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The digital boom is making retailers think long term, much to investors’ delight
The ‘mega-shed’ is not typically considered the most glamorous addition to an investor’s portfolio of skyscrapers and luxury shopping centres, but for many, the evolution of the industrial sector is attracting institutional investors in their truckloads.
In March, CBRE Global Investors (GI) acquired a 183,575-square metre cross-dock logistics portfolio in Germany, for €128.4 million, comprising of 10 new facilities located close to cities in order to meet the rise in demand for ecommerce and shorter delivery times.
February saw CBRE GI join forces with Prologis, forming the Prologis UK Logistics Venture, a joint venture seeded with 7.6 million square feet of properties, focused solely on developing logistics real estate in the UK, again, driven by the rise in ecommerce.
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It is a trend that has not just stood the test of time, but also political instability.
Even following the uncertainty of the Brexit vote, 2016 was a stable year for the European logistics sector. Despite below average investment in Q3, investors weren’t deterred, posting €9 billion in Q4, totalling €25 billion of investment for the year.
Jack Cox, head of industrial and logistics capital markets for Europe, the Middle East and Africa at CBRE, says: “The type of demand has changed, it’s not just about the size of buildings, but different types of buildings."
"Some of the ecommerce players are really striving to establish a strong footprint for their supply chains and by making quick decisions to fulfil this goal they are keeping the rest of the occupational community on their toes.”
It’s no secret that ecommerce has taken away from traditional retail spaces, delivering an increased demand for tailored warehouse space.
One of those meeting that demand is Delin Capital Asset Management (DCAM), which, after announcing a recent pre-let agreement on a 58,000 square-metre warehouse with Lidl E-Commerce, plan to develop a further 150,000 square metres across Belgium, the Netherlands and Luxembourg in 2017.
Ekaterina Avdonina, managing director of DCAM, said of the Lidle agreement: “Occupier appetite for both pre-let and speculative warehouse development schemes is unabated, as demonstrated by the strength of a pipeline that should offer significant returns on investment.”
Cox says: “If developers produce the right product, by focusing on occupiers’ needs, at the right time, they are achieving a substantial amount of letting pre-practical completion. Strong occupier demand has reduced the generic leasing risk and this has increased the potential to lock into some very healthy returns.”
The industry is ripe for investment and the market is taking note. According to the Prologis Logistics Rent Index, historically low vacancies in 2016 meant continued rental growth. Average global rental prices grew 4 percent, hitting 5 percent in the US and 3 percent across Europe.
Demand for warehouse space is increasing and, according to a recent survey by Deutsche Asset Management, is only likely to rise with urban and technological changes causing further disruption to the logistics sector.
France has been marked out by many as the market with most potential for development in the sector, and according to Deutsche Asset Management, which has tracked the country’s internet usage with the percentage of online purchases they make, the French lag behind countries such as the UK and Germany, which make 80 percent and 75 percent of their purchases online, respectively.
According to Savills Investment Management, which has highlighted logistics as one of its main investment sectors over the next five years, online shares of the EU retail market rose from 7 percent to 9 percent between 2014 and 2016.
Kiran Patel, chief investment officer at Savills IM, said of its plans: “The expansion of online retail across Europe is causing a rethink of many logistics networks as E-tailers seek to distinguish themselves through increasingly rapid delivery.
In particular, urban distribution centres within city limits will become crucial to enabling rapid delivery to customers.”
“The growing urban population, which is more tech-savvy and comfortable shopping online, is changing the logistics landscape. We expect this trend to continue, driving the need for innovative last-mile delivery capability and smart urban warehousing,” she added.
The tide is turning and it is not just a strong occupational market but, fundamentally, a systematic maturing of the market towards urbanisation and technological change that is driving the growth in the sector.
These trends are disrupting the logistics sector and forward-thinking retailers are reshaping their overall strategies to accommodate this.
Cox says: “This is not a short-term fluctuation in micro economics, but a structural shift in the occupational market.”
The question now is whether supply can keep up with demand for warehouse space, although investors are more willing to invest their time as well as money on success. Going long on targeted development in the face of lower investment yields offers investors a higher risk-return opportunity relative to established assets, according to Cox.
If the trend is starting to be felt in the European market, then it has more or less been institutionalised across the pond. The US has entered a something of a boom in the sector, building some 224.5 million square feet of industrial space in 2016 alone, the highest since 2008.
More than two thirds of all projects were also built speculatively, signalling a high level of confidence in the sector, according to the JLL Q4 2016 Industrial Outlook.
The challenge will be keeping up with demand, especially in Europe, where square footage per family is four times less than that of the US.
Cox says: “The bottleneck is the number of best in class developers, however, the development community is very well capitalised at the moment so the deals that we do see will be very exciting because developers can deliver the new types of assets that occupiers are calling for.”