Global investors flock to European logistics real estate as ecommerce penetration accelerates and vacancy levels drop to historic lows

Leading global investors are strongly increasing their allocations to logistics real estate, drawn by the market’s robust fundamentals including accelerating ecommerce penetration during the Covid-19 pandemic, constrained warehouse supply and the enticing prospect of rental growth, over 500 participants heard panelists debate at Prologis’ first online European webinar:  ‘Acceleration… or a New Direction?’

Moderated by Dirk Sosef, Vice President of Research and Strategy at Prologis Europe, the panel brought together an impressive line-up of guest speakers from Tesco Pension Fund, UPS and leading international investment managers Norges Bank Investment Management, the largest sovereign wealth fund, CBRE Global Investors as well as Almazara Real Assets Estate Advisory to discuss the implications of a reopening world and the risks and opportunities for logistics real estate. The high attendance is a reflection of the power of the Prologis brand to bring together such high-level panelists at a virtual venue to grapple with the topic and express opinion on key topics and a way forward in these unprecedented times.

Dirk Sosef kicked off the discussion with a presentation showing how the logistics customer base is growing and diversifying at a time that new supply is being delayed, exerting further downward pressure on vacancy levels. Occupancy rates are now 200 basis points higher than at the previous peak level in the market’s cycle in 2019, while new forecasts point to ecommerce penetration rising to 17.5% on average in Europe by 2024, from 11% in 2019. This is 250 basis points higher than the pre-Covid forecast, Sosef pointed out.

Logistics is “most definitely” the sector of choice for many investors at this point of time, with the coronavirus crisis accelerating trends that were already underway and further highlighting its resiliency as an asset class, Achal Gandhi, CIO Global Indirect Real Estate Strategies at CBRE Global Investors said.

In contrast to other real estate sectors, notably retail and hospitality, which have been battered by pandemic social distancing measures and lockdowns, demand for logistics properties has been expanding and investors recognize that trend is gathering pace and so are allocating more capital to the sector, he added. CBRE GI has been overweight to logistics for the best part of the last decade.

Ed Lerum, Portfolio Manager at Norges Bank Investment Management, noted that the sector has become much more institutionalized over the past decade due to logistics’ strong market fundamentals, “which investors are taking notice of.” Thanks to its global scale and presence, NBIM is able to learn from what is happening in other markets like the US where overall ecommerce penetration rates are a bit ahead of Europe in general and well ahead of some specific countries. “The US may serve as an indicator of where things might go in Europe,” Lerum predicted.

Judy McMahan, Portfolio Manager Real Estate, UPS, agreed the logistics sector in the US was more institutional and mature than in Europe, but added the pandemic was also highlighting other drivers like clients’ need to have excess inventory, as a buffer against supply chain disruptions, and access to new or existing locations where it is possible to secure additional capacity. These trends are broadly the same in Asia, Europe and the US, she said.

Pension funds are increasing their allocations to logistics real estate partly because rental growth prospects are attractive compared with other real estate sectors and also because high occupancy rates are supporting relatively stable cashflows, Wietse de Vries, Partner at Almazara Real Assets Estate Advisory and Advisory Committee member for the Prologis European Logistics Fund (PELF), said.

Logistics is also the only commercial real estate sector where appraisers were prepared to withdraw a ‘material uncertainty clause’ in Q2 after they were introduced for virtually all markets and sectors at the end of March due to the Covid-19 pandemic. “That was a pleasant surprise and tells you something about the liquidity in the market and the maturity of the sector as an institutional asset class,” De Vries added.

Jenny Buck, Deputy CIO, Tesco Pension Investment, highlighted the strong track record logistics real estate has had over the past 10 to 15 years, and noted that there were still good investment opportunities to develop more sustainable warehouses with ESG rising up the agenda.

Ben Bannatyne, President of Prologis Europe, remarked that attracting labor was a major concern for many occupiers and that he was ‘extremely happy’ Prologis has the scale and critical mass to improve the quality of existing and new facilities in terms of both sustainability and wellness. Earlier this year, Prologis started rolling out its PARKlife program at its parks across Europe to create environments that are more attractive to employees as well as surrounding communities. PARKlife offers a range of park-wide services and amenities, including access to a green travel plan, park security, green spaces, paths and cycleways and support from a dedicated in-house property management team.

“We are constantly talking to our customers and we know this is what they want,” Bannatyne said.  Logistics real estate is increasingly being seen by consumers, investors and governments as critical infrastructure, he added.

“Logistics makes modern life possible,” Prologis’ Dirk Sosef concluded.

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