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Retail revolution sparks logistics change
From the Financial Times of Tue, 23 Dec 2014 15:18:23 GMT

Delivery firms may not be expected to match Santa Claus’s dash around the world in a single night but many are coming under pressure to meet tighter deadlines.

The move to same-day and next-day deliveries is forcing retailers and distributors to make radical changes to their property portfolios. Logistics companies have previously required fairly humdrum industrial property — and their breeze-block sheds have struggled to compete with glossy offices and bustling shopping malls for investors’ attention. But getting things to where they need to be is no longer such a simple matter.

The problems faced by delivery network Yodel and retailer Tesco earlier this month in coping with a deluge of parcels highlighted the practical challenge that retailers and distributors face.

Before the advent of ecommerce, distribution activity was largely focused on a handful of huge hubs such as the UK’s golden triangle in the Midlands and the Benelux corridor stretching inland from Europe’s biggest ports, Rotterdam and Antwerp.

Those hubs are still in demand but a new array of smaller sites of 70,000-100,000 sq ft (one or two football pitches) are also developing around major population centres in order to fulfil faster delivery times and supply local convenience chains.

Gareth Osborn, logistics director at listed industrial property specialist Segro, says: “Retailers are taking industrial units around the main conurbations, to break up big lorry loads into lots of small deliveries in a fleet of small vans. That requires a different type of building [to traditional big-box facilities].”

About 35 per cent of Segro’s tenants are parcel delivery companies, third-party distributors and retailers, up from 10 per cent a decade ago.

Access to land is the biggest problem for these new facilities, Mr Osborn says, with housing developers in particular proving tough competition.

A shortage of suitable space means that investors expect rents to rise in the next couple of years. “In the short term there’s a bit of a capacity problem, with parcel numbers going through the roof,” says Christian Jamison, chief executive of Delin Capital, which launched a £400m pan-European logistics fund in 2012.

As a result, investors have been piling into this asset class this year. European logistics property investment volumes jumped by a third to top €20bn in the 12 months to the end of September, according to figures from Standard Life Investments.

One reason for this demand is the high returns. European industrial property — including logistics — produced an 8 per cent total return in that period, compared with 5.7 per cent from offices and 5.6 per cent from retail, according to data company IPD.

“What resonates with investors about logistics is that it’s a very defensive asset class to invest in,” says Mr Jamison. “Even in the absence of economic growth you will get increasing demand for logistics because ecommerce is taking up more of the retail market.”

Demands are also changing for the bigger, out-of-town warehouses more traditionally used by retailers and distributors.

Buildings are becoming taller, with ceiling heights rising from 6-7m up to as high as 25-30m, and wider, with floor space of up to 1m sq ft — the size of 23 football pitches. Technology such as automated packing systems and mechanised storage means tenants can cram more into their buildings.

“The size of these assets now gives international investors the opportunity for scale,” says David Paine, head of real estate at Standard Life Investments. “It is becoming increasingly hard to deploy a lot of capital into offices and retail quickly, but large-scale logistics platforms enable investors to do that.”

UK-listed retail landlord LondonMetric began to move into logistics property two years ago. Its chief executive Andrew Jones says it was a natural next step. “I look at distribution as the fifth type of retail property, alongside shopping centres, supermarkets, retail parks and the high street. As this Christmas is demonstrating, most retailers don’t have [logistics] space which is fit for purpose,” he says.

Investors’ push into Europe follows a similar trend in North America. “Investors are looking at Europe as a place where you can get a significant spread compared to the US market,” says Philip Dunne, president of the European division of Prologis, one of the world’s largest logistics landlords.

Blackstone led the way in the US from 2010 onwards, accumulating the $8.1bn IndCor portfolio that it sold earlier this month to Singapore sovereign wealth fund GIC. It is now trying to replicate the portfolio in Europe with its Logicor platform, which has accumulated 61m sq ft of space across 12 countries.

Mo Barzegar, Logicor chief executive, says four global trends are driving the need for “a more sophisticated supply chain”: globalisation, consumption growth, urbanisation and the changing face of retail.

While few in the industry have the global coverage of Santa, the emergence of pan-continental distributors and retailers also means that even the biggest logistics landlords need to deal with relatively few tenants.

“It is a very homogenous asset class — whether you are in London, Barcelona, Prague or Moscow the boxes are the same and the occupiers to a large extent are the same,” says Mr Jamison.

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