Logistics booming thanks to flourishing e-commerce
Logistics trails only Germany’s prized automotive industry and retail as the largest and most important segment in the nation’s economy. The country’s central location, excellent infrastructure and state-of-the-art technology means Germany is a key and growing hub for pan-European logistic services.
According to the latest available figures, the three sectors that make up German logistics (logistic companies, e-commerce and deliveries) together generated EUR 267 billion in business in 2017 – almost a quarter of Europe’s total revenues – and employed more than 3 million people.
This year earnings by the country’s 60,000 logistic companies, the great majority of which are small or medium enterprises, could amount to EUR 280 billion, according to the BVL, Germany’s national logistics association. A key factor in this ballooning growth is e-commerce.
In 2018, e-commerce revenues in Germany totalled EUR 53 billion. The figure for all Europe topped EUR 317 billion, and worldwide EUR 1.6 trillion. A further gain of at least 50 per cent worldwide is expected within five years. In parallel, changing consumer behaviour and a growing shipping volume boosted revenues in the CEP (courier, express, package) segment in Germany to EUR 20.4 billion (an increase of 5.2% from the previous year).
Explosive development a blessing and a curse
Yet, the unrestrained growth of the entire logistics sector, particularly in Germany, is pushing players all along the value chain to their limits. This includes retailers and transport service providers, as well as congested cities where the logistical ‘last mile’ reveals the industry’s ugly side.
Demands are growing louder for the sector to reduce greenhouse gases and traffic. The emerging concept of ‘green logistics’ means that the entire distribution process needs to be rethought, starting with collaborations between companies and segments through to the strategic development of up-to-date, flexible properties.
"Not all logistics locations attract the same level of investor interest: Sometimes investors don’t trust the maturity of the market and prospects, but more often their concern is about the political or geopolitical situation."
Rob Brook, Managing Director and Head of Logistics at PATRIZIA
Choosing and planning suitable locations for such development is becoming a key for the success of logistic firms. In metropolitan areas, in particular, logistics companies need more space if they are to meet the challenge posed by green logistics. The problem is that suitable sites are scarce: so, real estate developers and investors are getting creative and testing alternative concepts.
Nicolai Soltau, Fund Manager of the pan-European PATRIZIA Logistik-Invest Europa I & II funds, says one trend is for retailers to combine logistics with bricks-and-mortar shops. One example he mentions is Bonprix, a subsidiary of Germany’s Otto Group.
In Hamburg, Bonprix has created a small shop that only displays one sample of each item in its catalogue. Customers select an article and the size they want to try, for example, via their smart phone, and the item will be waiting for them in the fitting room. Alternatively, they can order the item online and try and pick up their merchandise on location.
This is a model that may inspire imitators, says Soltau. “It is an efficient solution, but the model now needs to prove itself.”
Investors should focus on diversification and sustainability
Soltau believes that although boutique approaches, such as that by Bonprix, may prove effective, more will be gained from repurposing and converting existing buildings to meet modern logistics requirements.
“The challenge is to find a sustainable concept for a given location that’s viable for the long term,” he explains. Soltau basis his opinion on the experience he has gathered while managing a European logistics property portfolio valued at EUR 2.5 billion.
“We diversify our assets to cover all logistics segments,” Soltau says, “but conventional distribution centres and e-commerce logistics spaces are still particularly important for us.”
Among other things, his PATRIZIA logistics funds focus on a location’s sustainability. Using this approach broadens the development opportunities available from European metropolitan regions to include regional logistics hubs and agglomerations, as well as at ports and airports in established markets.
For example, PATRIZIA recently acquired a portfolio of logistics properties in Rotterdam, Moerdijk, and Bergen op Zoom in the Netherlands. All three locations are in a highly desirable logistics corridor that runs through southern Netherlands from Rotterdam, Europe’s largest port. At the same time in Germany, the company acquired a portfolio of six “cross-dock” facilities, which enable goods to be unloaded from an incoming transporter and quickly reorganised and loaded onto an outbound vehicle.
Investors prefer high-quality logistics spaces in good locations
Thanks to booming e-commerce and a growing demand by consumers for overnight or same-day deliveries, there is an historic low in vacant space at this kind of property. Soltau is certain that this trend will continue, and that the demand for high-quality logistics spaces in good locations will remain high.
“Acquisitions like these provide our clients with access to a diversified portfolio that generates long-term income with the potential for increasing rent,” he explains.
Rob Brook, Managing Director and Head of Logistics at PATRIZIA, says that, “In the sector as well as our other investments, it is our ambition for the property to appeal to the broadest possible range of potential tenants for the long term.”
Brook says logistics has long left its niche status behind. As a sector, logistics investment are defined broadly: “If you want to cover not just CEP locations but also XXL locations, you need investments in the order of anywhere from five to more than EUR 80 million.”
According to a survey of 885 European real estate experts, seven out of ten believe that the traditional real estate industry must expand to include real assets and related service businesses in order for investors to hit their return targets – that’s why investors are turning their attention to logistics properties. According to the survey, these rank among the Top Three investment categories in terms of appraised development of performance and investment volume.
Declining vacancy rates despite construction boom
Transaction volumes in logistics in Germany have risen from EUR 3.3 billion to EUR 6.8 billion since 2014, notes Brook.
“When you look at logistics hubs in Europe, you see a similar picture,” he says, but cautions that not all locations attract the same level of investor interest: Sometimes investors don’t trust the maturity of the market and prospects, but more often their concern is about the political or geopolitical situation at the location or the region, he explains.
Today average returns on logistics properties throughout Europe are down one-third from the six percent they averaged five years ago. But even looking at return prospects like these, Soltau says that despite an ongoing construction boom, the segment’s vacancy rates continue to fall, making logistics properties a good investment for the long term.
The supply shortage combined with the growing demand of consumers for fast delivery of their goods is also driving developers and investors to renovate and remodel older properties in their portfolios. The new types of logistics solutions include automation that enables storage racks to be used to the maximum height allowed by the ceilings, as well as developing B and C locations.
Maximising the use of vertical space is another trend, notes Soltau. Currently, facilities typically have a ceiling of 10-12 meters, but newer constructions are being planned with 14-16 meters to take further use of automation possibilities.
“Even if the initial tenant only requires a vertical of six metres, new buildings will often have 10-12 meters to allow for future use,” says Soltau.
In sum, Soltau says, the logistics property of tomorrow will be characterised by flexible, easily reconfigured spaces, ideally with an expandable warehouse or even high-rise storage, barrier-free entrances and exits, and drive-through capability.