Prologis Europe reports almost €1b of acquisitions in 2014

Prologis Europe is poised to shift its focus to southern Europe for acquisitions of existing logistics assets after buying almost €1 bn of new assets in 2014, the company’s president Philip Dunne told PropertyEU in an interview.

‘The UK and northern Europe have become somewhat pricey. That is not to say that we won’t buy in those markets but we see more opportunities elsewhere. We hope southern Europe opens up and that we will become more active there in the next couple of years.’

Central Europe is also on the agenda, Dunne said, but added that opportunities there were not as plentiful as in other parts of the continent. ‘Central Europe is still a relatively immature market with more development than existing product.’

In the fourth quarter Prologis Europe acquired €63 mln of buildings totalling 122,250 m2 in the Netherlands and Poland. That brought the full-year figure to €915 mln – or an additional 1.29 million m2 across Europe.

As a result, Prologis Europe significantly boosted its assets under management in 2014, by 13% to €10.9 bn. The figure, which also includes appreciations, corresponds to just over 25% of the total group figure. On Tuesday, the US-based company reported AUM of $52.8 bn (€43.2 bn) at 31 December 2014.

For the coming year, Dunne said some disposals were on the agenda as well as further expansion of the development portfolio. ‘We have a quality land bank and are ready to go… We have different levers to grow the business.’

Supply of Class-A distribution facilities remains low across all European markets, Dunne said, pointing to central Europe, particularly southwest Poland, Bratislava and Prague. On the other hand, he sees little or no potential at present in southern Europe. ‘I would be surprised if we saw any new development there in 2015.'

Overall, however, Dunne sees development activity roughly matching last year’s figure. ‘We started 24 developments last year; this year we will see about the same or a little bit more.’

In the final quarter of 2014, Prologis Europe initiated 10 new developments totalling 272,550 m2 in the UK, the Czech Republic, Germany, France and Sweden. The majority – or 85% - were build-to-suit facilities including a 31,730 m2 facility for Mall.cz at Prologis Park Prague-Jirny in the Czech Republic and a 26,180 m2 facility for Meyer & Meyer at Peine in Germany.

For the full year, Prologis started 24 developments across Europe totalling 536,600 m2. Of this figure, 57% of the development space was build-to-suit and 43% was speculative.

This marks a significant turnaround to previous years, Dunne said. ‘Prior to 2014, almost all of our new developments were build-to-suit and the market was very thin. In 2014, occupancy levels became much tighter and at the back end of 2014 we received significantly more enquiries about space.’

Prologis Europe ended the fourth quarter with 94.9% occupancy, an increase of 140 basis points over the prior quarter and an increase of 130 basis points over the course of 2014, he added.

Dunne said the company had generated 'healthy margins' from its European development activities in 2014. Overall, the US group generated a margin of 20% on its development activities, he said. This is almost three times the margin generated by acquisitions of existing assets. In total, Prologis invested $4.3 bn over the year at an average yield of 6.8%.

With occupancy levels getting tighter, Dunne said there was more room for rental increases, particularly in the UK, in London and the Midlands. But while some rental growth is starting to feed through, cap rates are rising more strongly, he added. Indeed, cap rates accelerated further in Q4 for the seventh successive quarter on the back of 'robust’ investor demand.

Dunne: ‘The market is becoming more competitive as the march of money around the world continues, but there is still some runway to go in terms of cap rate compression given that government bonds are almost at zero.’

Pointing to the European Central Bank’s long-awaited decision to introduce a quantitative easing programme, Dunne said this marked ‘a huge positive step’ for Europe. ‘This will boost demand and trade and create additional economic growth. As QE drives inflation, we will also see some more rental growth.’