New warehousing lifts parts of property sector – Frontier

Jennifer Johnstone-Kaiser and Martin Thompson
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Long the poor cousin of commercial and retail sectors of direct property, industrial – in particular warehouses – has been coming to the fore in the past couple of years, thanks to changing consumer buying patterns. Forget the old notion of a dusty warehouse. These are often new buildings, increasingly multi-storied, with robots in abundance.

Logistics is the term used to encompass the full range of storage facilities, from traditional warehousing to en-route packaging facilities and short-term holding-for-loading facilities referred to as ‘last mile’. Frontier Advisors has published the first of two papers on the logistics sector, based primarily on European markets. Called ‘Logistics 101’  first the paper followed a research trip to Europe last November by Frontier’s Jennifer Johnstone-Kaiser, head of property manager research, and Martin Thompson, senior consultant. The second paper is to be titled ‘European Logistics Under the Microscope’.

The authors say key areas within the logistics chain, and hence areas of demand for logistics space, include:

  • Consumption centres – Typically, large population centres with the level of consumption highly correlated with affluence. Paris is a key example of such a centre. Last-mile facilities are likely to become more common around such centres
  • Production centres – Usually located near areas of industrial production for the purpose of storing and transporting the raw inputs and also finished goods, and
    Fashion and industrial centres such as Milan fit into this category.
  • Transportation centres – Hubs that are integral to the logistics chain benefiting from strong transportation infrastructure (road, sea, rail and air), cost and availability of space. The Netherlands is an example of this category due to the Port of Rotterdam being the largest port in Europe. Another is the Czech Republic, which is a beneficiary of the strength of the German logistics network with goods moved on to serve the consumption centres in Germany.

The authors say that consumer demand for same-day delivery services creates immense pressure on logistics occupiers to find locations for distributions, centres and warehouses close to large population bases and flexible labour pools. These locations often are in inner city or city fringe areas.

But rents are a relatively small part of an operator’s overall costs, they say, representing seven-10 per cent or less, compared with transportation costs of 40-50 per cent.

“The location factor is the most significant consideration,” the study says. “For example, Frontier visited a logistics park located next to Schiphol Airport in Amsterdam. A large percentage of the tenants in the park were operating spare parts warehouses due to the easy access to air transport, allowing these parts to rapidly be distributed anywhere in Europe. Even the proximity to the airside (where goods are unloaded directly from aircraft) is a consideration for a warehouse located near an airport. Other locational considerations include the inter relationships between different tenants.

One logistics park, in a logistics property portfolio run by property manager CBRE, has a large postal service as one of the tenants; an attraction for e-commerce players due to the ease of handing off parcels to the postal service.

Frontier also spoke with five managers for its European study: Prologis, Nuveen Real Estate (formerly known as TH Real Estate), Invesco, La Salle, Aberdeen Standard Life and CBRE.

Heitman, a US-based global manager which specialises in property for both private equity and debt, says the European economy is “remarkably strong”, despite recent evidence of slowing growth. Logistics assets are continuing to benefit from the ongoing shift of retail activity from physical locations to online channels, with capital flowing accordingly.

The manager, which also has a strong presence in Europe, says logistics returns have recently been dominated by capital appreciation. However, going forward, the story will be more about growth, even though there may be some additional scope for relative yield compression. Sector growth includes the potential for expanded market size, depth, and liquidity, as well as the prospect of rent growth. Europe lags the US in terms of modernisation and rental growth.

Beau Titchkosky, Heitman’s Melbourne-based managing director for client service and marketing, says: “The stock of modern US logistics space is more than three times larger than in Europe, despite the European region’s slightly larger economy. Modern logistics stock penetration on a per-household basis is substantially higher in the US than in Europe.

“At the same time, European e-commerce penetration, except in the UK, is lower than in the US, but is growing. Ultimately, much of the beneficial impact that online retailing has had on the logistics sector has yet to be captured in Europe as compared to the US,” Titchkosky says.

Frontier says the three main customer groups for logistics businesses are: third-party logistics companies (3PLs); retailers; and, e-commerce, which represents a sub-set of retailers but usually with a higher degree of handling.

The cross-section of tenants comprises high quality and credit worthy operators with lease terms varying from three to nine years. An exception tends to be high-tech e-commerce operators with sophisticated distribution robotics. One study, Frontier says, indicates that in the US e-commerce operators use three times the logistics space used by traditional bricks-and-mortar retailers.

According to CBRE, prime logistics yields in Europe reached 5.3 per cent in the first quarter of 2017, compressing significantly from the 7.9 per cent figure it recorded in the fourth quarter of 2009.

Speculative development accounted for only 24 per cent of the 132 million square feet under construction in Europe in 2017 (circa 12.3 million square metres), down 1 per cent from 2016.
In 2018, new speculative supply delivered to the market was expected to be slow, due in part to a scarcity of development land in many markets.

With respect to returns, the study says, and according to CBRE, prime logistics yields in Europe reached 5.3 per cent in the first quarter of 2017, compressing significantly from the 7.9 per cent figure it recorded in the fourth quarter of 2009.

European investment volumes in 2017 were up 80 per cent to 41.3 billion euro (A$66.2 billion) compared to 2016, suggesting values are stretched in pockets of the market. The region’s logistics vacancy rate was below 5 per cent in December quarter of 2017, down from 6 per cent in the previous year, CBRE said.

– G.B.

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