MAGAZINE: Tailwinds lift logistics

Headwinds have turned into tailwinds for the logistics market - and the development engine is revving up again.

The European logistics market is definitely turning, according to Philip Dunne, CEO and president of Prologis Europe. 'We've had a couple of quarters of meaningful growth in demand, rents are turning up again and values are starting to recover. The headwinds have turned into tailwinds,' Dunne told PropertyEU.

Earlier this year, Prologis announced that rents at its European operations would grow 20% by 2016. The UK is leading the recovery, Dunne said. 'Rents there have recovered incredibly quickly. Demand is improving and rents are spiking.' He added that he expected rents to grow by 4-5% on average this year. Prologis Europe emerged in third place again this year in PropertyEU's Top Logistics Developers ranking despite boosting the overall volume of completed projects by almost 50% over the past three years. Goodman and Panattoni Europe held on to their positions in first and second place with Panattoni turning in a broadly similar result to last year. By contrast, Goodman remains on a roll and boosted its completed development portfolio by another 23% year-on-year.

In February, Goodman Group reported further growth in revenue and earnings and its US peer Prologis is also on a firmer footing after reporting a strong earnings upswing over 2013 after losses the previous year. It has also been successful on the capital raising trail. In 2013, the Denver-based industrial property specialist raised a record $4.1 bn (€3 bn) worldwide, including nearly €1 bn in Europe. 'A year ago, the world still faced limited liquidity. Now there’s plenty of liquidity but not enough opportunity,' Dunne commented.

Wave of private equity
A significant amount of private equity has been channelled into the European logistics sector in the past 12-18 months with the likes of Canadian investment giant Brookfield snapping up Gazeley, and TPG and Ivanhoe Cambridge joining forces to buy P3. In the coming year, Dunne expects to see the source of capital broaden. 'There will be less US capital, and more from Asia and the Middle East,' he predicted.

US equity is also moving into light industrial in Europe, according to James Markby, head of European industrial and logistics investment at CBRE. 'There is a growing amount of business for light industrial rather than logistics. The specialist pool of developers hasn’t changed much in the last four to five years but the type of money backing them has really changed in the last 8-9 months,' he said, pointing to Gazeley and P3. In most countries light industrial is not a market at all as there are only two to three players, noted Stefan Wundrak, director of property research at Henderson Global Investors in Germany. 'That's a shame and we need new players who want to develop platforms.'

Part of the funds Prologis has raised for Europe are earmarked for acquisitions of third-party assets and stabilised projects from the company's own pipeline for its open-ended funds. But a fair share of the spoils will be used to fuel the company's development pipeline, Dunne said. The Amsterdam-based company already launched a number of new developments in 2013, including four speculative projects. In January, Prologis announced it had signed two build-to-suit agreements totalling 45,800 m2 in the UK. 'The UK is really coming back strong,'Dunne commented. 'Rents are leading the recovery charge in core markets. The wave of supply of the previous cycle has been absorbed and development is starting to make plenty of sense.'

While a chronic shortage of supply exists in many areas of Europe, it is particularly acute in the UK, confirmed Mike Forster, managing director for the UK and Ireland at PointPark Properties (P3). 'We will see significantly more build-to-suit development. Last year, 70% of development in the UK was built-to-suit. From an investor’s point of view it is very interesting. Due to the lack of available options for occupiers, we are seeing better retentions and that is leading to more investor appetite for shorter leases and increased ability to take risk. Across the P3 portfolio we have somewhere in the region of the high seventies in terms of retention.'

Elsewhere in Europe, Prologis is working on a speculative development in Prague while projects are also on the agenda in the Benelux, Germany and Poland. 'We’re definitely seeing built-to-spec projects in the UK, but also Germany as well as pockets in CEE like Prague, Bratislava and Wroclaw. The markets there are very tight. Southern Europe is lagging a little bit, but there are some great projects there too. The situation is not uniform across Europe.’ In France the focus is primarily on Paris and, to a lesser extent, Lyon, where oversupply is also subsiding. ‘Le Havre is also showing signs of strong growth.'

According to Richard Holberton, director of EMEA research at CBRE, the occupiers' market is seeing a pattern of economic recovery, but significant challenges remain in various industries and sections of the supply chain. Finding ways of improving supply chain Efficiency will be key to revenue growth in what he described as 'a fairly gradual upturn'.

Reconfiguration of supply chains
'The growth in online retailing necessitates reconfiguration of supply chains. But there are significant factors to consider: people, IT, order fulfilment in urban areas, centralisation of inventory control for same-day delivery and reabsorbing returned items. The question is whether it can all be made to work financially. There is a quest going on for a seamless supply chain and we are not there yet. There will be some trial and error to get to that point.'

At the same time, reconfiguration of the supply chain may create demand for new niche products and logistics space in unusual areas, he added. 'Investors and developers need to understand what occupiers are doing, thinking and what is driving their behaviour. We are starting to see a polarisation between very, very big warehouse platforms and smaller urban logistics.'

Given the heavy concentration of capacity in small urban areas, a rental premium is necessary, he argued. 'Whether the market is entirely convinced of the pricing for this rental premium is an open question, however. There is a fairly limited capital market in this segment in most of Europe so I think this represents an opportunity but there are also risks. For example, will the economics work and will the centre become obsolete or vacant quickly?'

CBRE's Markby believes there is a 'definite gap' between parcel delivery and last-mile type of buildings and the investment market. 'I think the challenge is that some of the largest operators and tenants are looking to expand in a big way. Not just at one or two sites in Europe but in multiples of 10s and that is leading to competition. Which developers can provide that sort of coverage? Site density is a big issue as the rents required are higher compared to the rest of light industrial and standard logistics. I think this will lead to the emergence of specialist investors who understand those operations and will start to enter the market.'

CORMAC MAC RUAIRI & JUDI SEEBUS

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