LOGISTICS

The missing link

A high-tech Cromwell-owned asset near Milan in Italy

The maturing industrial market is heading for greater polarisation, as factors ranging from trading routes to ESG metrics increasingly define the sector’s prime product. Isobel Lee reports

From supply-chain jams to surges in e-commerce, the circumstances of the pandemic brought the utility of logistics assets into sharp focus.

Yet the business case for investing in industrial properties predates the global health crisis, and is set to persist long after its effects, according to experts in the asset class.

Robert Cotterell, head of investment, Europe & head of UK,

Cromwell Property Group, says:

“We calculate that due to rising online spending alone, over 6.5 million sq m of additional logistics space will be needed across

Europe by 2026. Furthermore, reshoring activity and a shift from ‘just-in-time’ to ‘just-incase’ supply chain models will create additional occupier demand.”

However, the fundamentals that make the sector so attractive also complicate the picture for would-be investors. Cotterell adds: “Despite this strong demand, record low vacancy, a lack of developable land and high construction costs restrict the ability of the supply pipeline to respond. This means strong rental growth potential for well-specified and located stock and scope for yield compression on higher yielding product. The trick will be selecting assets that comply with future occupier and ESG requirements.” Investors who want to build a tradeable portfolio of high-quality assets need to be smart about finding value, according to Jack Cox, head of EMEA industrial and logistics capital markets, CBRE. “The successful investors are those which have a very holistic view of the sector,” he says. “Holistic in terms of the entry points that they would consider — everything from greenfield and brownfield land through forward-funding, building up investment portfolios through portfolio and granular asset acquisition, and particularly, having an open mind towards recapitalisation.” For Cox, that approach also means taking a broad view of the way the asset class is evolving and requires a willingness to perform more complex underwriting. “In the past, logistics was about a spread over office yields, while total return was essentially an income play. Today, landlords can leverage the occupational market more strategically and differentiate their leasing strategies relative to the desirability of an end-user or 3PL for a particular building and whether single or multiple tenant occupancy is preferable.” Anne Kavanagh, chief investment officer of Patrizia, says the firm has been “strong believers in the sector for many years now”. She adds: “The shift towards ‘last hour’ logistics, as well as demand tailwinds from emerging subsectors such as dark kitchens, q-commerce that brings small quantities of goods to customers almost instantly, and cold storage have increasingly shifted the occupier demand balance towards urban/infill locations and has driven strong rental growth, in particular for the more urban micro locations.” Kavanagh suggests that this urban focus will keep Patrizia busy for the years to come. “Identifying well-connected urban locations with high purchasing power is one of the most topical focuses of modern real estate investment strategies in Europe today,” she says. “With limited land availability and competition for strategic loca-

Robert Cotterell, head of investment, Europe & head of UK, Cromwell Property Group Jack Cox, CBRE head of EMEA industrial and logistics capital markets

tions with alternative real estate property types… logisticians and retailers need to identify the most efficient locations for their urban distribution footprint.” Allianz Real Estate, an increasingly active logistics player with some €10.3bn of holdings in the sector, is pursuing a geographically diverse strategy combining investment and debt. While 2021 saw some of the firm’s most significant transactions, including the largest single logistics deal in the US to date, and additions to its Italian fund comprising over €400m across 16 facilities, 2022 is likely to bring further deals. In January, Allianz unveiled plans for a new joint venture with VGP to develop a portfolio of prime logistics assets in Germany, the Czech Republic, Hungary and Slovakia, prioritising the environmental profile of each facility. The new assets will aim to encompass Carbon Risk Real Estate Monitor and EU Taxonomy compliance, the use of sustainable certification including high BREEAM or DGNB ratings, and EPC criteria, among others. As such, the JV is expected to help Allianz Real Estate meet its target to reduce carbon emissions across its portfolio by 25% by 2025 and be carbon net-zero by 2050. The strategy reflects the fact that an increasingly important factor in warehouse selection is the ESG dimension. Yet for Cox, the challenges faced by logistics assets differ at times from the rest of the real estate industry, due to the way they are used. Logistics is one of the few areas where older buildings are not necessarily energy dinosaurs, he says. “While some properties may have low ESG ratings due to their age, they are often not heated, so can have very green operational metrics. Also, if assets are positioned in locations which reduce product miles, that can again have a positive environmental impact on the supply chain.” However, the industrial sector seems likely to make big, green strides in 2022 as the market focuses on the greater differentiation of prime product. Towards the end of 2021, logistics firm LCP clinched what it described as the sale of Europe’s first carbon-neutral logistics asset for a record net initial yield below 4%. Located near Bergamo in northern Italy, the 163,000 sq m facility is pre-let to Amazon and was acquired by Korean investor Midas International Asset Management for almost €200m. James Markby, LCP’s managing partner, says: “We are quite excited to be the first to be able to complete and actually commercially market a carbon-neutral accredited logistics building in Europe, also at serious scale. I think this proves what has so far been a missing link in the ESG discussion, that is, the commercial connection between premium pricing on an institutional-grade building and its carbon-neutral status.”

At this stage in the game, the debate has also shifted beyond just matters of carbon. “In reference to the ‘S’, employee welfare is fast becoming a major ESG issue for the logistics industry. Accusations of modern slavery and heavy use of zero-hour contracts has ignited a debate on employment conditions, but it goes much deeper than that as warehouses can be hazardous working environments. This means logistics tenants are likely to face tighter legislation and much more media scrutiny in the future,” Cotterell says. He adds: “Increased investment in digitalisation and technology will be one area that helps the sector mitigate these challenges. For example, wearable technology can be used to highlight issues and propose remedial actions before issues arise.”

Supply chain complexities are inspiring firms to take more space, such as this Cromwell asset in San Mauro Torinese, Italy