LOGISTICS WATCH: American hustle

As Dallas’ Trammell Crow Company becomes the latest US firm to expand in European logistics, we hear from sector veterans about why the Continent is so compelling for global capital.

Ian Worboys is back in European logistics and it’s almost as if he never went away. The industrial property veteran is spearheading Dallas-headquartered Trammell Crow Company’s (TCC) expansion across Europe from a base in Prague, just as he did as CEO of P3 Logistics Parks, a role he left in 2019. But is this the same logistics market that he stepped away from nearly two years ago? Not exactly.

‘There have been some important changes. Covid-19 has been a big e-commerce driver,’ says Worboys, TCC managing director, head of European logistics, since February. ‘The UK was always the strongest in Europe for e-commerce penetration, with other countries far behind. Now the UK’s e-commerce penetration has doubled – as has everyone else’s. Consumers realised how easy it is to buy online – you can look after your parents remotely, or send your kids groceries at university. The more that worked, the more confidence exploded.’

The pandemic has also created further shifts, Worboys notes. ‘Another thing we are seeing is the request to bring manufacturing back to Eastern Europe. Supply chains from China to Europe were broken during the pandemic. Whether they fully move manufacturing back or just a part, it will change the Central and Eastern European (CEE) landscape.’

Investment trends
He also predicts ongoing woes for the UK’s trade markets. ‘Brexit is a disaster,’ he says. ‘Export bureaucracy is creating huge difficulties, and although that may change, at the moment there is a big problem between the UK and the EU.

‘It could be seen as an opportunity to build warehouses closer to ports to service hold-ups. But right now, it’s just massively disruptive. So, the EU logistics market is at a crossroads when it comes to Brexit, and it will be interesting to see how that plays out.’

Despite all this, beyond the seismic shifts of the last year and a half, Worboys also recognises significant continuity with the business he knows so well. ‘Over the last 10 years, the best performing asset class has been logistics, both in terms of rental growth and asset value. So, for pension funds and big institutions, logistics is an easy argument. You can get the returns you need. In comparison, the outlook for office buildings has changed, although I think they will still be relevant,’ he says.

American hustle
TCC’s appointment of Worboys makes it the latest in a series of US firms to punt on European logistics. ‘TCC was looking to expand into the sector in Europe for the last three or four years,’ Worboys says. ‘I offered them an “oven-ready” solution. TCC bought Telford Homes in October 2019, so they already had a footprint in the UK in the BtR sector. It’s helpful to me that there is another TCC arm which has already taken its first steps here.’

Founded in Dallas over 70 years ago, TCC is an investor and developer working across multiple asset classes, from logistics to healthcare, offices to residential and mixed-use.

Like Panattoni and Prologis before them, as well as firms ranging from Blackstone to QuadReal, the European logistics sector represents a compelling diversification story for North American capital. Investors have ranged from pure play specialists to businesses such as Thor Equities which have pivoted to logistics more recently, or The Ardent Companies, which has just set up in the UK with a strategy that includes warehouses. Even Oxford Properties’ recent deal for M7 Real Estate was propelled by a desire to significantly expand its European logistics holdings, according to company executives.

For Jack Cox, Head of EMEA Industrial & Logistics Capital Markets at CBRE, there are lots of reasons for international capital to be excited about the sector in Europe. ‘There’s a real estate angle to geographical diversification, as well as a monetary and socio-political aspect,’ notes Cox. ‘Logistics is as close as you can get to a borderless activity; capital flows move with inventory. If we have learned one thing from the health pandemic, it is how globally interconnected supply chains are. So, logistics represents a forward-looking investment strategy.’ In the case of North American capital, European vacancy rates for logistics are also much lower than in the States.

‘The average vacancy in the top 10 Europe markets is around 4%. When we look at the relationship between completions and take-up, every year since 2009, take-up has dramatically outstripped completions,’ adds Cox.

‘The US supply-side response is far more pronounced, which is fine as long as supply and demand are matched, but there is more risk overall as more square footage is being delivered. The EU landscape, on the other hand, has been one way traffic in terms of supply versus demand imbalance.’

There are further complexities which divide the markets. ‘In Europe, it is still just about possible to service the whole continent from one unit. That doesn’t work in the US, due to concentrations of populations on each seaboard. Add in the grid systems which dominate town planning in the US, compared to the complexities of urban areas in Europe, and you have another key difference.’

The approach to developing assets in Europe has also changed significantly over the years. ‘If you go back to 2008, almost 80% of logistics development in Europe was speculative across its top 12 territories. Today, only 31% of new development is speculative, which is a dramatic change in terms of de-risking supply and development,’ says Cox.

Add to this more rigorous financing procedures, and assets have even more compelling fundamentals. ‘In the US, 100% unsecured construction finance is available for speculative schemes from good quality developers, but in Europe, that kind of cost-to-loan is available only if the debt is collateralised against standing assets. So that’s another strong governing force for the supply-side response,’ Cox adds.

Global flows
All these characteristics make the European logistics markets attractive not just to US players, but also on a global scale. ‘When you look at the raw ingredients of logistics markets globally, it is very easy to recognise that land is a key component, and there is less land in Europe full stop,’ Cox adds.

‘There is a presumption against the development of logistics real estate that is much stronger than anywhere else: from the obtuse UK planning system to increasing fears in Germany about consuming green land. This is an issue across the whole EU, with the possible exception of CEE.’

Logan Smith, head of logistics & industrial Europe at Hines, agrees that to focus only on North American capital flows is to miss the bigger picture. ‘There is sometimes a mistaken impression that North-American based platforms are backed solely by North-American capital,’ Smith says. ‘But international interest in European logistics began over 20 years ago, pioneered by Prologis in 1999 with their first pan-European fund which included investors from Asia, the Middle East, North America, and Europe.

And later, it was Blackstone, with a global investor base, which led the sector out of the Global Financial Crisis around 2011 as they began to accumulate assets into the Logicor platform which was sold to China Investment Corporation for €12.3 bn – the largest real estate investment transaction ever executed in Europe. Other major transactions included GIC’s acquisition of P3 for €2.4 bn, and the acquisition of Gazeley by Singapore’s Global Logistics Properties (GLP) also for around €2.4 bn.’

Adds Smith: ‘As an integrated developer and asset manager, Hines is a bit different. Scale and local presence matters – and we have a dedicated team of 600 Hines colleagues on the ground in Europe, a track-record of executing place-making projects in urban areas deeply integrated into the communities that they serve, and Hines has been building warehouses throughout the world since 1957. This is a privilege for us, and we continue to be excited by the opportunity in Europe right now.’

Guiding growth
Alistair Calvert knows a thing or two about guiding North American capital in Europe. The logistics expert, who is currently CEO of Clarion Partners Europe, has been switching between independent businesses and US-backed firepower for the past 15 years. As an entrepreneur, he started industrial and logistics specialist ThreadGreen Europe in 2006 when the warehouse sector was nowhere near as popular as it is today. He managed the company for eight years before selling it for an undisclosed price to the US’s Gramercy Property Trust (GPT), where he remained in charge.

Four years later, when The Blackstone Group stepped in to acquire GPT, Calvert carved out an opportunity to take Gramercy Europe independent. That lasted less than a year, before Calvert agreed to sell a majority stake to US investor Clarion Partners, as part of its strategy to break into Europe.

Calvert once again remained at the helm and seems to be enjoying the industry more than ever. ‘I’ve had several iterations of being a European manager owned by a US firm,’ Calvert says. ‘The biggest difference really is the access to the fund-raising side. That’s something you can’t replicate as a small European firm. Their assistance on the compliance and governance side is also enormous.

‘But it’s also a fact that US firms aren’t always successful when they come to Europe. They don’t always fully appreciate the differences over here, and it was important with Clarion not to fall into that trap. What helped was that Clarion Partners was once part of Dutch bank ING, so they were no strangers to Europe.’

Why does US capital keep circling back to European logistics? ‘On the investment side, the incredibly low costs of debt in Europe always amaze US investors. We are usually able to leverage deals at 1% on long-term credit lines. Yields are similar, if slightly lower. There are higher transaction costs and higher friction costs, but we can generate relatively high current cash flows rather than relying on rental growth to power returns. Despite that, we are also now seeing a lot of rental growth. Asset management is crucial, but the occupier side is extremely tight and concerned about finding space. So, for every leasing event, there is competition. As a result, we are agreeing very favourable rental uplifts as these leases revert.’

Given this backdrop, expansion is on the cards for Clarion Partners Europe, Calvert says. ‘The market is so competitive at the moment, we have to be constantly widening the net. Geographically, we are also expanding, especially when it comes to our development activity. We’d like to enter Italy and CEE is interesting. We’re also now about 20% invested in Spain, where yields are a bit higher and we can get a higher cash on cash return. We’re a little worried about oversupply in the Madrid market, but Barcelona is strong.’

In terms of broadening asset types still further, Calvert describes himself as ‘a huge generalist in terms of target asset type – everything from big boxes to last mile. Although in terms of the latter, it has to be top quality; the majority of our 25,000 m2 assets are last touch and a no more than a 20-minute drive from city centres.’

New rivalries
With so much interest from new players trying to entering the asset class, the logistics real estate business appears to be in danger of becoming a victim of its own success. ‘I spend most of my time with the investment team,’ says Calvert, ‘and it is getting harder and harder to source deals. Meanwhile the occupier side is so focused on future proofing their operations and wanting to maintain footprint, which is translating into much longer leases and big rental uplifts – on everything from traditional manufacturing to cutting edge e-commerce.

‘E-commerce is having a massive knock-on effect as its absorbing huge amounts of product in the market and making it that much harder for other occupiers. At the same time, it’s much harder to get permits these days – we have three large sheds under construction in the southern Paris market where there is no other supply coming online in the next 12 months.’

Worboys, meanwhile, is quick to differentiate between competent competition and the current scramble to enter the sector. ‘There are some people who think that any junction on a motorway is a warehouse location,’ he quips. ‘Some investors and the hundreds of funds that have sprung up are betting on these kinds of sites. The problem comes if there is a downturn – and there is always a downturn.’

Worboys adds: ‘I have been through five recessions if you count Covid, and there will be something else in the future which impacts the market. That means that the old maxim – location, location, location – still holds true. And although AI and better robotics and automated vehicles are coming – you still need people for logistics today. And location matters to people too.’

He concludes: ‘What I like about TCC is that the senior people are all developers. So, they understand the business and have all got their hands dirty. We’ve now lined up our country heads in Spain, France, the UK, and Germany, and we’re on the move. At the end of the day, I still believe that logistics is the perfect investment thesis.’