Warehouses Win Investors as Unsung Internet Heroes

Warehouses Win Investors as Unsung Internet Heroes

The growth of Internet shopping in Europe is luring investors such as Axa Real Estate and Blackstone Group LP (BX) to the cinder-block world of warehouses, where yields are beating showy storefronts and sleek offices amid a space shortage.

“Net effective rents could grow by as much as 20 percent over the next four years,” Philip Dunne, president for Europe at San Francisco-based Prologis Inc. (PLD), the world’s largest warehouse owner, said of the company’s portfolio in the region. “In wider Europe, with a population bigger than the U.S., we have four-and-a-half times less modern product. That gives you some sense of the scale and opportunity for growth.”

Europe needs 25 million square meters (296 million square feet) of new distribution and storage warehouses in the next five years, about 11 percent of existing modern space, to keep up with Internet sales growth, Jones Lang LaSalle Inc. said last month. The assets generate annual income that’s 2 percentage points higher than offices and shops in Europe relative to their value and a lack of space will lift prices, said Remy Vertupier, manager of the Logistis fund run by AEW Europe, a unit of Paris- based Natixis (KN) Global Asset Management SA.Axa Real Estate, Europe’s largest property manager, plans to add logistics centers even as it sells some of its malls. The company estimates that 90 percent of retail growth in the U.K., France and Germany will come from online shopping in the next four years. The unit of Paris-based Axa SA, Europe’s second- largest insurer, managed 45 billion euros ($59 billion) of real estate at the end of 2012.

Retail Shift

“We will be reducing retail on a selective basis, keeping the core assets,” Axa Real Estate Chief Executive Officer Pierre Vaquier said in a March interview. “It’s due not only to the economic environment, but also to the structural change that is happening in retail” because of the Internet.

Internet retail sales in Europe are expected to grow about 50 percent to 191 billion euros from this year through 2017, according to a report last month by Forrester Research Inc.

Investment in European warehouses increased 13 percent last year to about 10 billion euros, BNP Paribas said in a report last month. Norges Bank Investment Management, the Norwegian company that runs the world’s largest sovereign wealth fund, bought 50 percent of a European warehouse portfolio from Prologis last month for 1.2 billion euros. A joint venture formed to manage the 195 distribution and storage buildings said it may buy more portfolios or individual properties.

Construction Slowdown

Developers probably won’t relieve the space shortage anytime soon because rents are still too low to justify speculative construction and banks in Europe are holding back on lending for projects, Prologis’s Dunne said in an interview. A lack of construction in the U.S. has helped rents at “big box” assets of 250,000 square feet or more outperform the rest of the industrial market since the country’s recession ended in 2009, Chicago-based Jones Lang said.

Rental returns from warehouses are beating other types of real estate and outpacing assets that typically attract pension funds and insurers. Annual rental income from U.K. logistics centers equaled about 6.8 percent of building values last year, according to Investment Property Databank. That compares with 5.8 percent for stores and 5.5 percent for offices. U.K. 10-year gilts have an annual return of about 2 percent.

European Acquisitions

The properties are attracting North American investors including Toronto-based Brookfield Asset Management Inc. (BAM/A) and Blackstone of New York. LogiCor, set up by funds managed by Blackstone, has spent about 1.5 billion euros acquiring 26 million square feet of warehouses in the U.K., France and Poland since starting up last year.

“Our goal is to at least double” the size of its portfolio “over the next couple of years”, LogiCor President and Chief Executive OfficerMo Barzegar said in an interview.

LogiCor can buy properties with cash and then secure bank financing later which gives it an advantage over competitors, he said. For properties worth more than 100 million euros “we are very, very competitive because of our ability to move quickly and close” deals quickly, he said.

Warehouse tenants like Amazon.com Inc. (AMZN), the world’s largest Internet retailer, typically want little more than “four walls and a roof with loads of doors and a deep truck court,” said Dunne of Prologis. That means building warehouses costs about an eighth as much as offices and a fifth of the price of shopping malls, according to data compiled by London-based real estate consultants Davis Langdon.

Zalando, Docdata

“Amazon is the one everyone watches, but there are a number of other operators out there,” he said. “You’ve got companies like Zalando in Germany, Docdata (DOCD), another e-commerce provider, and a number of grocery retailers operating e-commerce through their facilities.”

Amazon.com wants to lease about 20 U.K. warehouses of 5,000 square meters to 10,000 square meters to allow same-day delivery, Jones Lang said in a March report. Goodman Group, the world’s second-biggest industrial property manager by market value, has developed more than 580,000 square meters of warehouse space for Amazon in Europe and plans to construct a further 225,000 square meters across two logistics centers for the Internet retailer, the company said in its annual report in September. Amazon didn’t respond to a request for a comment.

Goodman has gained about 21 percent in the last six months compared with an 11 percent increase in Australia’s S&P/ASX 50 Index. Prologis advanced 15 percent in New York trading in the same period, beating a 9.5 percent rise for the S&P 500 Index.

Good Fit

Investors such as life insurers and pension funds are looking to buy infrastructure such as warehouses because the income generated by the properties fits well with obligations like paying out pensions, Prudential Plc Chief Executive Officer Tidjane Thiam said at the Economist Insurance Summit in February.

Growing online sales may lead to mergers and acquisitions in the warehousing industry, JPMorgan Chase & Co. said in a note to investors last month. Europe’s retail-focused real estate investment trusts should buy logistics property companies so they can offer tenants both stores and warehouse space to supply Internet sales, the analysts said.

While rental income at logistics centers beats other types of properties, average selling prices haven’t kept up. Europe’s income-producing warehouses sold at yields of 7.5 percent at the end of 2012, up from 7.4 percent a year earlier, according to Jones Lang, indicating a decline in prices. Yields for office buildings fell to 5.2 percent from 5.3 percent and shops declined to 5 percent from 5.1 percent.

Supply Shortage

Values were held back last year as the euro region’s economy shrunk by 0.5 percent and large transactions in Portugal, Spain and Italy became “almost non-existent,” BNP Paribas said in the report. A lack of development caused by the economic uncertainty over the past three years has led to a supply shortage of prime assets that allowed landlords to reduce incentives to tenants significantly, it said.

LogiCor is looking at investing in Spain because “there’s practically no debt available”, Barzegar said, and “there might be some good opportunities in those markets to acquire assets at very attractive pricing.”

Valad Europe Plc, owned by its management and funds operated by Blackstone, plans to buy German logistics buildings as the country’s economy continues to grow, Chief Executive Officer Martyn McCarthy said in a March interview. The company remains interested in U.K. assets even as the economy struggles, he said.

German Strength

Online purchases and demand for modern facilities supported the German market in 2012, when new rentals were second only to the record level reached a year earlier, BNP Paribas said. Frankfurt and Hamburg accounted for the biggest increase for warehouses larger than 5,000 square meters.

LogiCor is also “keen to get a foothold” in Germany, Barzegar said.

Brookfield is in talks to buy London-based industrial developer Gazeley Ltd. from closely held Economic Zones Worldwide FZE, and may reach an agreement as early as May, according to a person with knowledge of the talks who declined to be identified because the discussions are private. A deal would give Brookfield an entry into the European warehouses market, where Gazeley owns properties and development sites, mostly in the U.K. and France.

Segro Plc (SGRO), the U.K.’s largest publicly traded owner of industrial properties, plans to sell an office park in England for more than 200 million pounds ($306 million) according to two people with knowledge of the talks. It will use the proceeds to buy logistics properties around major ports and airports in Europe, one of the people said.

Doubling Assets

AEW Europe is seeking to double its logistics assets to two billion euros and may achieve that by the end of 2017, Chief Investment Officer Rob Wilkinson said in an interview. The company’s Logistis fund has 1 billion euros in assets.

“There is a core group of players that occupy much of the space,” he said. “But to work with them you need a certain scale and critical mass.”

Across Europe, rents are 10 percent to 15 percent lower than they need to be to justify speculative development, Dunne said. Some markets have virtually no modern buildings and that’s a critical component for rental growth, he said. Those areas include the West Midlands and London in the U.K., German cities like Frankfurt, Munich and its Rhine-Ruhr region.

“It’s not going to be a gold rush. It will be very selective,” Dunne said. “It means the market isn’t going to be flooded with product, it’s going to be controlled.”

To contact the reporters on this story: Neil Callanan in London at ncallanan@bloomberg.net; Patrick Gower in London at pgower@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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