Doing the Continental

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With demand set to soar for e-commerce related warehousing is there enough space to support it? Liza Helps reports.

European retailers will need up to 269.1 million sq ft (25 million sq m) of additional logistics space over the next five years, according to a report by Jones Lang LaSalle.

“Demand is being driven both by the need to service existing stores and increasingly by a retail revolution caused by the growth of internet shopping, which is transforming the way goods are distributed to customers,” says Paul Betts, head of EMEA logistics & industrial at Jones Lang LaSalle.

“While traditional retailing is still driving demand for retail infrastructure, the growth of online is fundamentally changing the size and shape of distribution centres and where they are located.

Many retailers have outgrown their existing supply chain infrastructure and are having to work out the best logistics model to service the growth of multi-channel retailing. Their strategy will depend on the type of products, the volume of internet sales handled and the speed at which these are growing.”

Richard Holberton, director, EMEA industrial and logistics research, CBRE said: “The growth in online shopping across Europe has been rapid and continues to rise.”

Indeed, Andreas Fleischer, regional director for Goodman in Germany says: “[There is] high demand for large scale, good quality properties with specifications meeting the requirements of major e-commerce operators and confirms our view on the increase in demand for modern logistics space for e-commerce customers. We currently expect that online retailers across Europe will need approximately 10.764 million sq ft a year to realise their growth potential.”

In the 18 months to October 2012, nine of the 17 deals secured by Goodman in Germany were for the e-commerce sector.

“On average e-commerce warehouse developments are much larger than traditional logistics projects, requiring larger land sites to cater for greater warehouse sizes and extension possibilities. Warehouses must be located closer to customers, while the higher number of employees also results in different requirements such as the need for access to public transport connections and an increased number of parking spaces,” says Fleischer.

In October 2011 Goodman commenced the construction of a 839,580 sq ft (78,000 sq m) warehouse for Europe’s fastest growing e-commerce retailer Zalando in Erfurt and in May 2012 construction began on a 538,200 sq ft (50,000 sq m) extension for Zalando at the same site. A further 839,580 sq ft (78,000 sq m) logistics centre for the e-commerce retailer is being built at Monchengladbach in North Rhein-Westphalia, Germany, and will be delivered in July 2013.

With online sales predicted to almost double in the first half of this decade, e-tailing is creating new demands for warehouse space, including mega sites of over 1,076,400 sq ft (100,000 sq m), specialist distribution centres and smaller, local delivery depots.

In its report, A New Logistics Real Estate Landscape, Jones Lang LaSalle says that around 32.292 million sq ft (three million sq m) of specialised space is going to be needed for dedicated e-fulfilment centres, dealing solely with online demand. Another 236.81 million sq ft (22 million sq m) is needed for store replenishment, though retailers are increasingly moving to a fully integrated “omni-channel” customer offer, where customers buy in-store, online or via mobiles and either have their purchases delivered to their home or pick-up from stores or dedicated delivery centres.

Nigel Godfrey of Gazeley says: “E-commerce changes everything and will continue to do so over the next five years.”

But can Europe cope? Is there enough space to satisfy demand and is it of the right quality? A BNP Paribas Real Estate study says: “The shortage of new large available warehousing continues to support demand for end users opting for design and build (turnkey) options”

According to Jones Lang LaSalle there was almost 64.583 million sq ft (six million sq m) of non-speculative space under construction as at March 2013. This is a 25 per cent increase year-on-year and marked the highest volume since the downturn in development activity in 2008. Gazeley has several build-to-suit schemes under construction including a 548,960 sq ft (51,000 sq m) distribution centre for Toys “R” Us  at Saint Fargeau Ponthierry just south of Paris in France as well as plans for an extension of its Magna Park Kassel scheme in Germany which could take build-to-suit warehouses up to 538,200 sq ft (50,000 sq m).

Developer Goodman has its developments for Zalando and is also currently building a 968,750 sq ft (90,000 sq m) distribution warehouse for Amazon near Lille in France.

While build-to-suit will satisfy a number of occupiers what other opportunities exist? For starters there is always second-hand stock. Alexandra Tornow of Jones Lang LaSalle says: “Companies able to accommodate their operations in lower quality facilities outside prime locations will find secondary units at rents 30 per cent lower than prime stock.”

Nigel Godfrey of Gazeley adds that securing a short term lease on a second hand unit is an excellent way for new entrants to market to gain a foothold before going on to a build-to-suit once established. Occupiers which can be more footloose could consider the opportunities across Central and Eastern Europe (CEE).

According to a review of occupier conditions by Jones Lang LaSalle, CEE countries offer the most favourable environment for both leasehold and freehold solutions. Abundant choice of available stock and positive economic sentiment means occupiers can negotiate favourable lease terms. Countries such as Croatia, Romania, Serbia and Ukraine are also attractive to occupiers seeking to construct their own facilities due to a combination of low land values and construction costs.

Vincent Lottefier of Jones Lang LaSalle says: “Average land values and warehouse construction costs are substantially lower in Croatia, Czech Republic, Poland, Romania, Serbia and Slovakia than they are for Western Europe. Land values and warehousing constructions costs in Poland are €11.61 per sq ft (€125 per sq m) and €27.87 per sq ft (€300 per sq m) respectively, compared to €37.16 and €39.48 per sq ft (€400 and €425) in Germany. This presents value opportunities for those willing to become owner-occupiers.”

The lowest land values that have planning consent for industrial properties are in Ukraine (€2.50 per sq ft/€27 sq m), Serbia (€2.78 per sq ft /€30 sq m), Romania (€3,25 per sq ft/€35 sq m),Croatia (€4.64 per sq ft/€50 sq m) and France (€6.96 per sq ft/€75 sq m), with the highest land values found in Spain (€41.80 per sq ft/€450 sq m), Turkey (€42.27 per sq ft /€455 sq m) and the UK (€40.87 per sq ft/€440 sq m).

The lowest construction costs are in Slovakia (€27.87 per sq ft /€300 sq m), Spain (€27.87 per sq ft /€300 sq m), Czech Republic, France, Hungary and the Netherlands (all €32.51 per sq ft/€350 sq m), with the highest in Finland (€83.61 per sq ft/€900 sq m) and Sweden (€83.61 per sq ft/€900 sq m).

Strong existing supply means that France offers occupiers the highest incentives. Rent free periods of up to four months a year are achievable, thus providing a significant rental discount. Spanish markets follow with rent free periods of two months for each year leased the norm.

Case study- European Hotspots

Venlo, Antwerp and Rotterdam are battling it out as the top logistics hotspots in Continental Europe according to two new reports from Prologis and real estate advisor Colliers.

According to Colliers’ report “Top European Hubs”, The Port of Antwerp remains the ideal location for anyone wishing to set up distribution in Europe, even after the expansion of the EU to the East and the growth of consumer markets in eastern and central Europe.

However in the Prologis report “Europe’s Most Desirable Logistics Locations”, Venlo snaffled the top spot.

Colliers examined the attractiveness of 40 European cities and regions for logistics companies, now that future economic growth is mainly expected in eastern and central Europe and new transport infrastructure is also being developed there. In its study the real estate consultant took into account the attractiveness of the markets that can be reached from each location, the presence and quality of the transport infrastructure, the presence of specific logistics know-how, the operational costs, the labour market and the general economic climate.

On the basis of these parameters Antwerp remains the most important logistics gateway for Europe, topping Rotterdam and Düsseldorf in the rankings. Despite the rise of central and eastern Europe, cities located within the famous “blue banana” remain dominant.

This is also true of Prologis’ findings, with the exception of two markets Madrid and Pan-Regional Romania.

Prologis identified 13 criteria that affected the desirability of a logistics location and therefore the site selection decision. The three most important were: proximity to economic networks and strategic transport access, proximity to customers and labour availability and flexibility.

Western Europe, in particular the ‘Blue Banana’, remains the logistics heartland of the Continent; where most of the purchasing power is, the majority of stock, the best infrastructure, and where Europe’s gateways such as Rotterdam, Antwerp-Brussels and Schiphol are located so it is understandable that this is where the most desirable logistics hotspots would be located.

However, as Prologis’ report notes, Western Europe’s dominance will be increasingly challenged by some Central and Eastern European hubs which are gearing up with new infrastructure, cheaper land and a good labour supply.

Best locations for logistics operations (Colliers)
1. Antwerp
2. Rotterdam
3. Düsseldorf
4. Brussels
5. Hamburg
6. Amsterdam
7. Liège
8. Venlo
9. Lille
10. Frankfurt

Top 10 locations in Europe (Prologis)
1. Venlo
2. Antwerp- Brussels
3. Rotterdam
4. Rhein-Ruhr
5. Madrid
6. Liege
7. Central Germany
8. Pan Regional Romania
9. Il-de-France
10. Dusseldorf

Case study- Country spotlight- France

With only 8. 2 million sq ft (765,000 sq m) let or sold to occupiers in France in the first half of 2013, take-up is 18 per cent lower than a year ago and 29 per cent lower than in the first half of 2011 according to Cushman & Wakefield.

This poor performance is most prevalent in the Paris and Lyon regions where take-up has barely reached 2.8 million sq ft (260,000 sq m); a fall of 54 per cent in one year, due to the lack of any big deals and a general decline in the number of transactions on the back of general economic decline and lack of consumer confidence.

With fewer transactions, current supply levels provide more than one year of demand which means that occupiers can secure favourable incentives in some areas especially in second hand units and in more peripheral locations.

BNP Paribas Real Estate’s latest research shows that availability within a year started to rise in mid-2012 and the trend has continued with an increase of six per cent in six months. It stood at 34.4 million sq ft (3.2 million sq m) at 30 June 2013.

Grade A supply has contracted slightly and now accounts for less than 50 per cent of availability.

This increase in overall supply is affecting other buildings as further warehouses are released to the benefit of recently completed turnkey schemes with obsolete premises struggling to find tenants.

The main drivers of take-up in the first half of 2013 were owner-occupier and turnkey deals, which accounted for 32 per cent of take-up versus just 13 per cent in 2012.

The busiest regions were Provence-Alpes-Côte d’Azur, Gironde and Nord-Pas-de-Calais where Goodman is developing a 968,760 sq ft (90,000 sq m) logistics centre in Lauwin-Planque on a plot of 1.8 million sq ft (170,000 sq m) of land with access to the A21 and A1 motorways. Marseille also fared well with 1.2 million sq ft (115,000 sq m) taken up, largely thanks to a turnkey rental by Castorama for 828,828 sq ft (77,000 sq m) in Saint Martin de Crau as well as a 346,600 sq ft (32 200 sq m) build-to-suit by Carrefour on a 17.52 acre (7.3ha) site owned by Goodman in Euroflory à Berre-l’Étang.

Shippers were the dominant players over the period, representing 60 per cent of transactions. The two biggest deals were in food retail and DIY. Logistics providers and carriers made 15 deals – about 30 per cent of total take-up since the beginning of the year.

Prime rent in the Ile-de-France region is at €4.83 per sq ft (€52 per sq m) a year while in Lille it is €3.99 per sq ft (€43 per sq m) a year with Lyon at €4.27 per sq ft (€46 per sq m) a year and Marseille at €4.45 per sq ft (€48 per sq m) a year. Occupiers need to remember that property tax can vary strongly across the country with Paris at €1.85 per sq ft (€20 per sq m) a year and sub-regional markets only at €0.37 per sq ft (€4 per sq m) a year.

Incentives have yet to harden and occupiers can secure up to five months rent- free a year for a standard lease length.

The overall take-up in 2013 is set to be lower than that of 2012, probably by around 15 per cent lower.

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