Spurred by e-commerce, the logistics market is in a state of flux with several new asset formats emerging, prompting investors to reshape their strategies.
From a property investor’s point of view, what exactly is a piece of institutional-grade logistics real estate?
According to Marc-Antoine Bouyer, partner and head of acquisitions in the European Real Estate group at Carlyle, the definition is expanding, as investors wake up to the phenomenal need for more distribution property serving urban locations.
He doesn’t much like the term ‘last mile’, pointing out that an occupier may need premises in an infill urban location, like a Park Royal in London, or be able to serve customers from further out depending on local market and supply constraints. But he sees this urban distribution sub-sector as the latest evolution in a still relatively young asset class that began to take off with the standardisation of regional storage warehouses followed by growth in demand for XXL big box logistics facilities.
‘E-commerce is driving the expansion’ he says. ‘On the one hand, we have ever larger, more automated facilities with the advent of those triple X sheds, increasingly bespoke to their users. Then there is the one that everybody is talking about, urban logistics. I think we are in the very early stages of a new market here.’
Weight of capital
A more elastic definition of institutional-grade logistics is surely welcome to the mountain of capital targeting the sector. Six months ago Cushman & Wakefield totted up all the investors it had come across via its global network, that were actively trying to buy logistics assets in Europe: the result was at least €250 bn. Set this figure, says James Chapman, a Cushman EMEA capital markets partner, against the investible universe represented by annual transactions of €35 bn-€40 bn, and you have a 7x demand-supply in-balance.
‘We took a snapshot at a point in time, but that number has probably only grown since. It shows that there is a huge weight of demand in excess of the stock that can be traded,’ Chapman believes. ‘The Covid-19 pandemic has accelerated this with higher delivery volumes resulting from the continued shift towards e-commerce.’
For Carlyle, a two-pronged approach has enabled the private equity firm to deploy about 40% of its capital in recent years into logistics and still get the higher returns it needs. One strategy is selective development of big box facilities, like a 50,000 m2 asset it is under contract to develop near Milan.
Then last year, Bouyer, partner Peter Stoll and the Carlyle team kicked off a drive into buying smaller asset sizes in the urban distribution sector, typically anywhere between 1,500 m2 and 15,000 m2. In October they acquired an income-producing portfolio of 27 parcel delivery properties in Germany and France in a sale-and-leaseback with a 3PL logistics provider, known in the market to be Kuhne + Nagel. This is the income-producing bedrock of the new strategy.
‘Because this hasn’t been an institutional market so far, a lot of the stock is owned by corporates such as 3PLs’, Bouyer explains. ‘That is one of the areas of opportunity; others can be local SMEs.’
Since then, Carlyle has signed or closed a further 10 assets in Germany and France, painstakingly acquired in seven separate deals. The largest is a trio of properties bought in one hit from Nuveen Real Estate and Palmira Properties, in Hanover, Munich and Ulm. Another single Munich property, 13,090 m2 currently let to Volkswagen, was picked up in March from MAS Real Estate for €23.4 mln.
Not fit for purpose
‘We are working on about 10 more opportunities and we are also addressing other markets like Italy, which we know well, and exploring the UK and the Netherlands.’
Finding assets in good locations is ‘a granular game’, he says, and the hard work and the capital investment don’t stop there, because many are often old or imperfect buildings not fit for urban distribution use. ‘To reposition and lease them, you may have to deal with pollution/decontamination issues, building extensions, adding loading docks or resurfacing courtyard areas and so on.
‘As much as you would like assets in the locations of huge demand to have all the right characteristics, there is what you want on paper and what you can find in terms of sites in practice.’
Chapman believes retail space will increasingly be converted for micro fulfilment. But planning consent for change of use in continental Europe is not a given and takes a long time. Carlyle hasn’t tried it yet but Bouyer thinks for investors willing to underwrite longer business plans ‘it is absolutely a possibility’.
