The rapid evolution of the European logistics sector presents financiers with the opportunity to tap in to an exciting growth area, but it also puts them into uncharted territory. Perhaps more than any other real estate sector, the very nature of logistics is changing.
While many lenders now recognise the appeal of financing logistics, getting comfortable with new models and a continuously shifting landscape presents a challenge.
Banks are aiming to minimise risk, ideally through conservative financing on modern, flexible buildings let to strong covenants on the longest leases possible in locations with good accessibility.
The financing proposition is changing, however, due to a shift in the supply chain in recent years. Due to the boom in online shopping and consumers’ expectations about when and where their products will be delivered, demand for so-called ‘last-mile’ delivery centres on the outskirts of towns and cities has risen. The dynamic backdrop to the sector also means that occupiers are pressuring landlords for shorter leases to maintain flexibility.
“Retailers are fighting for customers by offering high-speed delivery, which is driving logistics operators closer to city centres; that’s reversing the trend of the past 30 to 40 years, that being large, standardised units far away from the city,” says Karel Stransky, director of EMEA corporate solutions at Colliers International.
However, tight supply in built-up areas means it is difficult to find large floor plates in non-traditional logistics locations. Alternative-use buildings are beginning to be converted in places such as London. These could be residential blocks that are reconfigured into multi-storey logistics buildings with accommodation on top, for example. The implication is that last-mile centres are typically smaller and more difficult to access than warehouse facilities situated close to motorway junctions – factors that lenders deem important.
The risk associated with last-mile logistics is, therefore, theoretically higher. “As exciting as the last-mile story is, speaking with lenders, those assets tend to be older in quality and less generic. There doesn’t seem to be as large an appetite from the banking side, largely due to concerns around future capex and viability,” says Rory Buck, senior director of investments at Gramercy Europe.
Lenders cited reservations about financing a new property type with few comparables in a survey on city logistics in Germany, carried out by backers including Berlin Hyp this year. Even though demand is strong, the market takes time to react as occupiers are bound by lease contracts of between three and five years typically.
Respondents also raised concerns about the fact last-mile logistics are likely to require intense asset management and specialist expertise. Above all, lenders are deterred by comparatively low rental income owing to a small floor areas.
Despite jitters, nearly half of respondents to the Berlin Hyp survey said they believe e-commerce will eventually open significant and auspicious opportunities. Also in its favour, they said, was the fact city logistics properties are typified by a high tenant retention rate, while alternative use can be safely assumed.
“For logistics units located within or on the periphery of towns and cities it is easy to envision a future when logistics may no longer be the highest value use for that site. For example, the land use could change to multifamily residential which adds to the residual value in the cashflow,” says Jack Cox, head of EMEA industrial and logistics capital markets at CBRE.
In logistics, the whole paradigm of what market players consider attractive is changing. Currently, it is expensive to buy land in city centres which means the size of last-mile logistics centres is compromised. In time, it is hoped that planners will designate zones to these functions as their importance in serving cities is acknowledged and the ecological benefit of transporting goods shorter distances or by rail, for example, is digested.
“Initially, this shift could represent greater risk to lenders who do not understand the market segment that well,” says Colliers’ Stransky.
Last-mile logistics will therefore remain categorised as an unknown asset type with special characteristics in the near term, lenders told Berlin Hyp. Until there is more evidence of what standard product looks like, financiers will attach higher mark-ups. In total, 48 percent of respondents estimated that pricing for city logistics will be higher than for large-scale assets outside the city.
The impact of new technology on logistics real estate is difficult to gauge. The prospective use of drones to deliver goods could influence the positioning of distribution hubs, for example. The idea is that these unmanned aircraft could be flown in from bases located further away from towns and cities. In the US, drones are already being used in more remote areas.
The prospect of inner-city, multi-level fulfilment centres has also been raised, as per a patent for a beehive-like depot by Amazon. From there, drones could collect parcels and recharge their batteries. The concept would still need to overcome regulatory obstacles however, besides practical issues such as how to protect drones from being stolen, for example.
“The technological feasibility is one thing, but to make this a comprehensive channel is probably still some time ahead,” says Michael Kröger, head of international real estate finance at Helaba.
Machiel Wolters, CBRE’s head of industrial and logistics research for EMEA, finds it hard to believe the sky will be filled with drones flying over densely populated areas. “We expect it will be a niche mode of transport, used to deliver goods to people who live far away or in the highlands for example. It’s not economically feasible for heavy goods or a repeated flow of goods. The main form of transportation will still be on the ground in the foreseeable future,” he says.
The proliferation of a different type of drone within warehouses is more likely, used to collect data by going through the shelves taking pictures of barcodes. This would enable operators to faster process and dispatch goods.
Fundamentally, there will still be a requirement for logistics property, Gramercy’s Buck argues. “Drones still need to get back somewhere and goods still need to be stored.”
The prospect of autonomous vehicles in the next 10 years could be a game-changer. Legal constraints on the maximum length of time lorry drivers can drive would become obsolete, for instance. This would open-up the country for logistics hubs, and demand for facilities in remote areas may rise.
“If the human labour factor is gone, central distribution centres can be situated further out. It would also strengthen the need for last-mile logistics because it would thin out the distribution network, which would require fewer regional warehouses but more distribution centres in the city,” says Wolters.
While 3D printing is still in its infancy, the concept could theoretically impact the demand for logistics space since certain goods could be self-built using printers that layer materials in successive patterns to make tangible objects, rather than being shipped from a manufacturer. The technology is relevant to customised products such as medical prosthetics, for example.
“The main volume of products we use are standardised, so mass production is much cheaper and faster. Those are the goods that are populating distribution centres, therefore the impact of 3D printing will be limited,” says Wolters, adding that 3D printers use materials which, in turn, contribute to logistics demand. At some point, he can envisage the emergence of small warehouses used to customise specific parts.
By when and to what extent technological advances will affect the supply chain, and thereby lenders to logistics property, in the coming years is unknown. The role of technology cannot be underestimated, however – with the growth of online shopping forecast to continue and ever greater demand for efficient dispatch.
The logistics market is actively adjusting to a changing future and, while the landscape takes shape, lending risk is higher. Strong demand for last-mile logistics is an immediate opportunity lenders can lock on to, though pricing will remain elevated. Commitment to the sector is evident, if financiers are treading with caution.