MAGAZINE Logistics leaders look beyond Covid-19 cloud

Near-term prospects may look grim, but many logistics developers believe the industrial sector will rebound quickly once the coronavirus crisis is over.

At the end of 2019, with no hint on the horizon yet of the novel coronavirus in Europe, the region’s leading industrial developers could look back on another solid year of business, with glowing warehouse completion figures and well-filled orderbooks.

As in the preceding few years, buoyant economies and the relentless rise of online shopping across many markets had fuelled demand for facilities of all shapes and sizes to meet the growing need for manufacturing, storage and distribution space.

The robust performance over 2019 completed another strong three-year run for the 14 players in our ranking. Between them, they developed over 18 million m2 of industrial and logistics space across Europe during 2017-19. E-commerce was the buzzword and last-mile logistics the holy grail of the industry as retailers and manufacturers sought to further refine supply chains and get goods to the customer even faster. Investors, too, continued to be charmed by industrial property as an asset class, with prime yields hovering at just over 4% in some markets and forecasts suggesting these would tighten even further.

So, despite signs of a global economic slowdown, the promise at the start of 2020 was of another good year for the industry. ‘This year should be very similar to 2019, with continuing strong levels of demand. Logistics in general is outpacing GDP and our sector is growing fast, driven by e-commerce and consumption,’ Ben Bannatyne, president of Prologis for Europe, told PropertyEU in January.

Covid-19 erupts
That narrative was rudely interrupted by the eruption of the Covid-19 pandemic in February, which quickly spread from Europe’s epicentre Italy to other parts of the continent during March. For the industrial and logistics sector, the immediate impact from the ensuing market lockdowns and other restrictive measures to combat the spread of the virus has been disruption to supply chains, delays to development projects and landlord-tenant tensions relating to rent payments.

Sector heavyweights Panattoni, Prologis and Segro all say they are in talks with struggling tenants hit hard by the crisis on deferring rent payments and other forms of assistance. As for disruption to supply chains and setbacks to development projects, these are likely to be temporary and will not affect business in the long term, they insist.

In the short term, there has even been a positive effect from the pandemic, with quarantines resulting in more online shopping, making warehouse operations even more essential. And, beyond the crisis, the strong fundamentals of the industrial sector – driven in particular by the ongoing growth in e-commerce – mean it will weather any economic recession which many believe is now inevitable. There are even lessons to be learned from the Covid-19 crisis, which some say will alter for good certain business models deployed up to now – to the benefit of industrial real estate.

Robert Dobrzycki, CEO of privately held developer Panattoni Europe which tops our ranking for the fourth year in a row, divides his view of the market into a short, medium and long term. In the near term, ‘decisions are either being slowed down or held back, which certainly interferes with doing business, and as a result much less than expected is going on now’, he tells PropertyEU. Restrictions in movement are also hindering local viewings of buildings for both tenants and investors who would like to see sites or completed investments. For the moment, therefore, the company is focusing on current projects rather than completely new transactions.

Amid the outbreak, for example, Panattoni announced it was proceeding with the construction of a warehouse in Germany for Amazon Logistics, its fifth project for the e-commerce giant in the country to date. The latest scheme, located in Wilhelmshaven, Lower Saxony, will be used by Amazon to process last-mile B2C deliveries. In total, Panattoni currently has 1.8 million m2 of projects under construction across Europe.

In the medium term, Dobrzycki sees a recession as ‘highly likely’ - a scenario that ‘certainly could negatively affect our business’. However, in the long run, when lockdown measures are lifted and the coronavirus pandemic is over, ‘there should be a rapid rebound on all levels’, he predicts.

E-commerce driver
The Panattoni chief expects ‘a full economic rebound by 2021’, with the industrial facilities sector bouncing back faster than all other property classes. E-commerce will play a big role in this. ‘I am convinced that the present switch in consumers’ preferences in favour of online shopping will translate into their future behaviour and, consequently, to a higher demand for warehouse space,’ he says.

‘Over the past few weeks, things have turned upside down and the bulk of consumers have moved from conventional distribution channels to the web. Online stores have seen record numbers and volumes of orders, and e-commerce has become a crucial driving force, affecting the warehousing sector, too. The current move by consumers to online channels will change their behaviour in the future. That is why, even in the face of the anticipated slump, the segment of industrial and warehouse facilities is and will be in good form.’

US industrial giant Prologis, too, believes that any recession is likely to be temporary and that the effects for the industrial sector will be shortlived. In a business update webcast and conference call with investors in early April, the company’s head of global strategy and analytics, Chris Caton, said that ‘the consequences of a recession will lead to lower demand for our industry, but it will be temporary and last perhaps six months’.

Among the immediate effects of the pandemic for Prologis’ global operations, according to the company, are delays to development starts and a decline in the availability of construction financing. This trend is more pronounced for speculative projects than for built-to-suit schemes. In addition, work on projects already underway in areas with the worst outbreaks has slowed due to work restrictions and a pause in inspections in a range of municipalities.

Bigger inventories
A key lesson from the current crisis flagged by Prologis and others is that it will likely lead to companies holding higher inventories in future to deal with supply constraints. Ultimately, this will benefit logistics real estate as businesses scale up their space requirements to stock surplus goods. ‘We anticipate that all customers will tune their supply chains for resilience versus efficiency – 5% to 10% more inventories will translate to real demand for logistics real estate,’ said Prologis’ Caton.

Globally, the pandemic has underscored the need for flexibility and business continuity during times of crisis, and as the cost of carrying surplus stock declines – alongside ultra-low interest rates – this looks set to become a strategy that is broadly embraced by retailers and manufacturers.

The founders of Blackbrook, a new pan-European investment firm targeting ‘business-critical’ real estate assets, also highlight the move to more inventory space. ‘We see the current crisis accelerating a number of trends that were in the property world globally,’ says company chairman Gordon DuGan, formerly of Gramercy Property Trust. ‘Eventually this is to the benefit of industrial real estate, as people see that supply chains need to have a bit more redundancy in them and require a little more space for stock.’

‘It has long been noted that Europe has a shortage of last-mile and logistics assets,’ adds Blackbrook’s CEO Arvi Luoma, formerly of WP Carey. ‘E-commerce on the continent has lagged the UK in terms of deliveries. The current climate is likely to push forward logistics development, along with more businesses using the hub and spoke strategy of warehousing and distribution.’

‘Another aspect is the speed of delivery – if everyone is at home, people demand things more quickly, and this becomes self-perpetuating as it becomes the accepted norm.’

Less offshoring
Asset manager Warburg-HIH Invest Real Estate, which recently acquired two warehouse developments in Germany for a new logistics fund, pinpoints other supply chain changes.
‘The ongoing coronavirus crisis has increased popular acceptance of e-commerce, and will boost its growth in the long term. In addition, we are expecting to see a trend towards changed supply chains, especially of system- and production-relevant goods that will roll back the offshoring to Asia and prompt increased onshoring in Germany, resulting in growing demand for logistics accommodation in Germany,’ says senior transaction manager Lars Bothe. ‘The logistics real estate sector stands to benefit from the trend accordingly,’ he adds.

Listed UK REIT Segro, which takes third place in our ranking this year, noted in a Covid-19 update in early April that many of its customers are involved in the supply of business-critical goods and that some are looking for additional space both for immediate occupation and to prepare for longer term growth once the crisis is over.
‘Whilst current global events are unprecedented, we anticipate that the structural trends that have been driving occupier demand for high-quality, well-located warehouse space will remain intact and may even be strengthened by the crisis, as the importance of logistics supply chains has been thrown into sharp focus in recent weeks,’ CEO David Sleath said.

Segro, a large pan-European player with a 7.8 million m2 portfolio spread across the UK and seven countries on the Continent, said government measures to curb the further spread of the pandemic would delay most projects scheduled for completion during 2020. Development activity will also be hampered by constraints in securing materials and/or labour for construction sites, the firm said.

Landlord-tenant discussions
Like Panattoni and Prologis, the London-listed company said it was working with customers experiencing cashflow issues as a result of the coronavirus crisis, to help them reschedule rental payments. ‘We have a very diversified customer base across a variety of sectors, many of whom are involved in the supply of critical goods and services, but we appreciate that current circumstances are placing pressure on the cashflows of some of our customers,’ Sleath said. ‘Most of these businesses are fundamentally sound and we are working with them to provide appropriate assistance.’

Around half of the group’s headline rental income is payable on the UK quarterly payment days, with rents in Continental Europe payable on a different timetable. For the most recent quarterly payment date, 25 March 2020, 71% of the rent due was paid, while around 25% is subject to what Segro described as ‘reprofiling discussions’. At the same time last year, 96% of the rent had been paid.

Listed landlords like Segro and Prologis have been keen to stress their own financial strength in enduring the coronavirus crisis. Segro said it was ‘well-placed to weather the storm caused by the Covid-19 pandemic’, while Prologis, which has a 18 million m2 portfolio spread across 12 countries in Europe, noted that it had never been in better shape financially. ‘We enter this period with the highest quality portfolio and healthiest balance sheet we have ever had,’ chief investment officer Gene Reilly said.


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