Where next for European logistics?

Evert Castelein, Investment Manager for abrdn European Logistics Income plc, on how to harness logistics growth throughout 2022 and beyond.

• Logistics is a growing sector, fuelled by the explosion of e-commerce across Europe, plus changes in the way companies are managing their supply chains

• Long-term sustainable growth in income and capital requires a nuanced approach to harness the strongest opportunities

• Urban logistics and ‘big box’ warehousing are two areas of real opportunity this year

2021 was a strong year for the logistics sector across Europe, with the sector following the same trajectory as more developed markets such as the UK. However, directing investment towards the strongest markets, to properties with the right specifications to attract top tier tenants, should ensure that our trust, abrdn European Logistics Income can harness this growth throughout 2022 and beyond.

Logistics is a long-term growth story, fuelled by the explosion of e-commerce across Europe, plus changes in the way companies are managing their supply chains. The pandemic exposed long-distance supply chains as vulnerable. This not only prompted a wave of re-shoring to bring manufacturing closer to the point of distribution but has also encouraged companies to hold higher inventories. This is driving demand for logistics facilities and pushing rents higher.

There is currently a supply-demand imbalance across the entire European logistics market with vacancy rates sitting at historic low levels. This is particularly true in urbanised areas where there is lots of demand from other land uses. Rental uplifts are further fuelled by increasing construction costs with costs for raw materials, land and labour at much higher levels. This forces developers to increase rents for new buildings.

While the tailwinds are favourable for the sector, long-term sustainable growth in income and capital requires a more nuanced approach. It is vitally important to be selective on opportunities. This is more important today than ever before, as economic recovery slows, inflation rises and businesses enter a more challenging environment.

It is vitally important to find the right tenants to ensure ongoing growth. That means delving into their prospects and that of the sectors in which they operate. Our portfolio currently has around 50 tenants with the majority in the transport and logistics sector. We also have manufacturing and industrial tenants, plus a high exposure to the food industry. We have been extremely selective in ‘at risk’ areas such as fashion retail.

Perhaps even more important is liquidity of an asset. If a tenant can no longer pay their rent – after all, the world is not always predictable – the second life of an asset comes in play. Liquidity is defined by quality of location (established or not) and modern building specifications, which means the right size, the right environmental footprint and the right amenities.

Urban logistics

Around half our portfolio is focused on urban logistics. Delivery specialists want to be located as near as possible to high density urban centres. There is a lot of competition for land-use – with residential development for example – which means the right properties are rare and highly prized. ‘Housing’ is generally a relatively small part of a delivery group’s distribution costs, with transport and labour far higher. As such, if they get the right warehouse and it helps reduce transport costs, that improves their profitability. This creates real demand for the right properties.

Our recent purchases in Barcelona and Madrid are good examples. The Barcelona property is in the middle of a residential area in the heart of the city. Barcelona’s population is growing rapidly, but the city sits between the sea and the mountains, making it very difficult to find horizontal plots for warehousing. As such, our building has real appeal for distribution groups trying to compete on delivery times to consumers. Our Madrid property was the largest deal of the year. It is located on the Madrid ring road, a prime spot to access the capital’s 6.5 million population. All the buildings are new and high specification. Amazon is the main tenant.

Trade hubs

Apart from urban logistics, we also have properties in key manufacturing and trade hubs. Our holding in Poland, for example, is close to Lodz, one of Poland’s largest cities. It is centrally located across a North, South, East, West transport corridor, but also alongside the new ‘silk road’ railway connection from Asia to Europe. We also have properties in Rotterdam, which is a trading gateway and in key sites across France.

It is vitally important to understand tenants’ needs to ensure continued rental demand and a ‘second life’ for the asset should anything go wrong. This may be the right size for the type of tenant (we find greater demand for 20,000 – 50,000 sqm blocks, for example), or the right environmental, social and governance (ESG) credentials. Tenants want buildings that are energy efficient, and use renewables where possible, to help lower their carbon footprint. Last year, we completed two solar projects in the Netherlands, which adds to the already-high ESG rating for the Trust.

Against this backdrop, we are optimistic on rental growth expectations for the year ahead. To make the most of it, we believe it is vitally important to understand the supply and demand dynamics of the various markets across Europe. We can do this because we have ‘boots on the ground’ – specialists in each market sourcing opportunities.

In January we raised £38 million through a placing, which is allowing us to partly pursue a number of opportunities, including funding Phase 4 of the Madrid acquisition, plus asset management projects in Netherlands. There are also two deals currently in due diligence in France and the Netherlands

The European economy may come under pressure this year, but the structural tailwinds supporting the logistics sector are long-term. The right analysis and property selection can ensure that our portfolio has the potential to deliver sustainable growth and income into the future.

Important information 

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Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment company should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.

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