One of the most consistent messages from leaders in the European transport logistics sector is that the conditions created during the pandemic are simply an acceleration or accentuation of long-term, pre-pandemic trends that favour the sector.
Martin Pfandzelter, CEO at VIB Vermögen, suggests that increased demand for space is perhaps the most dominant trend that can be seen in transport logistics. The reason for this, he explains, is driven by the rise in e-commerce. Pfandzelter is clear that “this effect was further intensified by the coronavirus pandemic” rather than created by it.
And Pfandzelter is not alone. Nick Preston, Fund Manager at Tritax EuroBox, highlights “a fundamental lack of land in the most sought-after locations” becoming a critical issue for the industry. On the upside, as land supply becomes ever tighter, Preston predicts that “demand will not be able to be satisfied by supply, which in turn will positively drive upwards pressure on rents.”
This has not gone unnoticed and could prove extremely attractive for long-term investors only now turning to the sector. CBRE’s Q4 European logistics market summary highlighted that the most constrained markets rental growth was already evident with Belgium up 5.8% year-on-year on average, Italy up 1.8% and Germany up 1.4%.
There is a downside to a restricted supply of land, however. Jo De Wolf, CEO of Montea, notes that through the pandemic, “we have witnessed how quickly our economic system is disrupted when supply from outside Europe suddenly stops.” As a result, he expects companies to hold larger stocks and perhaps even bring some production back to Europe.
Logistically, where do businesses keep this stock with such constrained land supply in key locations? And what will the cost of storage be? For developers, the issue is competition space, which could present a challenge in the not-too-distant future. For occupiers, this could represent a significant increase in cost. How does an industry facing these challenges remain competitive and attractive long-term?
By now, it seems a cliché to look back on the past 12 months and recount the disruption caused to communities across the world and the businesses that exist to serve them. Indeed, without comprehensive and generous stimulus programs, the disruption could easily have become devastation. Yet, where town centre, high street and office real estate norms have been put on standby, a rare star has shone over the distribution and logistics real estate industry in Europe this past year.
According to Preston, it has been suggested that “the pandemic has conflated ten years of evolution in e-commerce into just one year.” But this is not to say that growth and development of the sector will now stall or even recede. “The pandemic has materially accelerated existing long-term structural trends,” he explains. “These are underpinned, in part by, urbanisation and advancement in technology.”
De Wolf agrees. The lockdown has been transformative to e-commerce. He describes it as a “breakthrough for e-commerce in Europe” and predicts that “growth of the sector in 2020 will be greater than the growth of e-commerce over the last five years combined!”
But, critically, the heightened level of activity and interest during the pandemic, which Preston has characterised as “explosive”, has done more than spur some operational upgrades to help deal with future demand.
Instead, the knock-on effect has brought forward growth in overall demand for logistics assets. The lack of prime land is a consideration already covered by the panel, but the extreme interest in assets raises a different problem entirely. Where there is currently a limited supply of prime locations for logistics businesses, there is an even greater dearth of state-of-the-art assets.
“The pandemic has laid bare the need for a new type of buildings, but it is not the only driver,” states De Wolf. “It is already obvious,” he continues, “that the rise of e-commerce will require additional storage capacity as well as new ways to re-organise the supply chain.”
For investors, Preston urges caution amid rising prices, though. “Players in this space need to avoid being swept up in the wave of demand,” highlights Preston. “There is danger here for anyone who is willing to deploy capital indiscriminately. The sector is expected to perform well, but not all locations will perform equally.”
Fortunately, it seems that the teams at Montea and VIB Vermögen are already alive to this and focus instead on enhancing current assets to better meet demand rather than embarking on a Europe-wide spending spree.
“Focusing on urban and sustainable delivery will require innovative solutions,” says De Wolf. “Given the scarcity of available land, we may well start to see many physical changes to the sector, like multilayer buildings on core locations becoming more common.”
Indeed, Pfandzelter agrees. “We do not expect the coronavirus pandemic to have a significant impact on our business strategy,” he explains, pointing to the long-term success of the sector outside of the influence of the pandemic.
Like De Wolf, Pfandzelter believes VIB Vermögen will look to make physical changes to its assets to help deal with heightened demand that is forecast to increase in the coming years. Amongst other measures, he highlights, in particular, the possibility of adding density to its existing sites to make them future-ready for increased trading.
“Performance hasn't slowed down in 2020,” she says. “We expect this trend to continue in a comparable manner in the current year, 2021. This is because stable user markets and high demand for logistics solutions continue to be behind this development.” It seems unanimous. The distribution and logistics party looks sure to continue.
ESG is everyone’s priority
Density and innovation to spur operational profitability is not, however, the only thing on the minds of investors and operators. ESG is, like in many other industries, of great and increasing importance in the transport logistics segment.
Preston, for example, highlights increasing evidence of occupiers’ preparedness to pay a higher price for high calibre buildings with strong sustainability credentials. Pfandzelter sees a similar trend, explaining that it is no longer just a game of numbers and profit. “It has long since ceased to be enough to simply build a logistics hall in order to achieve the highest return on investment,” he explains. According to Pfandzelter, all stakeholders, from the public to banks and creditors, now demand a level of ESG compliance that is growing more complex over time.
However, the complexity of ESG criteria and the discrepancy with which they are compiled could quickly become a problem for the sector.
De Wolf says that “the time of good intentions is over. The results of our ESG efforts will be quantified and judged.” But how? Now, Montea compares itself against its industry peers and is developing criteria around carbon emissions, energy consumption and sustainable construction practices.
“But the landscape for ESG and sustainability benchmarking is disparate,” explains Preston. Before long, he is sure there will be pressure from multi-country investors to harmonise an approach to ESG reporting and standards. “For now, though, there are many countries in Europe languishing behind advanced markets, such as Germany and the Nordics, who are leading the pack in this respect.”
It is worth noting, however, that while there may not be cohesion at the European level of politics on how to define, quantify and judge ESG efforts, change could be afoot in Europe with upcoming EU Taxonomy changes. At the same time, in pockets of the industry, there are monumental individual efforts being made to reduce the environmental impact of the sector. Montea is one example of a business looking to make extraordinary strides in reducing its own footprint. De Wolf believes the company’s operations can be carbon neutral by the end of 2021. If the business achieves this goal, it will mark a phenomenal effort from an area of the real estate industry that many might assume would be unable to compete on environmental sustainability.
There appears to be a consensus in the industry that the coronavirus pandemic has simply reinforced what were already permanent changes in modern consumerism. The trend towards more online shopping will continue to consolidate in the future and is spurring demand from retailers and e-commerce. In other words, a boom year for the sector does not indicate that there is a bust to come. At the same time, concerted efforts are being made across the industry to strengthen ESG efforts and transform the distribution and logistics sector into a positive ESG contributor, no doubt a trend accentuated by realisations of the economy’s fragility at the hands of the pandemic.
And, while nobody wishes to see a resurgence of pandemic conditions, when it comes to publishing their results in the coming years, everyone involved in transport logistics sector participants is probably hoping for a little more of the same.
