MAGAZINE: Logistics has become 'essential infrastructure'

This most unusual of years has brought enormous disruption to the real estate sector, but amid the Covid-inspired chaos, logistics has been a stand-out performer and a worthy topic of discussion for decision-makers from some of the sector’s leading businesses, at PropertyEU’s virtual roundtable. Executives from Prologis, CBRE, Segro, Panattoni, new entrant Mileway, GLP Europe and Mountpark, took a deep dive into this flourishing asset class in a wide-ranging thought summit moderated by PropertyEU’s editor-in-chief, Robin Marriott.

Reflecting upon a turbulent first half of 2020 for many in property investing, Nick Cook, president of GLP Europe said: ‘One of the words I’ve been using a lot over the past months is “fortunate”. We’re fortunate to be in a sector that is more resilient than most. If we were running businesses in the office or retail segments, then we would likely have experienced some very different things over the past few months. In the past, our sector hasn’t always had the recognition it deserves, so it’s good for logistics to be the shining star among the asset classes.

‘We’ve been cautiously optimistic about the performance of the business over the past few months and I’m more optimistic than cautious today.  I’m hopeful that logistics will come out of this period stronger than ever, and will have positioned itself as a critical part of the operational infrastructure of our economy.’

Echoing the positive sentiment, Jack Cox, CBRE’s managing director of industrial and logistics, said: ‘The mood is front-footed for good reason. We have seen increasing allocation of capital coming from other sectors because logistics has stayed open, unlike retail and some office.

He added: ‘The response this year from developers has been very mature. Vacancy rates have remained low and there’s not been an overshoot. So, it’s no surprise that cap rates are down.’ Indeed, research by CBRE suggests the months ahead look favourable for the segment.

‘Many of the roads lead back to rental growth, whether it’s last mile, urban, mid or big box, and much of the rental growth is in clusters around those mega cities with the tightest land supply,’ said Cox. ‘The clusters of exciting rental growth that we’ve seen in the US and in the UK, those are beginning to join up in Europe, particularly in terms of net effective growth.’

E-commerce driver
Underpinning the good health of logistics in no small part is the continuing rise of online retail. Panattoni, one of the leaders in the industrial development segment, finds that a sizeable chunk of demand for its assets comes from the e-commerce sector.

‘I think the demand [from online shopping] is much greater than the loss of demand from traditional retail, said Robert Dobrzycki, CEO of Panattoni. ‘We develop for the retail sector; but also carry out light production and assembly facilities, but probably right now e-commerce is 50% of what we do.’

One feature of this turbulent year in logistics has been a relative absence of deals and developments being delayed or cancelled, compared to other asset classes. Our panel also identified a welcome lack of insolvencies among clients. As a result, rent collection has been a bright spot, with Andy Gulliford, COO at Segro, reporting cash collection levels of around 95%.

Of course, Covid-19 has had adverse effects, causing several firms to hit pause on speculative developments as the pandemic took hold in March. But thanks to responsible distancing measures and Covid-secure policies, firms such as Prologis have been able to begin taking a look again at speculative development, while maintaining focus on build-to-suit projects, explained president of Prologis Europe, Ben Bannatyne.

Data centre growth
Online retail is not the only factor fuelling logistics’ strong performance during 2020. Panattoni’s Dobrzycki and others identified the roll-out of data centres as an important growth area for developers, as digital infrastructure mushrooms across Europe. The firm is expanding west from its heartland in CEE, in another sign of strong demand across the Continent.

‘Alongside e-commerce, the demand for data centres has appeared as another key wave during the Covid-19 pandemic. We’ve felt more positive thanks to this new type of property rollout in Europe,’ said Dobrzycki. ‘The shift of capital is happening and will continue and the impact of that shift will not be small, so it feels like there’s a great future demand-wise from customers and tenants and obviously capital is following.’

For new platforms such as Blackstone’s Mileway, contending with the roller coaster that is 2020 has been made easier by being agile. ‘As a pan-European urban warehouse investor with over 1,400 properties, we benefit from economies of scale. We are focused on urban logistics, which is where we see the strongest rental growth, driven by occupier demand for last-mile logistics facilities, coupled with limited land availability,’ said Emmanuel Van der Stichele, Mileway’s CEO.

‘We’re a young company and we have invested heavily in our technological systems, which supports our ability to gather market information and to improve our customers’ experience. It’s an advantage to not have much in the way of legacy systems and the scale we’re building up is a real benefit.’

The timing looks auspicious, with the view among the panel being that a ‘tidal wave’ of capital is coming towards logistics due to its resilience amid the storms breaking over the retail and office asset classes.

Fundraising success
Nick Cook, who is in charge of the European operations of GLP, revealed the firm is enjoying a fruitful period of fundraising, having raised just over $5 bn (€4.3 bn) of capital in the past few months.

Elsewhere, Prologis in Europe was able to raise more than €1 bn through its 10th green bond and first benchmark sustainable debt, which achieved attractive financing rates for its biggest European open-ended fund during the pandemic.

Similarly, Gulliford of Segro said the firm had raised over €1 bn via an oversubscribed share placement this year and enjoyed success with a well-subscribed debt bond offer.

‘It’s not just the purchase of direct real estate, capital is coming to us in a variety of forms which is interesting,’ said Gulliford. ‘I’m convinced it’s because people are recognising logistics is essential infrastructure. They are seeing real estate for what it is; it was always seen as operational, but this year has confirmed it as cash flow certainty.’   

As a result, competition is heating up among operators. Prologis Europe identifies rental growth as a key metric for companies seeking to thrive in ever more demanding market conditions.

‘With the amount of capital coming into the sector it becomes extremely aggressive and competitive, so you have to have some conviction about rental growth if you’re going to get the returns investors expect. Markets that are softer right now are parts of Spain and Poland, but the rest I would say are very strong and in northern Europe especially we’re seeing significant rental growth,’ Bannatyne said.

‘The challenges will be in core markets like Germany or the UK, attracted by core product. However with strong customer-focused strategies, which provide greater value beyond the real estate and by leveraging the economics of scale to provide meaningful solutions, from customer demand and development views, we’re set for a really good Q4 and 2021.’

Among the hotspots for logistics in Europe, the two standout locations are Paris and London – cities which also provide the biggest headaches over supply of land.

ESG factors
Nigel Rowe, managing director of Western Europe at Mountpark, notes the French government is set to prohibit greenfield development in the near future. To thrive in this constrained environment, social and governance (ESG) factors are top of the list of priorities, he said.

‘The ESG position is vital for our customers in what they can offer their staff, especially as warehouses are where they spend their time when they’re not at home. So, the long-term operational environment is crucial,’ he noted.

‘We are in growth mode; working out what the demand cycle is and I think a focus on the customer is central, as well as identifying the opportunities and the challenges – which in themselves offer opportunities. Yes, it’s a growth market but it’s going to keep changing.’

Indeed, occupiers and also investors are directing logistics firms to focus ever more keenly upon ESG,  and this is making warehouses more welcoming places as a standard rather than an optional extra, explained Dobrzycki of Panattoni.

‘This huge trend is just starting, it will be going deeper and deeper,’ he said. ‘We feel logistics was a bit behind other classes in this reference, but we are catching up fast and we should soon be leading the way in knowing how assets influence the environment.’

Our roundtable also highlighted ways in which logistics firms are innovating, showing that the segment is about more than uninspiring-looking warehouses, factories and distribution centres. Indeed, in places logistics is pushing the boundaries of what is possible.

GLP recently completed a 300,000 sq ft (27,870 m2) property in Milton Keynes in south east England, which it reckons may be the world’s first new building to achieve net zero carbon in its construction phase, as rated by the UK Green Building Council. This is no mean feat considering around 30% of all the carbon an asset emits during its lifecycle is generated during the construction phase.

‘We’re doing what we can through relatively simple changes,’ said Cook of GLP. ‘We challenged our construction partners and they brought a host of suggestions which we put together in the Milton Keynes building to drive positive environmental credentials. There’s some interesting opportunities to build more sustainably and I think the construction industry is a willing partner.’

Last-mile challenge
Elsewhere, logistics firms are getting to grips with the pressing ‘last-mile’ challenge of how to build distribution centres close to densely populated urban centres amid an acute space shortage. One eye-catching solution by Segro has been to dig deeper, quite literally.

Beneath the pavements of Paris, the firm discovered a cavernous space across two subterranean stories. Now talks are underway with the local government and a joint vehicle commercial partner to repurpose the neglected space into a 75,000 m2 hub for online retail deliveries.

‘We think it’s quite exciting and it’s potentially a lucky find,’ said Gulliford. ‘If you want to dig down it costs a huge amount, so you really need a hole to already be there and we came across one from the 1970s in the city centre. If you had to create it today, it would never get done because commercially it would not fly.

‘But we need to think more laterally about inner urban areas because the fact is that you are not going to find a nice, straight 15-hectare site in any serious urban conurbation any time soon. So we’re far more in tune with the use, than with the precise type of property itself. We think it’s going to be really interesting to see how this last piece of the supply chain works out.’

Whatever the future holds, logistics companies are today more in tune with customers than ever before, according to Rowe of Mountpark. ‘What’s happened over the past five years, and especially with e-commerce super-charging, is that the uses have become much more diverse; last-mile issues are fundamental to that.

‘Getting an understanding of the pain points - and there are a lot of pain points for occupiers - is crucial. How do they support and supply their stores, for example? What is the cap for fitting out a building? This understanding about occupiers and what they are going through makes our sector different from what it was like five to 10 years ago.’

Last mile opens up new opportunities and forces growth in certain areas, according to Van der Stichele of Mileway. ‘The “last-mile” challenge feeds into a broader debate at the top of almost every company’s agenda: sustainability. Not just in terms of the environment but also in terms of social value. Owning and managing last-mile properties, we are improving the efficiency of supply chains for companies of all sizes and embedding ourselves in the economic fabric of the communities in which we operate. That’s why we pride ourselves on being a good neighbour and connecting our customers with the consumers and local communities they serve.’

After Covid-19
While the longer-term future looks bright for logistics, what about the short term? After the threat of Covid subsides and normal life resumes – whenever that might be – is there not the risk of the segment coming back down to earth, after being lifted by external events such as the pandemic and tis effect upon consumer shopping habits? Not according to our panel of experts.

Cox of CBRE pointed out: ‘There’s been very good data from the UK which shows that in the run-up to the lockdown there were an extra 79 million visits to bricks-and-mortar food stores, but in that same period online sales rose 14%.  That relates directly to e-commerce being a central part of how we live today.

‘For the past six years at CBRE we’ve worked hard to integrate our occupation and our investment business lines to create a global vertical. We’re passionate about providing well-informed market advice to our clients and strong occupational advice to our investment clients because the genesis of value begins with the customer.’

Cook of GLP highlighted that historically low vacancy rates across Europe were a positive indicator for logistics in the medium term and beyond. Indeed, every year since 2009, the rate at which developers have been able to deliver warehouses and delivery centres has trailed take-up by customers.

Reasons to be confident in the future of logistics also lie in the macro-economic climate, according to Van der Stichele of Mileway.  ‘If you look where interest rates are, there is still a substantial positive yield gap between cap rates and bond yields. This helps to attract capital to the sector,’ said the Mileway CEO.  ‘Because of the positive structural dynamics in our sector even pre-Covid, you saw investors under-weight in the asset class and post pandemic, logistics real estate is outperforming most other real estate assets.’