For investors in logistics buildings, Covid-19 spurred expected growth by years. Surging demand for e-commerce means the number of warehouse sites is shrinking, providing a solid foundation for the sector’s future, writes Alex Rolandi.
In February, Legal & General Investment Management (LGIM) invested more than £100 million
(€117 million) in UK industrial real estate sites, citing investors’ enthusiasm for the sector as a result of Covid-19.
The firm is one of many worldwide seeking to increase exposure to industrial and logistics properties – a trend galvanised by the accelerated shift towards online retail during government-ordered lockdowns to combat the pandemic.
According to LGIM, the rise of e-commerce
and a scarcity of “high-quality, well-located” industrial assets has created a significant supply-demand imbalance.
The main issue facing the logistics and industrial sector, aside from climate change, is this lack of assets, says Jonathan Holland, senior fund manager at LGIM Real Assets.
“Our biggest challenge at the moment is trying to find more opportunities in what is now a very competitive market,” he says. “Every man and his dog wants industrial at the moment.”
A study by property specialists Savills shows that 2020 was a record year for demand in the logistics sector. In Europe, take-up reached 26 million square metres – an increase of 12% on 2019. The report highlights the fact that although the situation remains tough in parts of the export economy and manufacturing sectors, e-commerce has “benefited disproportionately”.
As people increasingly turn to the internet for shopping, there aren’t enough ‘sheds’ in strategic locations to house goods. The industry is faced by a “chronic” under-supply, says Rémy Vertupier, co-head of institutional fund management, separate accounts and club deals at AEW, one of the world’s largest real estate investment specialists.
Two factors lie behind the growing demand for logistics, he suggests. “With more than 75% of European people living within cities, an increase in e-commerce is leading to an increase in urban logistics space requirements.”
The second structural driver is related to the impact of new technologies and artificial intelligence in the industry. “This has enhanced demand for smaller, high-quality industrial space that is flexible by design and located in dense urban areas,” Vertupier explains.
Money has been pouring into the sector from a variety of different sources, including US banks, institutions, private equity, and firms in the Middle East and Far East.
“That has driven down yield considerably over the last six months,” says LGIM’s Holland.
A lot of the new capital can come with a lack of knowledge, according to Thomas Karmann, head of logistics at Axa Investment Managers’ alternatives division, Axa IM Alts.
“Risk is often not correctly priced anymore and there is hardly any differentiation of location and market depth for (re)letting. There seem to be less single asset sales and more portfolios, containing some less attractive buildings which would almost be unsellable on a standalone basis,” he says.
Dark stores needed
Since the onset of the pandemic, the transportation of goods has become more complicated due to Covid-related restrictions. This has exacerbated the need for warehouse space – particularly in urban areas – with notable demand for chilled, food-related storage space, or ‘dark stores’.
“Several years of expected growth were brought forward and have led to increased demand for fulfilment centres, parcel hubs and last-mile locations,” says Karmann.
‘Last-mile’ hubs play an increasingly crucial role across the world as part of the final stage of delivering goods. Operators can’t deliver the weekly shopping to people’s front doors in heavy goods vehicles, after all – that job is better left to smaller, more agile vehicles, LGIM’s Holland highlights.
For BMO Real Estate Partners’ director of property funds, Matthew Howard, finding land for these smaller logistics facilities is one of the biggest problems facing the sector.
“This is a fast-growing and essential link in the logistics network and it suffers from the same challenges faced by residential: the relatively low availability of land in densely populated areas,” he tells Funds Europe.
“At some stage, urban logistics occupiers will start to reach affordability challenges when rents ‘top out’ and the development pipeline slows,” he adds.
Appetite from consumers is seen through the increasing penetration of e-commerce over the past 12 months – a trend that was already underway, but which the pandemic has accelerated, as Hugues Braconnier, head of logistics at Allianz Real Estate, points out.
The fund manager recently purchased a last-mile facility 10km outside of Vienna for €72 million. As these kinds of facilities are well sought-after, the acquisition made a strong addition to its portfolio, the firm said.
“What we see in the market is companies, particularly online retailers, looking for extra space in the short term in anticipation of ever-increasing demand,” says Braconnier.
For him, the easiest way to see how the appetite for e-commerce has developed globally is by looking at the total level of investment into logistics as a proportion of global transaction volumes, and the compression in yield because of the weight of capital entering the sector.
In 2010, he notes, logistics and industrial made up 10% of total global transaction volumes. Last year it reached 25%. Meanwhile, logistics yield shrank to 5.8% from 8.1% in 2010, he says.
“In terms of investor activity, we see an increasing number of investors from across the globe entering the European market for logistics assets and portfolios. And all of these changes are happening at pace; the challenge is to stay ahead of the curve.”
One such investor is Bahrain-based GFH, which has made a number of recent logistics acquisitions in both Europe and the US. It also bought a majority stake
in UK logistics specialist Roebuck Asset Management in December last year.
Roebuck’s managing partner, Hugh Macdonald-Brown, says that GFH wanted to acquire a logistics asset management platform to increase their pipeline and visibility in the European marketplace, where they have historically invested primarily in offices.
A global trend
As is often the case, what happens in the US spreads across the globe by way of Europe. “From a European standpoint, there are many reasons to say the market is pricey due to the supply-demand imbalance,” says Macdonald-Brown.
“But there are also so many reasons to say that the journey is not even halfway through yet – and that comes down to fundamentals. The supply/demand imbalance is going to create pricing tension from an investment point of view, but also in the occupational world.
“This will drive up prices, making the owners of these assets less likely to sell,” he says. “It’s a perfect storm for the logistics world.”
According to Braconnier at Allianz, Asia-Pacific is also “notably” undersupplied with modern logistics facilities. “Consumers in Asia are perhaps more advanced in the way they purchase goods online compared to Europe – with the exception of the UK – but in general, the trends are global,” he says.
This limited supply, particularly in Southeast Asia, is challenging companies who seek to meet their sustainability commitments while remaining cost-competitive, according to Singapore-based Tom Woolhouse, head of logistics and industrial at JLL Asia Pacific.
Furthermore, he says, despite overall resilience throughout the pandemic, the Asia-Pacific sector has also felt the impact of Covid-19 through the disruption of global supply chains.
“The pandemic provided real-time stress testing for supply networks. Some had to respond to a huge spike of demand and some to a sudden cancellation of all orders,” Woolhouse explains.
“That put pressure on supply chain leaders and forced them to digitally transform their supply chains overnight as visibility of inventory is now expected not just for B2C, but also for B2B logistics.”
Despite its challenges, however, the industrial and logistics space is set to see a prolonged period of growth across the globe.
As the dust from Covid-19 settles, it is only a matter of time before the sector achieves a balance between supply and demand.
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