The European Logistics Market

Demand for logistics assets to double by 2025 as e-commerce grows to make up 20% of retail activity from the current 9%.   Logistics has become the fastest-growing sector in real estate across Europe, and is perceived as the least politically sensitive asset class.


The extra mile: The logistics sector has come a long way from warehousing and distribution

The extra mile: The logistics sector has come a long way from warehousing and distribution

You know what they say about property investment; “location, location, location.” Well, here’s another mantra with an l-word; “logistics, logistics, logistics.” There is seemingly no end to investor interest in the real estate facilities needed for the efficient and time-sensitive storage and movement of goods between source and end-user and there are good reasons for that.

A lot of it has to do with e-commerce. Penetration rates for online retailing across Europe vary between market, depending on country, computer usage and culture, and a common factor is the requirement for state-of-the-art storage and distribution facilities and systems that are able to handle the flow of product from factory or field to retailer, and from retailer to customer and back. But the further common factor that excites most is that those online penetration rates are still rising and will continue to rise across a broader range of products — this is not a static market but almost a real estate investor’s dream come true. “Logistics is moving from being an ugly duckling to a beautiful swan,” says Dirk Sosef, vice president of research and strategy at Prologis.

“Logistics hasn’t always been so popular,” points out Phil Redding, CIO of UK-REIT SEGRO Plc. “We have been in this sector for nearly 100 years, so it is slightly surprising to us that it hasn’t been more popular. An easy way to see how big e-commerce or online retailing is in a country is to count how many Amazon sheds there are,” he adds. (Amazon shares, listed at $18 in May 1997, recently hit $1,000, a 55-times increase over 20 years.)

Personal connections 

“Logistics is more popular than ever,” says Rémy Vertupier, fund manager of AEW’s €1.7 billion LOGISTIS Fund, “because of the highly-positive supply/demand dynamics of the sector. Structural changes are having a major impact on supply-chain management around the globe and we can be reasonably very positive for the future of logistics as an asset class.

“There is also a ‘trend’ effect,” Vertupier continues. “Investment style can be affected by trends and the trend here is e-commerce. E-commerce gives every individual a personal connection with logistics. When you look at the portfolios of the large investors, they are underallocated to logistics. If you do some maths on the best possible allocation between office, retail, industrial and logistics, for an optimised portfolio you should have between 5 percent and 10 percent in logistics.”

“Logistics remains our top sector,” Simon Wallace, head of research, Europe, alternative and real assets, at Deutsche Asset Management, comments. “Compared to office or retail, logistics is expected to be the outperformer. If you go back three or maybe five years, there was always the perception that if you bought logistics you would do well.”

Redding agrees with the characteristics that continue to attract investors to logistics: the high income return, the relatively quick development periods, the long leases, relatively strong covenants. “They have all been around for quite a while. But the recent step change is the rise in demand caused by the explosive growth of online retail.

“There has not been a commensurate increase in supply, so what we are getting is almost ideal market conditions of robust, growing demand meeting fairly-constrained supply, and that is equalling rental growth,” Redding adds. “That rental growth in logistics is what is bringing a lot of new entrants into the sector.”

Will that growing popularity result in the bubble and crash that we have seen so often before? “We don’t see that there will be a sudden correction from current levels,” Redding says. “There is interest to invest at the current levels from a wide and diverse group of investors, so the pricing at those levels is very well supported.”

Questions and answers 

For José Pellicer, partner and head of research at Rockspring Property Investment Managers, demand for logistics is not the issue. “The demand is undisputed. The question is more who is driving the demand — investors or occupiers?” Pellicer suggests.

“Investors have this idea that the only driver of logistics demand is e-commerce. That’s not correct. The vast majority of logistics is old-fashioned trade. The key demand driver for logistics is still international trade, not just of consumption goods but also components and capital goods. And manufacturing. “Retailers are changing their supply chains to adapt to the rise of e-commerce and need facilities to handle fulfillment, urban distribution and returns. Supply adapts to demand very quickly in logistics — if there is money to be made, someone will jump in to grab that money,” Pellicer points out “Investors need to find out where demand is highest and supply most restricted. Investors can’t get enough of logistics but you have to discriminate; where there is demand and limited supply is where you will find rental growth. It is the supply question that needs to be asked.”

Year after year after year 

“No other sector can demonstrate occupier growth year-on-year over the past five years like the logistics sector,” says Ekaterina Avdonina, managing director of Delin Capital. “Every other year has been a record year for occupational take-up. Nothing like that has been seen in office or retail. The majority of institutional investors started looking at logistics because of the structural drivers rather than the economic drivers that were underpinning the growth.

“The defensive character of logistics has been known about for a long time,” Avdonina points out. “Most of the return is derived from income and for fixed-income investors buying logistics has been a great diversifier. Logistics has very little volatility, 90 percent of the return derives from income, and that makes a really good story.”

“The retail market is going through a seismic change and technology is at the forefront of that,” says Andrew Jones, CEO of UK-REIT LondonMetric Property Plc. “How we shop and interact is evolving, and logistics is a large part of the change. Every retailer has a slightly different strategy for dealing with this. Some retailers cover a country or region with one large warehouse. Others adopt a hub-and-spoke model, with the hub located strategically and the spokes placed around the major urban conurbations. And someone like Amazon will do everything, the full spectrum.”

“The last mile is very important,” says Jones. “Making very bold delivery promises is what will allow retailers to build their brand with their end-customers.”

Dmitry Kostygin, chairman of Russian e-commerce retailer Ulmart, has a different perspective. “Logistics is a never-ending story of evolution,” he explains. “There is always change and room for improvement.” Kostygin, for example, sees scope for a new type of real estate for online retail in Russia: distribution or fulfillment centres that are accessible to customers, look slightly better outside than just a shed and with some parking, a sort of warehouse club.

“Our investment team has been active in the market and is positive about logistics,” says Greg Mansell, head of research at AXA Investment Managers – Real Assets. “Logistics is popular from an investor’s point of view because demand is outstripping supply. Performance in the medium term is expected to be stronger than that of offices and retail as well. Agreed, yields have come down quite a bit, to below 6.5 percent on average across Europe. That’s down a long way from where we were four or five years ago, and the spread between logistics and offices has also come in.

“But I don’t think that investors are getting ahead of themselves,” says Mansell. “It’s more to do with the lack of supply. Investors are looking for assets and there aren’t that many out there.” Limited availability of good logistics product and high investor demand is pushing prices up.

Where could it all go wrong? “It could go wrong if there was excess supply,” says Pellicer. “If developers and investors start building like crazy, occupiers will have choices and rents could fall.”

Someone else’s problem

Nothing has changed in logistics and yet everything has changed. The sector has morphed from the once-unloved and low-tech but tolerated warehousing and distribution sector into the fancied and highly-desirable high-tech supply-chain facilitator that it is today — whether classic retail from factory or farm to shop shelf or whichever-way-you-want omnichannel retail from distribution facility to consumer.

It is arguable that logistics has gone the extra mile and usurped retail as the second commercial real estate sector after offices. No real estate owner wants voids or vacancies but in the current environment it’s likely that they would rather have an empty shed than an empty shop as it’s more likely to re-lease quickly. Depending on “location, location, location.”

Fortunately, the vexed question of how much longer retailers can continue to bear the rising costs of the rapid online deliveries and generous and penalty-free returns policies that consumers have come to expect is not one that investors in and owners of logistics facilities will have to concern themselves with too much.

3D printing? No worries 

Fears that the wider adoption of 3D printing could have adverse consequences for operators and owners of logistics facilities have been debunked by senior executives of leading developers and investors. Hamid Moghadam, CEO of Prologis, told delegates to this year’s INREV annual conference in Berlin that “the material that goes into a 3D printer has to get there somehow. I think we’re good.”

Ian Worboys, CEO of P3 Logistic Parks, the former PointPark Properties that is now owned by GIC, made the same point another way in an interview during last year’s Expo Real event in Munich: “If every household has a 3D printer,” he said, “it [and all the parts that go into it] will have to come through a warehouse. Things are not printed out of thin air. If you have a 3D printer, you will have to put in the basic materials. These materials will all have to go through a warehouse.

“At the moment, it’s all a bit science fiction and maybe in 20 years’ time you won’t be buying anything, everything will go through the 3D machine,” Worboys adds. “But you will still need the basics for the machine to make it work. There will be a pretty big supply chain around that.”

Richard Fleming is editor of Institutional Real Estate Europe. He is based in Kimberley, United Kingdom.

For further information please contact:

Delin Capital Asset Management
Ekaterina Avdonina
+44 (0)207 487 1220

FTI Consulting on behalf of Delin Capital Asset Management
Dido Laurimore / Richard Gotla
+44 (0)20 3727 1000


Keep the industrial faith - it will pay off

Industrial  and logistics real estate is undergoing a transformational renaissance. Warehouses now form the spine for a modern supply chain.

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Onward and upward

Logistics real estate has become a plum target for investors as e-commerce and automation transform the business landscape in urban areas across Europe. Paul Hamblin takes the temperature.

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DCAM and Blackstone agree a new partnership

DCAM recapitalises UK and Dutch logistics portfolio and establishes prime logistics partnership with Blackstone

London 11 April 2017 – Delin Capital Asset Management (“DCAM”), a leading pan-European logistics real estate owner, investor and developer and Blackstone’s Core + platform have established a partnership to acquire prime logistics assets in Germany, Benelux and the UK. DCAM has contributed an initial seven asset portfolio of UK and Dutch assets to the venture comprising over 230,000 sqm of leased Grade-A logistics space, including a 58,400 sqm pre-let development in Roosendaal in the Netherlands. DCAM will be asset manager to the partnership.

DCAM and Blackstone plan to grow the portfolio through additional investment in logistics assets where locations are underpinned by a demand/supply imbalance.

Ekaterina Avdonina, Managing Director of DCAM, commented: “We are delighted to have created this new partnership with an established real estate investor in Blackstone and look forward to growing it over the coming years leveraging our combined experience to identify and acquire new opportunities across our target markets.”

“Occupier demand for high quality and well located warehouse and logistics space continues to gain momentum, underpinned by the structural changes taking place in consumer shopping habits. With the sector having demonstrated ongoing resilience and outperformance, we are confident that underlying market fundamentals are in place to support this new vehicle.”

DCAM was advised by JLL and Blackstone was advised by CBRE.

For further information please contact:

Delin Capital Asset Management
Ekaterina Avdonina
+44 (0)207 487 1220

FTI Consulting on behalf of Delin Capital Asset Management
Dido Laurimore / Richard Gotla
+44 (0)20 3727 1000

Notes to editors

About Delin Capital Asset Management

Delin Capital Asset Management (‘DCAM’) is a leading real estate company focused on European logistics.

DCAM will continue to manage its own portfolio of logistics assets whilst increasingly focusing on the development of new assets and investing in value-add logistics opportunities across its target geographies of the UK, Benelux and Germany.

DCAM’s strategy encompasses the development, ownership, and active management of best in class warehouse and urban logistics distribution properties which are well located and which are set to benefit from increasing growth in e-commerce and Europe’s logistics supply chain.

DCAM is headed and by Ekaterina Avdonina, one of the few very senior women in logistics property.

Delin Capital Asset Management UK Limited is an Appointed Representative of Gallium Fund Solutions Limited, which is authorised and regulated by the Financial Conduct Authority.

About Blackstone

Blackstone is a global leader in real estate investing. Blackstone’s real estate business was founded in 1991 and has approximately $102 billion in investor capital under management. Blackstone’s real estate portfolio includes hotel, office, retail, industrial and residential properties in the US, Europe, Asia and Latin America. Major holdings include Hilton Worldwide, Invitation Homes (single family homes), Logicor (pan-European logistics) and prime office buildings in the world’s major cities. Blackstone real estate also operates one of the leading real estate finance platforms, including management of the publicly traded Blackstone Mortgage Trust.

Consolidation centres: less is more

Consolidation centres: less is more

Fifty into one does go. At least if you’re consolidating the number of deliveries to one of London’s prime shopping streets it does (see case study, below). The Crown Estate has cut trip deliveries to Regent Street retailers by around three-quarters since 2009 and AXA IM – Real Assets is hoping to achieve a reduction of 50% of daily deliveries when its planned 1.4m sq ft office building at 22 Bishopsgate, EC2, is fully operational at the end of this decade.

The idea of consolidation centres – standard warehouses outside an urban centre – isn’t new, but London’s increasing pollution and traffic congestion levels are giving the concept new impetus. “The success of any consolidation process relies on it being universally adopted. It needs a critical mass,” says Harry Badham, AXA’s UK head of development.

At 22 Bishopsgate, where the planning consent was conditional on the provision of a consolidation centre (see development box, below), office tenants will need to sign up to the consolidated delivery service as part of their lease terms. The specifics of the building’s consolidation centre are still being determined, but it is likely to be located in the A13 corridor.

This raises the tricky issue of land supply. “Consolidation centres are fine in theory but the reality might not be so easy if it is dependent on a plentiful supply of readily accessible industrial property,” says Piers Hanifan, industrial consultant at London-based agency Kalmars.

Paul Weston, senior vice president at developer Prologis agrees. “There are still inappropriate industrial sites in London. Why not move them out to elsewhere? And we need to seriously look at green belt land,” he says.

There is unlikely to be a standard size for future consolidation centres because the amount of space required is dependent on the area or building being serviced, so warehouses could range from a few thousand to more than 200,000 sq ft.

Delin Capital Asset Management, which is hoping to be behind many of the capital’s new consolidation centres, believes they will need to be within a 15-mile radius of central London, where the issue of competing land uses, particularly residential, is most acute. “That’s why we think there should be joined-up thinking with local authorities. Space could come from obsolete stock and other types of real estate,” says Delin’s managing director Ekaterina Avdonina.

One solution would be to locate centres further outside, where land supply is better. But then, says Steve Mitchell, director at Colliers International: “Customer expectations for quick delivery may be compromised by congestion if products are delivered from longer distances outside London and cannot get there on time.”

And wherever a consolidation centre is located it adds a layer of cost to any distribution network, points out TFT partner Seth Love-Jones, who notes that the operational costs of a centre will probably outweigh fuel and mileage saved by vehicles.

The economic viability of consolidation centres may end up being the hardest part of the equation to solve. Kieran Soobadoo, associate solicitor at legal firm Russell-Cooke, says: “To date, centres have been funded largely by subsidies, and they are expensive to run. Landlords and tenants will be wary of the implications of a consolidation centre closing. Where tenants are required to use a particular centre, care will need to be taken in the drafting of leases to cover this possibility.”

Anyone expecting a sudden ring of consolidation centres around the capital is likely to be disappointed. Savills industrial director Bridget Outtrim says: “I think it’s something that will gradually evolve. They are likely to appear with large office buildings – but how often do they come along?”

Demand for consolidation centres 

As the immediate benefits of consolidation centres – cleaner air and less traffic congestion – are difficult for individual tenants to quantify and therefore cost effectively, it is perhaps unsurprising that neither developers nor industrial agents reports little demand for such buildings. “I’m not being bowled over in a rush for consolidation centres, though I think they will come eventually,” says Prologis head of London & South East markets, Paul Weston.

Enquiry lists remain disappointingly void of consolidation centre requirements, says Savills’ industrial director Bridget Outtrim. “This is going to be driven by policy [see development box, below] – a regulatory phenomenon that will create demand,” she adds.

One of the reasons 3PLs and other operators aren’t enthusiastic about the concept is that it is currently seen as a model associated with other countries, rather than the UK, reports Seth Love-Jones, partner at property consultancy TFT.

Case study – the Crown Estate 

Think Crown Estate and “early adopter” may not be the first phrase you associate with the landlord. However back in 2009, in the depths of recession, when the term consolidation centre was practically unknown in London, the Crown Estate set up an operation to coordinate deliveries to its retailer tenants in the heart of the West End.

The impetus for the project was a desire to reduce the volume of traffic on the famous shopping streets. The Crown Estate partnered with specialist Clipper Logistics to filter deliveries to participating retailers to a 76,000 sq ft warehouse at Harlow, Essex, before making the trip into the capital in one of two electric lorries. Now 50 retailers (around half of all retail tenants) use the service and the number is rising.

“It’s useful for them to have a plug-and-play logistics solution,” says Crown Estate portfolio manager Bob Dawson. Is it worth the money? Dawson suggests that the cost increase is marginal and outweighed by the benefits to local store environments. Critics, however, point out that many retailers have still not opted in. Dawson responds: “Our preference is not to enforce, but to try and persuade. We have to remember that some retailers have long-standing relationships with existing suppliers or their delivery arrangements are made nationally.”

The biggest issue faced by the operation so far has been getting replacement supplies for the electric vehicles. A smaller electric vehicle is used for a separate consolidation scheme run by the Crown Estate to collect restaurant waste in the Swallow Street area. At present there is no waste consolidation on Regent Street (the offices there generate a surprising volume, reports Dawson), though the Crown Estate is considering how this might be achieved in the future.

Carrot and stick to encourage development? 

The absence of a profusion of consolidation centres around the capital when there is broad agreement that the concept is not only sound but necessary suggests that the market may need some help to get centres established. Some see this as inevitable. Harry Badham, UK head of development at AXA IM –Real Assets, developer of 22 Bishopsgate, says: “It will almost become mandatory for new office buildings.”

Yet, so far, London’s local authorities have been exceedingly cautious about telling the market what to do. A few, such as Camden, Waltham Forest, Enfield and Islington, have worked jointly on a small-scale consolidation centre for their own deliveries, but key authorities like Westminster and the City of London have not made any firm pronouncements on the subject.

That may soon change. The City Corporation is due to discuss the topic in more detail later this year. “We’re still in the very early stages. At the moment we’re encouraging developers and business to look at this,” says director of built environment Carolyn Dwyer. Could the carrot turn into a stick? Dwyer is non-committal: “The last two large planning consents included the requirement for a consolidation centre. It will become a standard requirement that new developments have an environmental management plan. And that may or may not include use of a consolidation centre.”

Some of those who may provide future consolidation centre buildings are convinced that regulation is inevitable. “It will be a top-down approach – it won’t come from tenants voluntarily, but through changes in the planning regime,” says Ekaterina Avdonina, managing director at Delin Capital Asset Management.

For further information please contact:

Delin Capital Asset Management
Ekaterina Avdonina
+44 (0)207 487 1220

FTI Consulting on behalf of Delin Capital Asset Management
Dido Laurimore / Richard Gotla
+44 (0)20 3727 1000


Many unhappy returns

How is the rise of e-commerce–notably the phenomenon of merchandise returns–affecting manufacturer's and retailers' distribution facilities, staffing levels and networks?

Click below to read the full press release