European logistics is a market real estate lenders cannot afford to ignore, but it has its challenges.
Logistics is a particularly hot market right now in European real estate. Aside from trophy office towers, some of the most stunning European property plays by cash-rich Asian investors this year have been for huge portfolios of warehouses dotted across the continent.
Take this month’s $2.8 billion purchase of logistics platform Gazeley by GLP. The deal puts the Singaporean investor in control of around 15 million square metres of standing facilities in the UK, Germany, France and the Netherlands, plus a development pipeline roughly the same size. The stand-out deal, however, was China Investment Corporation’s June purchase for €12.25 billion of Logicor – the pan-European warehouse platform assembled by Blackstone – representing Europe’s largest-ever industrial property deal.
'Sheds', as warehouse property is often disparagingly called, has never been considered the sexiest segment of the real estate market. But consider the fundamentals. European economies continue to perform well, supporting high levels of consumer spending and export activity. Shopping habits are fast changing and people expect to tap their phone in the morning and have a parcel delivered to their door in the evening.
European investment in offices and retail declined during the first half of this year, BNP Paribas Real Estate figures show; industrial and logistics investment went up 10 percent.
Supply of modern stock is constrained, while demand is high. A paper published at the recent EXPO Real fair in Munich by backers including German bank Berlin Hyp highlighted that large portfolio transactions have dominated Germany’s market, with almost 80 percent of investment to the end of July 2017 accounted for by foreign buyers.
For real estate lenders, the logistics boom translates into a massive opportunity, as well as a challenge. Large portfolio transactions have led to substantial financing deals. In March, three investment banks and a private equity firm provided more than €1 billion of senior and mezzanine debt to support Blackstone and M7 Real Estate’s purchase of Hansteen’s Dutch and German light industrial assets. A $1.2 billion financing of GLP’s Gazeley deal is also understood to be ongoing.
But with big-ticket equity players active in the market, debt requirements can be limited and, in the case of some Asian buyers, dealt with outside the region. For instance, CIC’s Logicor deal has been financed with Chinese bank debt. Major logistics lending deals are nice work for those that can get it.
Looking forward, innovations in the sector will create opportunities for those lenders that can get comfortable with them. So-called ‘last mile’, or urban logistics, is the next major property trend, as developers aim to convert city sites into small-scale facilities capable of handling a high turnover of goods for delivery to individual homes. Drones flying overhead carrying parcels and driverless vehicles passing by might still sound a bit sci-fi to some, but technology is already shaping the way goods reach their destinations.
Lenders need to approach this evolving market with a healthy degree of caution. In the short- to-medium term, urban logistics will be difficult to price due to the nascent nature of the sector and the lack of comparables for lenders to scrutinise. In fast-moving markets, the danger of assets becoming obsolete also rises.
However, logistics faces a fascinating future and the provision of finance will be crucial. Many lenders have turned their attention to the sector, to back the wave of large portfolio transactions. But to truly capitalise on the evolving logistics space, lenders need to get to grips with the profound changes in consumer behaviour and technology which are underpinning the sector’s evolution.
Source: Real Estate Capital newsletter