Logistics Europe: Logistics delivers the goods
Offering predictable income and expanding because of e-commerce, logistics is fuelling investor appetite, writes Russell Handy
With rental growth in sight, few would doubt the sustained appeal of European logistics at present.
“An increasing number of investors are now realising that the income from logistics is more predictable and less volatile than that of the office and retail sectors,” says Mo Barzegar, president and chief executive of Blackstone subsidiary Logicor.
However, the sector presents several stumbling blocks for less-seasoned investors.
The increased influence of e-commerce, tenants’ preference for flexibility, as well as macro-economic factors such as the impact of Chinese trade flows, have rendered the sector more interesting but, crucially, more complex.
Speaking on a panel at Expo Real conference in Munich in October, David Buck, USAA Real Estate managing director of industrial development, said the logistics sector is undergoing significant change, with the way tenants’ needs are catered for evolving.
“E-commerce has catapulted the sector into the limelight,” says Nick Cook, chief acquisitions officer of Brookfield-owned IDI-Gazeley. “It’s added a new dimension to the industry.”
The effect of e-commerce upon the investment class is under constant evaluation, with investors keen to learn more from the likes of Amazon’s director of EMEA real estate, Raimund Paetzmann at trade conferences and events.
Barzegar says e-commerce is playing a big role in the performance of the firm’s 7.7m sqm portfolio.
“In the first half of this year, retailers accounted for 80% of our leasing activity,” Barzegar says. “Nearly half of that was related to e-commerce activity.”
E-commerce grew by 16% in Europe last year alone, according to PATRIZIA Immobilien, which recently launched a logistics business. The new, Amsterdam-based division is targeting both conventional and e-commerce assets.
Patrizia said the decision to create a logistics platform was based on changes in the supply chain caused by new consumer behaviour, reflected in the growth of e-commerce, new infrastructures and the transformation of retail by digital technologies.
“Changed consumer behaviour is having a major impact on the way in which retailers and logistics service providers handle product services,” Patrizia chief operating officer, Klaus Schmitt recently said.
The Healthcare of Ontario Pension Plan is also looking to benefit from the continued growth of e-commerce, focusing on ‘last mile’ logistics assets.
Growth in online retailing has created a new logistics sub-sector close to urban areas – the mid-sized parcel delivery hub, says Real Capital Analytics. That has been coupled with a move towards complementary larger, so-called ‘XXL’, out-of-town units (see Electric Currents opposite).
Pierre-David Baylac, fund manager for CBRE Global Investors’ Logistics Property Fund & European Industrial Fund says: “One of the big changes the sector has undergone is a switch to what is regarded as ‘XXL’ units, as speed of delivery becomes key,” he says.
Barzegar says Logicor is “invested and interested in the supply chain from national and regional distribution centres to sortation centres and cross-docked facilities on the edge of the city”.
“E-commerce has catapulted the sector into the limelight. It’s added a new dimension to the industry”
“Then it becomes quasi-retail – so that’s where we stop,” he says.
Macquarie Capital this year launched a UK logistics management platform with Peel Land and Property Group, citing demand for logistics driven by e-commerce.
Despite the increased interest in the evolving sub-sector, Towers Watson consultant Paul Jayasingha says there is a risk that investors “overplay” e-commerce and its influence on rental growth.
Speaking at Expo Real, Jayasingha said he was yet to see evidence that increased market rents are linked to e-commerce, which has been on an upward trend for a decade.
Logistics rents, he said, have only been rising post-financial crisis, he said, adding that any correlation therefore seems weak.
“There’s a bigger link to the general business cycle,” Jayasingha said.
Leading that improved business cycle are the UK and Germany, followed by the Nordic region, according to Real Capital Analytics research.
The UK and Germany are, along with the US and China, among the world’s largest online shopping markets. The four countries’ combined online markets are predicted to double in size to £645bn by 2018, according to joint research by OC&C Strategy Consultants, PayPal and Google.
RCA estimates that investment volumes in the European sector are up 50% on their 2007 peak, while in the UK, BNP Paribas Real Estate and MSCI finds that investment is up 87% on long-term averages.
Underpinning the increase in investment is the belief that logistics is, as Buck puts it, the “backbone of the economy”.
The UK continues to attract capital. APG Asset Management and the Canada Pension Plan Investment Board (CPPIB) recently backed a UK logistics partnership with the Goodman Group. The trio’s Goodman UK Logistics Partnership will invest £1bn in value-add, core and developments logistics and industrial developments.
Dutch pension manager APG and CPPIB each committed £200m, matched by the same amount from Goodman, which has co-operated with CPPIB since a joint investment in China in 2009.
The recently published UK Logistics Investment Report 2015 by MSCI and BNP Paribas Real Estate found record levels of investment flows targeting the country’s logistics sector, with “unprecedented levels of occupier demand” over the past 24 months.
“Strong demand fundamentals in a supply constrained market have led to strong investor appetite,” the report said.
CBRE Global Investment Partners recently bought a European logistics portfolio from TH Real Estate clients as it looks to invest more in the sector. The portfolio of seven assets, in France, Germany, the Netherlands and Spain, was sold for €350m and includes the Villabbé scheme in France, let to French retailer Auchan, as well as assets let to DHL and Procter & Gamble.
Thorsten Kiel, portfolio manager, head of logistics, Europe at TH Real Estate, said good-quality buildings in well-established logistics hubs are expected to deliver strong income returns, particularly in western and southern European markets, where the spread between bonds and prime logistics yields are still more than 450 to 550 basis points.
In The Netherlands, Gazeley recently agreed its debut deal. The firm bought 13 logistics warehouses, spread across a number of locations, including Amsterdam, Venlo and Venray.
Cook says the 2m sqft portfolio will form the core of the firm’s new Dutch platform.
“We’re looking to go deeper into the Netherlands in the next couple of years,” Cook says, adding that Gazeley will consolidate investments around “core logistics hotspots”.
AEW Europe recently bought land with development consent at Groenenbergterrein, near Amsterdam’s Schiphol Airport for €38m for its Logistis Fund.
CBRE Global Investors’ Baylac says the firm has zoomed in on areas of undersupply – such as the south-west of France, where it is investing in a speculative, 20,000sqm development for its European Industrial Fund (EIF).
“We looked at the area and found there was only 6,000sqm of space in the pipeline,” he explains, adding that the Toulouse area is a promising market to invest in.
Across the main real estate sectors, Western Europe continues to attract capital.
The largest market in Logicor’s portfolio, says Barzegar, is France, where the firm has invested in 1.9m sqm, followed by the UK with 1.5m sqm.
Less established markets in Central and Eastern Europe have also appealed to investors, with Poland very much the starting point.
Ivanhoé Cambridge and TPG’s European logistics parks specialist, P3, has invested and developed in CEE countries close to Germany – including Poland – as well as the Czech Republic and Slovakia.
Ian Worboys, P3 chief executive, says the firm is looking to take advantage of the countries’ proximity to Germany and links to the federal republic’s automotive industry.
“Some of those countries fly somewhat under the radar – but you can’t doubt their potential,” he says.
The firm has bought land in Poland, Romania and the Czech Republic. Its purchase of a site in Prague, he says, was the first on a speculative basis in the Czech Republic for six years.
For Prologis, Poland is one of the top five major markets for European e-commerce, representing 13% of the Continent’s e-commerce direct leasing agreements.
The relatively low cost of operating in Poland is one of the reasons for its high ranking, the firm says in its European E-Commerce, E-Fulfilment and Job Creation report.
“In the past three years, e-commerce leases accounted for 15% of total leasing volume and we expect this ratio to rise further as more companies expand their e-fulfilment capabilities,” says Chris Caton, senior vice president of research at Prologis. “Most growth is expected to occur in Europe’s three largest e-commerce markets, the UK, Germany and France, which could account for approximately 10m sqm alone.”
Cook says he would like to think that Gazeley would invest in the Czech Republic or Poland next year.
“The fundamental rule of location remains,” Cook says. “Being close to major population hubs and their ports is key.”