How has the pandemic changed logistics in Europe?
CFD: There has been a marked increase in both tenant and investor demand, driven by increased online delivery requirements and changes to supply chain management to improve resilience. This has resulted in rents growing well ahead of inflation and yields falling substantially.
PERE’s EMEA panel
Charlie Ferguson Davie
CIO, Moorfield Group
Head of developments, Valor Real Estate Partners
Head of pan-European logistics and industrial, BNP Paribas Real Estate
Managing director and co-head private real estate Europe, Partners Group
Head of European research, Nuveen Real Estate
VM: Demand for e-commerce and ultra-last-mile delivery has surged due to the multiple lockdowns experienced across Europe, which have accelerated changing consumer behaviour – in particular demand for the even-quicker delivery of goods. Increased storage capacity and faster supply chain requirements have also considerably reinforced the appeal of the logistics sector.
CM: It is no secret that the rates of buying online due to the pandemic have increased dramatically. Volumes in relation to capital inflows to the sector have increased, as has tenant take-up. This drive to buying online was happening before the pandemic due to technological evolution and faster distribution channels. However, the pandemic has accelerated this process.
RG: The pandemic has accelerated changes in consumer behaviour, and we think there are two related trends in this regard: further e-commerce growth due to changing consumption habits and the increasingly mobile labour force capable of remote working. The continued offline-to-online migration will result in occupiers refining their supply chains to ensure short delivery times and reduced transportation costs.
SW: Overall, the covid-19 pandemic has had very little impact on the logistics sector in Europe. The existing trends in favour of logistics before the impact of covid-19 have strengthened, with nearshoring, e-commerce, ESG criteria and warehouse robotics all driving growth in the sector. As a result, the sector has benefited from rental growth and yield compression.
Which market will see the most interest in 2022?
CFD: The UK is well set to attract further investor demand. The dynamics are very favourable, with very low levels of availability and limited speculative development. Tier 1 cities continue to be at the forefront of most investors’ focus, but there is also likely to be interest in regional locations due to pricing and rental growth expectations.
CM: The larger markets of UK, Germany and France performed very strongly in 2021 and will continue to see strong interest. Spain and Italy are seeing more interest as their e-commerce markets develop further, and the Netherlands is still seen as a core entry point into Europe. A theme for 2022 will be a focus on the last-mile or delivery point locations to improve customer service.
VM: The most densely populated cities like London, Paris and Berlin are set to benefit the most from tenant demand and, consequently, rental growth. We are seeing investors increasingly keen to try and grow their exposure to these markets. The challenge is how granular they are, which means they require superior local knowledge and deep market connections that take a number of years to develop.
RG: Urban logistics facilities linked to e-commerce that facilitate the delivery of smaller and more fragmented orders with shorter delivery times stand to benefit the most. This is particularly true for markets that suffer from a structural undersupply of high-quality facilities. The opportunity to reduce operating costs via more efficient facilities within close proximity to key population centres should continue to support take-up of modern stock.
SW: The UK has seen an investment comeback after Brexit uncertainty ended. As a result, yields will fall and the gap to the eurozone will narrow, albeit not fully due to the higher financing costs in the UK. Meanwhile, France, Italy and Spain are on the cusp of strong e-commerce growth, which will drive demand for space and, consequently, push up rents, making them attractive markets for investors.
Which market is most unfairly overlooked?
CFD: There aren’t many markets that are overlooked, but the disparity between London and the UK’s other major regional cities can sometimes be excessive. There is additional yield on offer in Scotland because of additional concerns about independence, but the smaller universe of investors increases liquidity risk.
VM: There isn’t one individual geography that isn’t on investors’ radars that should be, simply because of the amount of capital looking at the sector. However, most institutional investors keep focusing on sizable deals. The more granular, complex deals require more effort and a fully integrated platform, but also provide the most potential for value creation.
CM: I don’t think any market is unfairly overlooked, given the parameters and market indicators. Each market has a certain level of maturity and population it serves.
RG: The UK and the Netherlands remain structurally undersupplied with respect to high-quality, modern logistics facilities. We believe that both economies stand to benefit from increased online trade, given their established port presence and functionality as key hubs for shipping entering Europe. Given the cross-border nature of logistics, we also see high relative value in Poland due to lower labour and real estate costs.
SW: The Czech Republic is often lumped in with other Central and Eastern European countries. However, financing costs are as low as in Western Europe and logistics zoning is also as tight as those further west. That drives value and reduces volatility and, in contrast to the rest of Central and Eastern Europe, there is a domestic investment market as well.
Thinking about logistics, what concerns you most?
CFD: The weight of money chasing the sector has driven a substantial shift in yield. There will come a point where rents will not grow as fast as predicted and the yield environment could change. This is most likely to be driven by a higher interest rate environment as a result of economic recovery and higher levels of inflation. Higher taxes could be targeted at the logistics sector and meeting net-zero carbon targets will also introduce additional costs.
VM: The unprecedented amount of capital chasing the sector has led to strong competition, which is driving up prices to unprecedented levels. We are also mindful of the impact of cost inflation on construction and the longer supply chain delays, which have an impact on the delivery of new developments. However, these pressures should ease over 2022.
CM: ESG is the big one. This is having an impact on design, location, external space, use of materials, etc. All these components need to work as part of the supply chain to ensure a common target is met. Cost inflation can be a concern.
RG: The broader macroeconomic rate environment. Yields have compressed materially and capital values for assets continue to grow to unprecedented levels. Cost pressures, whether through energy crises or other supply-side shocks, are creating challenges for the underlying occupier market. We need to be vigilant in underwriting rents from a serviceability standpoint. For us, it’s not as simple as ‘build it and they will come’. We need to pay much closer attention to the kind of tenants attached to leases and the proximity to their supply chain.
SW: The primary concern is that, at some point, structural strong demand growth will end. But determining when the market is saturated is extremely difficult. The second concern for investors is the low yields for tertiary locations and that the old assets coming to the market will require significant capital expenditure, as these will start to impact returns.
What will be the biggest change in logistics in 2022?
CFD: The very best-in-class assets will attract the most attention. Lower quality buildings that are not fit for the future, especially because of environmental requirements, will become less appealing.
VM: Reflecting demand from customers, local authorities, investors but also lenders, ensuring that both existing and new space is fit for purpose from a sustainability perspective will become standard practice for managers and developers. The ongoing shortage of available land will also result in more innovative construction methods.
CM: Possibly more pressure on land supply generally.
RG: Warehouse automation and robotics will likely have the most significant impact on logistics in the year ahead. We think that occupiers will increasingly start to forward plan for facilities that can accommodate these technologies, and commitments might occur as early as 2022. Separately, we also see an increasing focus on ESG.
SW: From our perspective, one of the biggest challenges for investors will be navigating the inward yield shift as it runs out of road due to less ECB quantitative easing and rising financing costs as a result of inflation. This could be offset by more rental growth than in 2021.