Logistics – Big continues to be beautiful

I can’t help but ask myself is the investors’ recent love affair with the logistics sector just a result of the attractive income returns along with risk mitigation through diversification, or is there more to it? After all, income returns have always been highest for logistics assets.

Half-year logistics and industrial investment volumes at €6 billion across Europe were up 57% on the equivalent period last year, marking the strongest half-year result since the peak of 2007.  This was to an extent driven by an increase in large scale transactions. Portfolio and platform transactions reached €2.7 billion in H1 2013 which was 125% higher year-on-year.  As a result, the asset class now represents 10% of the total European direct commercial real estate investment – up from an average 8% over the last three years.

So what’s the deal? Stable cash flows? Higher yields compared to office or retail assets? Risk mitigation?

No doubt, all those points count, in particular during economic low growth cycles and amid economic uncertainty. But in my view, there is more to it than just this – it is a new perception of the logistics sector as a whole that is driving investor interest.

In the past, logistics activities were mostly associated with large trucks causing congestion (and pollution) while most of us rarely gave any thought to what made shopping, from food to fashion to household goods, possible. How often have you thought about the logistics requirements behind the simple pleasure to dine out?

A number of important events have however made logistics a hot topic:

  • The significant growth in e-commerce that has morphed first into multi-channel retailing and now evolving into an omni-channel retail experience has sparked a lot of discussion about distribution and supply chains
  • Changing demographics and growing urbanization (although much of the latter is happening in the developing world) that is leading to the introduction of new consumer goods and rising demand from a growing affluent middle-class (again in the developing world)
  • Growing congestion putting ‘last-mile delivery’ on the spot
  • A number of natural disasters such as the flooding in Pakistan or the Japanese earthquake and tsunami or the flooding in parts of Germany and Central Europe earlier this year, has highlighted the vulnerability of supply chains

The logistics supply chain has suddenly become a topic of general interest. The development of increasingly large logistics buildings, mostly for large e-commerce players, has caught the eye of other developers and investors. Many have asked the question if large-scale occupier demand is sustainable. Judging from latest statistics, it is. Over the first six months of the year we saw twelve deals exceeding 50,000 sq m of floorspace and more than thirty for units between 20-50,000 sq m.

At the same time, an increasing number of parcels for home delivery and rising complexity around last mile delivery are pushing demand of parcel hubs, mostly cross-docking facilities, in proximity to large urban areas at the other end of the scale, from 5-20,000 sq m of floorspace.

In a period of global economic uncertainty and office markets enduring shrinking take-up volumes, supply chain reconfiguration has driven continued healthy occupier demand and this trend is expected to continue in the remainder of 2013 and beyond.

Investors – as the public in general – have discovered the importance of a sector that in the past thrived in the shadow and are becoming more familiar with its drivers and fundamentals. This is supporting rising investment volumes. In 2013 we expect investment to break the €10 billion barrier – after the two boom years of 2006/2007 this would be the third highest volume traded over the past decade.

If you want to learn more about recent investment and occupier activity, please read our Q2 European Logistics and Industrial Pulse Report or view our Infographic.