multiple transactions in Europe. We think that Germany has probably repriced to represent decent value at this point, and the Netherlands is not too far behind. France is a bit more difficult to predict – I think there is still some more repricing to be had there. Spain and Italy are perhaps another three months behind France. We’d argue that all of this was all fairly predictable, historic European property repricing almost always happens in this order.’

Strength in diversity
From big boxes to small city units, Calvert agrees that institutional appetite has evolved as the asset class has become more diverse and sophisticated, and Clarion is similarly ready to consider a range of property types.

‘We are a generalist logistics investor, so do invest across all kinds of logistic space,’ he says. ‘We’re probably better known for our big box strategy, but we own assets across all subsectors, other than multi-let industrial, which we don’t have a desire to have exposure to.’

However, despite some of Clarion’s peers pursuing properties as diverse as data centres or life science properties, Calvert draws a line under such deals – at least for now.

‘Clarion has a big exposure to life sciences in the US,’ he notes. ‘We don’t have that in Europe right now. We may well look at the those very long-dated income-focused type leases soon. But we are much more focused on asset types where we can get rental growth. And rental growth is stronger than ever – especially in territories like the UK, the Netherlands and Germany.’

In terms of current opportunities, Calvert thinks that decisiveness and a willingness to act remains crucial. ‘One thing that happens whenever you get a repriced market, is that you are likely to pick up higher quality assets earlier on in the repricing,’ he says.

Occupier outlook
While ecommerce operators hitting pause on expansion plans muted the market over the last 12 months, Calvert doesn’t regard this as the new normal. ‘E-commerce really took a breather for nine to twelve months, but is starting to come back,’ he says. ‘We are seeing the biggest occupiers looking to lease large amounts of space once again. This is new, it’s a trend we’ve just started seeing in the past few weeks. We have leased space to a much wider array of tenants in the last year because of the pause in e-commerce activity, as those particular operators digested the extra space they took on during Covid.’

Meanwhile, changing occupier ambitions around environmental, social and governance (ESG) goals are also driving the industry’s evolution. Yet to date, this has played out in Clarion’s favour.

‘We’ve got such a new portfolio,’ Calvert notes. ‘. As tenants focus increasingly on their own ESG obligations, we are very well positioned.

‘It’s something we have considered very closely from an investment perspective and I believe we have compiled a very fit-for-purpose portfolio from an ESG standpoint. The whole ESG question, as far as I can see, poses a much bigger challenge to the other asset classes. Just look at the regulation being applied to office, retail and residential properties. With warehouses, at the end of the of day, its relatively simple. You need low energy assets, so it’s about measures such as electrification, LED lighting, heat pumps and solar panels, and that’s the bulk of it.’

Finally, while looking to the short to medium-term horizon where macroeconomic issues still seem stubbornly present, Calvert remains sanguine about the future of the asset class. ‘Logistics remains a favourite of institutional investors for a very good reason,’ he says.

‘You can often take what has happened in the US as a predictor of what will happen in Europe. And if you do, it’s clear that we still have a long way to go. We still don’t have enough logistics space, and that means there is room to grow rents and increase supply for the foreseeable future.’