REFIRE caught up last week with Alexander Hoff, Managing Partner of Frankfurt-based Palmira Capital Partners, specialist in logistics and corporate real estate. Palmira invests alongside or on behalf of third party investors in modern logistics assets, and manages the assets across the whole value-added chain with its 40-strong team. It currently manages more than €2.2bn in assets from its seven European locations.
REFIRE: As we’re all aware, the hottest asset class throughout the coronavirus crisis has been Logistics. All the talk is of last mile, ecommerce, onshoring, nearshoring and generally driving up demand for logistics properties. What do you see is happening?
A. Hoff: The important thing is that in continental Europe, from our perspective, logistics has always been an institutional asset class. This fact has been overlooked by a lot of new investors, traditionally focused on retail and office, who have switched on to the logistics asset class since COVID-19. The pandemic has simply served to accelerate a process that was coming anyway.
There IS a certain substituting going on, from retail to last-mile logistics. This was a trend that was already established in the US and the UK, while Germany only started catching up in a big way in 2013-14, when the first big funds were set up. Since then the fundamentals, underpinned by the massive rise in ecommerce, have all been aligning strongly for the asset class. These have been given a further push by the COVID lockdown environment, but COVID itself has not been responsible for the surging popularity of the sector.
With all that global capital looking for a home, we must though be looking at a huge diversion of capital from other asset classes into the logistics sector?
Certainly. Hotels are in a terrible situation at the moment. Retail is difficult, with the exception of the grocery-anchored segment, while nobody is quite sure where the high street is headed. Office is likely to experience a dip. What remains is really residential and logistics, and these asset categories are feeling the effects of the extra support of money chasing assets. When the asset allocations of the big investors are determined and announced in 2021, we’ll see higher allocations to these last two asset classes, and those will then be a direct result of the COVID pandemic.
Palmira has been garnering lots of positive headlines recently, and the comprehensive BulwienGesa annual logistics study put you as the leading indigenous German investor in logistics in 2019. Bell Management Consultants also ranked Palmira recently as the largest German Captive Asset Manager in the logistics space.
Firstly, we’ve invested more than €1bn in pan-European logistics assets since 2017. Then there was a lot of publicity surrounding the big portfolio sales we did with Apollo Global Management, for whom we’d built up the portfolio. (This time last year Singapore’s GIC sovereign fund bought the Maximus Portfolio, with 28 logistics assets of which 60% by value were in Germany).
Then this year, as a result of Corona, we’ve experienced along with others the phenomenon that is digital fundraising. Without the pandemic, we’d never have thought this possible – raising money from people you might not ever have met personally. But this has undergone a real surge in the last quarter, as investors who had sat on the sidelines while adapting to the changed environment are now suddenly taking positive action.
We’ve really noticed this in raising money for our new Palmira European Core Logistics Fund, which we’ve just launched. The open-ended Special fund is targeting equity capital of €350m and a total volume of €650m, with a dividend yield of 5%.
The fund will focus on logistics assets in core locations along the main transport axes in continental Europe, complemented by last-mile logistics assets close to the biggest conurbations. We’ll have about a 50% share of German assets in the fund.
Most of your investors are German and Austrian institutions. Will you be targeting foreign investors with your upcoming funds?
What we’ve always had are core funds, and value-add joint ventures. Our approach has always been to work in parallel with international capital on one-off joint ventures, such as project developments, re-developments, or re-letting. We’ll continue to invest in this way.
Last-Mile logistics – demand that’s here to stay?
Yes, they’re absolutely essential. You have to have the ability in the logistic property to quickly turn around goods arriving in larger trucks to the smaller Sprinter-type vans. You need very special types of property for this turn-around, and they’re a big challenge – you only have about 25% land cover because you need so much space for trailers; the building costs of the hall are about three times higher than the usual logistics properties; and of course the land costs are much higher because of the proximity to the city. However, these are all critical and only likely to gain in importance. Rents of €15.00 per sqm for this kind of asset are now not unusual.
What mistakes are new investors in logistics likely to make?
There is a wide range of differences between logistics properties. On the surface they may all look like simple structures, but there are wide differences between what’s internally possible in a building. If you don’t know your way around all this, it can be difficult to really judge a property.
There’s also a current fad to go for the biggest possible size. A 100,000 sqm newly-built Amazon shed is not necessarily a good investment. It may be a good investment, but if it’s in a location where I normally have an annual net absorption rate of 20-30%, then after 10 years my re-negotiation with Amazon won’t be a re-negotiation – won’t be between equals.
Views on the market for 2021?
We see ongoing strong demand from investors for logistics assets. We see further yield shifts ahead, and we don’t see any reduction in demand on the tenant side. If anything we see further potential for rent increases, although we’d be a little more cautious than some others who think rents will rise across the board. But for the first time in the last couple of years we are optimistic that these rent rises will be sustainable. We believe that in these tricky demand driven markets those will be successful that have an in-depth understanding of logistics.
