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Equally, tenants making big commitments to automation are also likely to want to sign longer leases – of 15 years or longer – which offers additional security for landlords, Flaoyen said. ‘Tenants might ask for lower rents in exchange for committing to a space for longer,’ he added.
Europe’s €870m logistics sector is approaching a technology-driven inflection point, which will have far reaching implications for the industry and real estate investors committing capital to it, according to new research from Aberdeen Standard Investments (ASI) and Transport Intelligence published this month.
‘The paradox is that technological change is why logistics is doing so well but these changes can be a worry for occupiers in terms of how to adapt to them and the extra cost it generates,’ Lars Flaoyen, head of real estate research - Continental Europe & Nordics at ASI, told REFIRE. ‘Automation of warehouses is a significant investment for occupiers. For instance, in one of the logistics properties we recently acquired, the investments the tenant did in the automated picking system cost almost as much as what we paid for the property. The changes are causing problems but, at the same time, the technological enhancements are also the solution.’
For Guido Nabben, spokesperson for German Property Partners, technical innovations will continue to influence the logistics sector this year: ‘The automation of logistics processes will continue to be intensified and driven forward inexorably,’ he told REFIRE.
And as the technology itself changes, so does the definition of what a logistics space needs to offer, Flaoyen said. ‘Traditionally, logistics has been driven by the need to have warehouses in areas where labour is cheap but as automation increases, that will no longer be a major factor. Instead, it will become more important to be in or near major cities.’
Equally, tenants making big commitments to automation are also likely to want to sign longer leases – of 15 years or longer – which offers additional security for landlords, Flaoyen said. ‘Tenants might ask for lower rents in exchange for committing to a space for longer,’ he added.
Of the companies surveyed by ASI, 52% have already invested in data analytics and 32% are utilising the ‘internet of things’. Just 10% of firms have already investing in robotics but 56% intend to do so in the future. And while 25% of respondents have already invested in warehouse automation, a further 43% intend to invest in it in the future, making automated technology the most important feature for new facilities, according to the survey.
‘This survey is a clear illustration of both the extent and nature of growth that we are likely to see in this industry in the years ahead,’ said Aberdeen Standard Investments’ senior research analyst, Craig Wright.‘There is an inflection point approaching where logistics becomes much less about generic sheds employing low-skilled workers and much more about high-skilled workers working with increasingly sophisticated technology.This has deep implications for local, regional and global supply chains. But it will also have implications for investors in real estate who are allocating to logistics. There is clearly going to be more demand for space that can exploit a location near consumers and transport but also that can capitalise on highly skilled workers,’ he added.
What will this mean for the 11m people working in logistics and transportation today? Ultimately, that work force is expected to shrink as automation takes hold. Almost 50% of respondents said that warehouse automation will impact the amount of labour required to operate facilities. Nonetheless, the survey suggests that the human work force is not on the scrap heap yet with 48% of respondents citing labour as the cost they are most sensitive to and 60% of companies say are undertaking initiatives to improve working conditions.
The survey also indicates that the European logistics sector will continue to see growth in the years ahead, with 34% of respondents saying they do not have enough capacity to satisfy customer demand over the next one to two years. A further 39% said that a lack of available, efficient logistics facilities were hindering their business’s growth.
‘For some years now there has been a blatant shortage of supply in existing and new buildings,’ Nabben said. ‘An elementary point for the logistics properties to be built is the time lag between the ability to move in and the short-term needs of logistics service providers. This time gap is often a decisive factor.’
In Germany, the logistics and industrial asset class recorded its second-best year ever last year with a transaction volume of almost €7.5b. Mid-cap transactions grew significantly, and proved to be an extremely dynamic segment with 140 deals recorded, totaling €810m.
For Nabben, the ‘Big 7’ locations dominate: ‘The best investment opportunities in logistics properties are in the Top 7 locations, in established logistics hubs (GVZ) and close to established ports. Due to the high level of competition among investors in the Top 7 locations, B and C locations are becoming more important and attractive,’ he said.
Despite the markedly higher overall number of transactions last year (230, +13% compared to the previous year), the investment volume was below the record level of 2017 (-14%). This is because in 2017, the five largest deals amounted to €4.57b, including the Logicor portfolio (€1.9 b), accounting for 53% overall. In 2018, the top five deals totalled €2.46b, corresponding to a third of the overall logistics volume, according to JLL.
‘For the year 2019 we expect a very high transaction volume again, but below the values of the last two years,’ Nabben said. ‘The reason for this is the lack of supply in the large-scale segment, which means fewer portfolio transactions.’
Prime yields are expected to fall again this year in the ‘Big 7’, according to JLL. In the 12 months to end-2018, yields fell 40 bps to 4.1%. The gap between logistics and office yields (3.11%) is now only one percentage point, compared to two percentage points in 2011 (4.9% compared to 6.9%).
For now, investor interest remains high: ‘Logistics and resi are still the top pick for many investors,’ Flaoyen said. ‘The deal volume this year will just depend on how many portfolios come to market. Investors need to be careful, though, and ensure that they are investing in logistics that meet their needs rather than for the sake of it.’
The survey was conducted for Aberdeen Standard Investments by Transport Intelligence between November and December 2018 and is based on the responses of 123 supply chain executives from 29 European countries. (ssk)
