Logistics property breakfast

e-comm-value

European logistics boom to accelerate as e-commerce takes hold

The rapid evolution of the logistics sector will accelerate in the coming decade as e-commerce grows across Europe, drawing even more investors into what has become a mainstream property sector closer aligned to retail than its industrial roots, the logistics property breakfast audience heard.

“What we have seen in the last 10-15 years is nothing compared with what we will see in the next 10-15 years,” declared Smith. He acknowledged that logistics has grown from a niche play into a mainstream property sector, accounting for some 11-13% of commercial real estate volume in Europe. However, he added that it had much further to go as the continent has three times less warehouse space per capita than the US, and e-commerce typically requires three times more % floor space than normal logistics, which could mean up to nine times more capacity is needed. “ at number is probably an exaggeration,” Smith admitted. “But imagine any other property sector – any other industry – that could go through that thought exercise with you and talk about being nine times underserved for a particular core product they sell.”

“The e-commerce market has made it much easier for investors to understand what logistics is. We have seen a lot more investors come into the market in the last few years and we have seen contraction in yields because of that capital,” Beyer said.

Yields on prime logistics in core markets now vie with shopping centre or office yields below 5% in the UK, with Germany likely to follow soon. “Capital values in some markets have peaked – the UK has really peaked – but in some European markets we think the capital values are still below their previous peak levels,” said Ekaterina Avdonina, managing director at Delin Capital Asset Management. “We still see a lot value attracted to fundamentals in core markets,” she said, adding the structural shift in logistics means it has emerged as an institutional real estate sector in its own right, separate from industrial property and in some instances more closely correlated to retail property.

That shift along with the potential for 10 and 20-year leases with blue-chip e-commerce companies is increasingly attractive for conservative investors who want long term security. “We are having more conversations about logistics. People who would never have considered logistics are now asking questions and are seriously considering it,” De Blasio said. He gave the example of a large Italian pension fund which has never invested in logistics before but sees that it is a valuable investment sector that can help it fund pension liabilities in 20, 30 and 40 years’ time. “ they are convinced logistics will be there in the future,” De Blasio said. pie

Lines blur between logistics and retail

As e-commerce makes logistics an easier sector for investors to understand, it is also blurring the lines between more traditional retail subsectors and those warehouses geared towards online retail. “Now we are at level where I would say – what is the difference between a retail warehouse park and logistics? It’s a very similar story in the end,” Beyer said. Avdonina agreed that mainstream logistics may be more closely correlated with retail warehousing. “I think we will see some more subsectors of logistics being more closely aligned with retail,” she added.

Smith went even further and speculated that logistics assets could ultimately account for 40% of commercial property volumes as new formats may bring it closer to offices also. “You are going to see it bleeding into other sectors; you are going to see a blurring of the lines between logistics and retail. But why not between logistics and offices? Or logistics and multi-family? It’s kind of invading other sectors. It does not need to be the big XXL build-to-suit,” Smith said. He said the continued rise of e-commerce put logistics “at the start of the trend, not at the end of the trend”.

The shift in perceptions surrounding logistics is also leading to a rapid contraction in yields. Audience members spoke up about recent deals for UK logistics assets that priced at yields of 4.5% and 4.75%, as well as an Amazon warehouse in Poland at under 5.5%. “The yield compression which comes with a lot of capital going in is a correction,” Beyer explained, adding that he believes prime yields in Germany will also go through 5% this year.

However, investors still need to take care not to invest in poor locations, or fall foul of furious levels of development which are increasing supply. “We talk about capital values and cap rates [but] people also have to watch out for the rent levels,” Avdonina said. “What will be the ERV (estimated rental value) of the large logistics hubs going forward, and how that would balance with secondary stock is a big question in my mind,” she added. pie

E-commerce drives need for variety of spaces

The all-pervasive rise of online retail is having a big impact on the volume of space being taken by tenants. Not only do those companies need about three times more space than traditional warehouse tenants per €1m of revenues, but the explosion in the number of tenants is still rising. “2015 was a very good year for take-up. It surpassed ten-year averages and  ve-year averages across all the countries,” Avdonina said. “About 30% was e-commerce take-up – and that didn’t exist before 2008-09.” From Beyer’s experience, about one-third of logistics lettings turnover in Germany was driven by the retail sector – with the majority of that stemming from online retailing – putting the segment well ahead of more traditional industrial logistics. E-commerce tenants in particular need property of different sizes and locations to  t their business models. “We do see the big boxes are still very much in demand. But there is also the much smaller stuƒ closer into the city, which has been much more tricky to  nd – and that’s why there might be a little bit more value in there,” Beyer said.

“Investor and tenant demand remains high in pretty much all cases,” Smith added. Demand for 100,000 sq.m. XXL warehouses has been a function of the emergence of global online platforms like Amazon after build to-suit facilities on long leases. In addition, e-commerce companies need small units close to towns and cities that can serve for so-called “last mile” parcel delivery and accept customer returns. In some cases, imaginative developers are repositioning shopping centres to meet that demand. But despite the very particular needs of online retailers, more traditional logistics centres of about 30,000 sq.m. are still sought after, with virtually all sites built in the speculative glut before the  financial crisis now taken by tenants. “ ere is no risk of immediate functional obsolescence,” Smith added.

Although e-commerce is the principal driving factor, manufacturing trends are also reshaping demand for industrial property. The return of manufacturing to Europe’s largest economies from cheaper locations in eastern Europe and China is breathing new life into factories and supply chains. “We are beneftting from the onshoring process – taking business to Italy from eastern Europe and China. But what I see is not demand for new spaces but demand to revamp existing stock,” De Blasio said. He gave the example of Italian car manufacturer FIAT, which is investing heavily to restart auto production in Milan and southern Italy. pie

Demand across Europe but investors to be wary

Investor demand for logistics is widespread across Europe, with many open to all countries. “Global platforms are not necessarily focusing on specifc markets. I see that investors are now considering Europe as a market and they are trying to pick up opportunities west and east,” De Blasio said, although he added: “Many of my clients see Poland as a must-go destination for logistics.” He also said that Prologis is considering Italy as an important investment destination, with changes in legislation in Italy, as well as Spain, lifting those locations up investors’ wish lists. “Italy and Spain used to have very protective tenant legislation, but now you can write what you want into a lease agreement. As a result, northern European tenancy laws are less attractive than Italy and Spain, and Italian and Spanish labour laws are more flexible,” he added.

Avdonina said investors should be wary of putting eastern European countries on a par with western and northern Europe. “Political risk is something that investors should underwrite. When you have Polish yields lower than in Benelux, I raise my eyebrows,” she said. Avdonina highlighted locations like Hamburg’s port area as ones where demand will always remain robust, and said investors should also consider countries’ legal systems and business transparency.

Yet, even in core countries like Germany, there are challenges. “Germany still has a lot of older sheds. I would think that more that 50% of the stock is older and might be outdated.  These stocks are often in very good locations, closer to the city and there is definitely potential in them. But all these sheds need to be refurbished, renewed and maybe even demolished,” Beyer said. He said that there has been more green field logistics construction in Germany and less brown field renewal.

Smith said there remain pockets of value across the continent, even though regions like central Europe and countries like Spain oƒ er fewer opportunities than a few years ago. Some investors are looking broadly across the entire continent for deals, although others are taking a different tack. Smith cited the example of a global real estate investor that has decided not to invest in all Europe simultaneously. “Let’s pick a small country oƒ the beaten path and put a % ag down there and try to get our head around that one country – which I think is probably just as good a strategy,” he said. “It doesn’t really matter much which market, value is to be found pretty much anywhere at this point in the cycle.” pie