INTERVIEW: Prologis keeps faith in CEE sheds

PropertyEU sits down with Ben Bannatyne, Prologis’ president for Europe, to find out what the second half of 2019 holds for the New York-listed industrial developer.

With a European portfolio of 17 million m2, 144,458 m2 of new leases and 329,029 m2 of lease renewals on the continent, these are busy times for Prologis. Across the EU in the second quarter of this year alone, the industrial giant put up 54,668 m2, including a build-to-suit facility at Prologis Park in Wroclaw, Poland.

Indeed, Central and Eastern Europe (CEE)  is fertile ground for the company and this is not going to change any time soon, with the developer active in every country in the region. The reason is clear: CEE is where the strongest rent growth has taken place.

‘CEE is the core of our business in EU from a square metre point of view. It’s a very important region for us and definitely still a region where we see a lot of growth opportunity,’ explains Ben Bannatyne,  Prologis’ president for Europe.

Being the world’s largest industrial real estate company provides some scope for Prologis to be adventurous, as illustrated by a new asset it just built in the Hungarian capital, Budapest.

Erected speculatively in defiance of current market logic, which states spec yield is distinctly lower than that of  its build-to-suit equivalent, and in a city hammered by the previous decade’s great financial crisis, the new 10,000 m2 facility at Harbor Park is now leased to occupiers.

‘It’s the first speculative building we’ve built in Budapest,’ says Bannatyne. ‘We decided the time was right and so we took some risk. It’s one building out of a large portfolio, so it’s a conservative risk, but it paid off and the building is now leased.

‘Budapest was one of the markets hardest hit by the global financial crisis and it’s just taken some time for that market to come back from that; it lags the rest of CEE and there’s very limited supply of warehouse space and rents are increasing significantly. So it’s a market we like, which we’re comfortable in and we’d love to invest more capital in.’

In the short term, Prologis has projects coming through in the Czech Republic and is embarking upon new developments in Poland – although Bannatyne keeps his cards close to his chest on specifics. Another new project is also in the works in Budapest.

Prologis Labs
The company is also experimenting by adopting a strong customer service focus, which clashes with the way industrial developers traditionally operate.

The company has set up Prologis Labs in San Francisco for clients to try new ways of doing things. The bad news for customers in Europe is there are no plans to bring the labs concept across the Atlantic.

But there is plenty of innovation taking place on the old Continent, insists Bannatyne. ‘We’re doing a lot of stuff which is really customer-centric and trying to come up with solutions to alleviate their pain points. We’ve got Clear Lease, which is effectively a gross lease whereby we get rid of this idea of service charge reconciliation, which was a big pain for our customers.’

Availability of labour is a major challenge for logistics companies, and one which Prologis has a stake in helping solve.
‘There’s not a lot we can do about creating a labour pool, but we can help customers attract and retain labour. So making a warehouse a much nicer place to work is one thing. We’ve just finished a warehouse in Tilburg in the Netherlands which is the first industrial warehouse facility globally to get the WELL Gold certificate.  

‘This is usually used for offices and deals with the environment such as air quality and natural light. We’re doing things like five-a-side football pitches, BBQ, nice walkways, car sharing, car pooling, which isn’t specifically related to the building itself, but to the amenities for employees. It’s about customers attracting the best labour.’

H2 outlook
With H2 2019 well under way, what does the future hold for the logistics sector? The last quarter saw occupational demand for logistics push down weighted average prime yields across Europe to a record low of 5.66%, led by CEE where Prologis is highly active and where the strongest rental growth has been, according to adviser Cushman & Wakefield.

Bannatyne is optimistic. ‘I don’t think logistics is overheated,’ he says. ‘We’ve still got a long way to go in Europe; we are lagging the US significantly if you look at square metre of distribution space per capita. I think we’re probably about at a third of what the US has – not that I think we’re going to get to US levels – but I think there’s a significant amount of growth to go and a lot of that is coming from existing customers reconfiguring their supply chains.

‘This is the highest occupancy we’ve ever had and we’ve had it for the past 18 months. We’re up at 97% at the moment and in some markets we had literally 100% leased. There really is a lack of new supply coming to market and any new supply tends to be leased. I see that continuing. Land is becoming more difficult to get permits for industrial use and our customers continue to grow.

‘I don’t see any reason – other than if there is something we don’t see on the horizon – I don’t any reason for a slowdown. Obviously there is a huge amount of interest in our sector at present and a lot of capital trying to get in, so it’s expensive. but on the other hand we still see great opportunities for rental growth and good returns, so I think it looks good for the foreseeable future.’

E-commerce driver
And why wouldn’t it, while online shopping’s growth continues to generate fresh demand for logistical facilities? This year, Prologis has picked up around 20% of its new business from the e-commerce sector.

Bannatyne says: ‘E-commerce is one of the main drivers of our business at the moment, it is what has given our business a turbo boost across EU. I think CEE, particularly Poland, lags EU but it is catching up. It’s more in its infancy, but we do see a lot of growth.’

Occupying plenty of bandwidth at present is the issue of last-mile logistics. This is the last link in the online shopping supply chain – and the most expensive. Will challenges to do with space and costs throttle the growth of logistics close to conurbations?

‘Last mile is very interesting for us, but mainly in those markets where there’s a large population base and restricted supply of land,’ says Bannatyne. ‘The two biggest markets are London and Paris and those are places we are looking for urban and infill opportunities.

‘In CEE, most of these cities already have a supply of warehouse space close enough to the city centre that you can get into the city centre within half an hour, so there’s not such a need for last-mile facilities.

‘So it’s really the big population centres like London and Paris where there are issues. You can imagine it happening in Barcelona, where there’s a real restriction on land, and maybe German cities. but I think for now it is not an issue in CEE.

‘Prague is one market where we’re starting to see land supply dry up but there’s enough stock around the city so you’re not going to see urban infill anytime soon.’

‘We don’t buy big for the sake of it’
Location, location, location is the thinking behind Prologis’ acquisition in early August of 18 logistics buildings near Madrid.

That is according to Joseph Ghazal, the company’s chief investment officer for Europe, with whom PropertyEU spoke shortly after the deal was signed with Spanish REIT Colonial.

Located in some of Spain’s core logistics markets including Madrid, Barcelona and Guadalajara and totalling 314,000 m2, Prologis reportedly paid Colonial between €425 mln and €480 mln for the assets – although the company has not confirmed this.

Under the terms of the agreement, Prologis has a call option on seven buildings still under construction, totalling 159,000 m2, over the next three quarters, which it plans to exercise.

They sit in the Henares corridor between San Fernando de Henares and Guadalajara and along the A2 motorway that connects Madrid and Barcelona, the Iberian’s Peninsula’s main logistics corridor.

‘We focus on location very strongly, it’s not about buying big for the sake of it. We’ve been there, done that. Our focus is on quality and to provide customers with synergies.

‘As an active buyer in the market, we purchase highly complementary land tracts and logistics facilities that are in line with our strategic investment approach.’

The proximity of Prologis’ latest acquisitions in Spain to major urban centres means they are optimised for last-mile delivery, an area in which the company is forging ahead.

Online shopping is widely credited with bringing the boom times to the industrial and logistics sector, and its impact is real and growing. But this is not the full story, says Ghazal.

‘Online shopping and last mile are a big driver of demand for smaller units, but it’s not the only one,’ says Ghazal. ‘Same and next-day delivery demands are having an effect, but that doesn’t mean big-box or medium-size is going away.’

‘We have a strategy focused on Paris and London because they have the densest populations, so we are starting there, we are looking into spaces we would not have looked at five years ago, such as inside the ring road of Paris.’

Developers are blurring the lines between asset classes in order to serve client demand. For example, former retail properties can be converted to logistics, in the same way as office and industrial identities sometimes overlap.

Ghazal: ‘We are buying units which used to be offices in Paris and London and we could look at similar units in Barcelona because of the lack of availability of land there.

‘This a both good and a bad thing. What’s good is that developers don’t go wild and start building stacks like 10 years ago. It’s bad in that there is a lack of land to serve our customers.’

 

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