By Art Patnaude
DAGENHAM, England--On a weekday morning in suburban east London,
a group of real-estate agents tucked into pork pies and sipped sloe
gin during a sales tour of a recently vacated warehouse the size of
four football fields.
They all agreed it wouldn't remain empty for long.
Industrial warehouses are becoming vital to retailers across
Europe as their business models shift to serve the burgeoning
number of online consumers expecting next-day delivery of their
goods.
Real-estate investors--hungry for the meatier returns often
available in less-trodden corners of the market--have noticed. Last
year investors piled EUR24.9 billion ($26.8 billion) into European
industrial properties, up from EUR19.3 billion in 2013, but still
below the pre-financial-crisis peak, according to data firm Real
Capital Analytics. Logistics properties are expected to be the
best-performing real -state sector in Europe over the next five
years, a recent report from Deutsche Asset & Wealth management
said.
"Industrial is a relatively young asset class for investment in
Europe compared to the U.S.," which has seen an influx of investors
into the sector in the past few years, said Philip Dunne, chief
executive at San Francisco-based industrial real-estate firm
Prologis Inc., which bought EUR915 million of properties in Europe
last year. "Now it's becoming more institutional."
Investment returns are one big draw of warehouses. European
industrial properties had an average capitalization rate, which
measures income as a percentage of invested capital, of 7.3% in
2014, compared with 6.2% for retail space, Real Capital Analytics
data show.
North American investors have led the drive into Europe. P3
Logistics Parks--acquired in 2013 by private-equity firm TPG
Capital and Ivanhoé Cambridge, the real-estate arm of Quebec's
state pension fund--doubled the size of its business in 2014 with
about EUR1 billion in acquisitions.
LogiCor, an arm of Blackstone Group LP formed in 2012 to buy
European logistics assets, scooped up more than EUR2 billion of
properties last year, more than doubling the size of its portfolio
while expanding into six new markets, including Germany, Spain and
Italy. LogiCor owns the Dagenham warehouse, which it is seeking to
rent out.
Blackstone, the world's biggest real-estate investor, embarked
on a similar push in the U.S. in 2010 with its IndCor Properties
business. It sold IndCor to GIC Pte. Ltd., Singapore's
sovereign-wealth fund, for $8.1 billion in December.
Eventually, Blackstone will sell the LogiCor business, either
through a stock listing or a private sale, said Mo Barzegar, chief
executive at LogiCor. "In the meantime," he said, "we'll keep
building the platform."
Shiny glass offices and bustling shopping malls have
historically grabbed the attention of property investors. Offices
in Europe saw EUR94.6 billion of deals completed last year, while
EUR46.1 billion in retail assets were sold, according to
Chicago-based commercial real-estate broker JLL.
But retailers, grocers and delivery companies "increasingly need
high-quality logistics space to fulfill orders," said Hemant Kotak,
senior analyst at Green Street Advisors, a real-estate research
firm based in Newport Beach, Calif. "There are opportunities
here."
There are also risks. Older warehouses "were often just a box,"
Mr. Kotak said. While some warehouses can be fitted out with
high-tech automation in desirable locations, others are "being left
behind," he said. For landlords, "the question is whether you'll be
able to relet these" more basic warehouses when the lease is
up.
Out in LogiCor's Dagenham warehouse, called Logic233, the
previous tenant had a contract for distributing Coca-Cola Co.
products in London, said Mike Best, U.K. asset manager at LogiCor.
When the tenant moved out, he said, the firm spent about GBP500,000
($741,000) refurbishing the space, "mostly just cleaning and basic
repairs." LogiCor is planning to lease it for about GBP1.7 million
a year, he said.
Global delivery companies, U.K. food retailers and U.S.
e-commerce companies are the types of firms that could potentially
sign the next lease, said Dominic Whitfield, director at broker
Savills, which LogiCor hired to rent out the facility.
Other agents present were scoping out Logic233 on behalf of
clients. They liked the proximity to central London, which saves
fuel costs, and the size, which at 233,000 square feet is larger
than other warehouses in the area.
"There's not enough product around here," said Peter Higgins,
divisional partner at property consultant Glenny LLP. "Hardly any
stock was built during the recession. And any that was built was
small. People are looking, but there's nowhere to go."
A lack of warehouses near major cities, with their millions of
consumers, is evident throughout Europe, the Deutsche report said,
adding, "Much of the available space is either in secondary
locations or not up to the required standard of current
occupiers."
Analysts said this will need to be addressed to suit the
changing needs of retailers. "E-commerce is a new demand driver.
It's very, very important," said Mr. Dunne at Prologis.
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