A sea change in demand

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The European logistics real estate market is changing. The established hotspots of Western Europe, such as the major distribution hubs of Lyon, Paris, London Heathrow and ports such as Rotterdam, Antwerp and Hamburg are being joined by new logistics centres in Eastern Europe with new markets also rapidly emerging in the Balkans, Russia, Ukraine and Turkey. New European Union transport policy to move freight off roads and onto water is also having a substantial impact. Established ports in France and Belgium may become more important in relation to other logistic centres, due to their strategic location, and emerging ports that connect newly created sea routes may soon supersede traditional logistics locations. The rise of China as a global economic power is also set to have a major impact on the European logistics market.

Increasing demand for modern facilities in central locations from specialist logistics operators looking to expand has meant that property rents in the logistics sector have remained relatively strong

London Heathrow remains an expensive distribution location compared to other traditional logistics hotspots due to a strong economic performance in the UK. The traditional logistics hotspots of Barcelona and Madrid have seen an increase in rents, predominantly due to a lack of modern alternatives, whereas in Copenhagen and Helsinki rents have remained under pressure, however their importance as major ports is expected to provide a strong basis for improved occupier interest.

Many Eastern European cities are seeing improving rental levels including Moscow, Kiev, Warsaw and Istanbul. Strong rental levels in Moscow follow a long period of inactivity, which has been spurred back to life by a severe shortage of stock and a significant rise in pre-lets.

Strong trade
Since the enlargement of the European Union (EU) in May 2004, there has been strong trade between the 25 EU member states. This is very positive news for logistics operators as increasing trade in Europe is a critical catalyst to growth in the logistics market, with businesses operating on a European and global scale.

The enlargement of the EU has supported a growing logistics market in new member countries within the Central and Eastern Europe (CEE). These countries provide a gateway between Europe as a whole and non-EU countries, particularly Russia, and ultimately access to a wider market represented by an increase in population of 74 million to more than 456 million.

Strong economic growth coupled with a rise in trade will increase the importance of transport and logistics creating the need for pan-European transport issues to be addressed. This is particularly important given most of the new member countries have undeveloped infrastructure and the ports consequently have a great opportunity to play a significant role in the future growth of the distribution and logistics industry.

Current EU transport policy has led to the dominance of road transport at the expense of other modes. Consequently, this has resulted in increased congestion and bottlenecks that have had harmful effects on the environment. In addition, the EU is characterised by the fragmentation of transport systems and a lack of good connections between regional and national networks. In response to this, the European Commission White Paper on European Transport Policy for 2010, published in 2001, set a number of ambitious targets to ensure competitive and sustainable mobility in Europe.

Fundamental to this was the creation of the Trans-European Transport Network (TEN-T)
programme, a major initiative incorporating rail, road, waterways and shipping channel projects as well as addressing issues such as accessibility and interconnections, multimodal links, cross-border connections, congestion relief and Galileo, the satellite navigation system.

As well as improvements to and the liberalisation of the rail system, there is an increasing importance on sea transport which has been addressed by the EU through the promotion of the Short Sea Shipping initiative, the Marco Polo programme and the ‘Motorways of the Sea’ policy.

The introduction of the ‘Motorways of the Sea’ policy is expected to improve short sea shipping by offering efficient, simplified services with the aim of becoming an integral part of door-to-door logistics chains. The chosen ports connected at either end of the ‘motorway’ need to have efficient hinterland connections with well-developed local logistics markets, rapid administrative procedures and a high level of service. They also need to have sufficient land available to develop a dedicated terminal with access and reception areas, plus several berths with a waiting zone for vessels in case of adverse weather conditions.

Throughout the 1990s there was a rapid emergence of the feeder or Hub ports which serve as the gateway to Europe. The predominance of container ports in the northern range, from Le Havre to Hamburg, has been one of the reasons for the increase in north-south traffic routes, which are already stretched to capacity. Ports such as Antwerp, Rotterdam and Hamburg have been used because of the high quality to price ratio of services provided since they have better modern equipment and betterdeveloped links with the rest of the world.

However, due to the high volume of goods being shipped major ports have become highly congested. Consequently, there could be opportunities for smaller ports to reposition
themselves as container ports. ‘Motorways of the Sea’ aims to respond to the development of ‘superports’ and congestion by promoting nearby less developed ports to take a share in the growing market. This will have a direct impact on the logistics market in Europe as ports – both ‘superports’ and container ports – will attract distribution real estate markets to these locations.

To date, the EU has suggested four major routes: Motorway of the Baltic Sea; Motorway of the Sea of Western Europe; Motorway of the Sea of South East Europe; and Motorway of the Sea of South West Europe

Of these four, the Baltic route presents the greatest opportunity. Currently 40 per cent of freight in the new member countries is carried by rail and road infrastructure in this area is below the average of the EU15. Major logistics operators could therefore potentially benefit from locating to near to Rostock, Lubeck, Sassnitz, Tallin, Riga, Gdansk, Gdynia, Sczezin and Ventspils.

Concern with costs
For the transport and logistics industry there is a concern with costs and benefits in transporting freight from ports and the accessibility of ‘Motorways of the Sea’. Experience has shown that Short-Sea Shipping requires efficient, integrated commercial services. In order to do this, thought should be given to bringing together all links in the logistics chain (consignors, ship owners and others involved in the shipping industry plus road, rail and inland waterway operators) in a one-stop shop to make intermodal transport by sea as reliable, flexible and easy to use as road transport. Additionally, there is a need for simplified customs and documentation procedures, an  all-in payment and fidelisation system, and liability insurance (road/sea).

The principal limitation of the water mode is that it is unable to carry freight from door to door. Unloading and reloading adds costs, both financial and time, making the services less competitive, to the benefit of road haulage. This has the advantage of the feeder network enabling it to carry goods almost anywhere. If this program is to be successful it is important to create the right technical conditions for developing the profession of the freight integrator and to standardise loading units.

The development of logistics facilities close to ports faces a lack of land supply with port authorities often only permitting leasehold development. Consequently, logistics facilities can often be located 60 to 70 km from ports.

A further problem for the logistics sector is poor hinterland connections and lack of multimodal platforms. However, implementation of the ‘Motorways of the Sea’ initiative combined with the Marco Polo programme, should lead to the development of the multimodal links required, as already evidenced in North East France, and increase the attractiveness of ports to the logistics sector.

The entry of 10 new countries to the EU presents both a challenge and a long-term opportunity for logistics. According to the European Commission, to eliminate major bottlenecks at borders will require an investment of e90 billion by 2015. Transport systems in Central and Eastern Europe have traditionally favoured rail (40 per cent of all freight traffic) over road.

Trend is changing
This trend is changing as these countries embrace market-based economies, with rail  freight rapidly migrating to roads. However, there is an opportunity to take advantage of their growing port traffic and invest in it. The logistics sector is well established with a strong appetite for investment, which will expand further to Central and Eastern Europe. Therefore the ports targeted by the ‘Motorways of the Sea’ initiative will be potentially good locations for establishing warehouses and distribution centres in the future, especially in the Baltic area.

China’s emergence as a global economic power is also set to have an impact on European logistics markets. A sharp increase in imports from China into Europe has been one of the critical catalysts to growth in the European logistics market in the last 12 months.

The northern range of ports, from Le Havre to Hamburg, handle most Chinese imports arriving by sea. Since early 2004 the ports of Rotterdam, Hamburg and Antwerp – better known as the Gateway of Europe – have experienced above average trade growth with Hamburg being the main entry point for goods from China.

Occupier demand is emanating from German logistics operators, keen to provide storage and distribution space for the increasing export from Germany as well as the growing number of Chinese shipping companies entering the port. As a result the leasing market has seen growth of around 50 per cent with a steady rise in rents.

A similar trend of growth is mirrored in Holland where developers are finally starting to catch up with increasing demand for warehousing around Rotterdam’s port with experts estimating that in the last two years, 90 per cent of total growth in trade at the port has originated from China. Likewise to the south of Europe in Italy, demand for warehousing space has surged around the southern Gioa Taouro port, which can accommodate the largest vessels and where new logistics space is being developed, again as a result of the growing trade with Asia and China.

An expected 38 per cent increase in trade between the 25 EU member states by 2010 will lead to a shift in the mode of transport used for the transportation of goods between countries. The use of ports and sea motorways will become fundamental in terms of cost and time saving. Belgium along with the Netherlands is considered to be the Gateway of Europe, and should benefit from growing traffic. France, especially La Havre and Marseille, will grow in importance as logistics locations. However, less developed ports also have an opportunity to gain a more competitive advantage in the future through the EU’s proposed ‘Motorways of the Sea’ initiative. ¦

 Simon Lloyd is head of Eurologistics at property agents, DTZ

The centre of gravity

Eastern and Central Europe may be growing in importance for DC locations, but the
gravitational centre remains the West. By Charlie Jacoby

We can’t stop ourselves. We are tied to the USA in everything and Europe’s experiment with the euro leads only down the path of bankruptcy. That was the main conclusion of property expert Dr Peter Linneman, launching the 2006 NAI Global market report, hosted by NAI Fuller Peiser in London. He says the real estate market is set to continue its buoyancy for the next few years but then, as the US economy falters, there will be a downturn by 2010.
The pan-European warehouse development industry has been fascinated by the growth of China, the exports it sends to European ports and the network of distribution hubs that fan out from those. But Linneman says the USA is the engine of the global economy. The US produced e405 billion of economic activity in 2005 alone, with China a long way behind on e284 billion.

He cited the remaining three years of President Bush’s term as a major factor in terms of economic change. He says that political campaigning and ‘finger-pointing’ leading up to the election will take the emphasis off economic change. Any monetary policy that would be put through government now would not come into play for three years anyway.

Linneman also referred to the euro as a ‘failure waiting to happen’ due to the lack of flexibility of the exchange rate mechanism to respond to supply and demand imbalance across Europe. He predicts we have a further three years of good times to look forward to. Those good times will roll unless governments pursue outrageous monetary policies.

The NAI global report predicts that European growth will remain mixed with the UK solid, particularly in the buoyant investment market, emerging markets in the east becoming stronger and the west recovering from the downturn.

In Europe, stable rents, lower vacancy rates and limited development are likely to keep the balance in western European countries, while in Eastern Europe the large demand meant very low vacancy rates as supply struggles to keep up. Paris is realising an improved absorption and Frankfurt seems to have hit the bottom after several years of decline.

A more sober assessment
This is the story of European warehouse development at the moment. The excitement about European ports and about opportunities in the former Soviet bloc countries in the last few years has given way to a more sober assessment of the market by property professionals, which reveals that it is dominated by the big deals in core Western European locations. Demand is more traditional than we have been led to believe.

In time for MIPIM, warehouse developer ProLogis and consulting company Capgemini brought out a joint report on key trends in the logistics and transportation industries and how they are impacting warehouse location and design. Of course the study said that the emergence of Central and Eastern Europe is a major driver affecting European supply chains – which study doesn’t? It also said, however, that Western Europe remains the ‘centre of gravity’ for companies with distribution operations on the continent.

In addition, the study says warehouse developers are under increasing pressure to provide customers with facilities that offer a high degree of operational flexibility, given the rapid changes to distribution networks taking place across the continent. Shortened lead-times and tighter delivery windows are creating more pressure for companies to be closer to the customer and increasing demand for warehouse space at strategic
transportation hubs.

The report goes on to say that the primary function of warehouses is evolving from basic storage to management of the flow of goods. As a result, 79 per cent of shippers and 84 per cent of logistics providers expect to establish or expand cross-docking at their facilities over the next three years. The increasing volatility in customer demand and service requirements requires a supply of warehouse facilities both flexible in size and location. Shippers and LSP’s increasingly choose to lease warehouse space and demand flexibility in lease contract terms. Distribution warehouses need to be located at premium locations. ‘Upgrading’ of existing obsolete logistics real estate at strategic locations can bring relief to markets where supply of warehouse space at these locations is limited.

Reecnt big deals
Among big recent deals, ProLogis leased more than 152,000m2 in Germany to two leading logistics providers. In one transaction, ProLogis will develop a new industrial facility west of Frankfurt pre-leased to GL Kayser Kontrakt Logistik, a private third-party logistics company serving enterprises throughout the country. In the other, ProLogis has leased 20,600m2 in central Germany to Geodis, a global provider of transport and logistics services.

Meanwhile, in Leipzig, Eurinpro has signed an agreement with global online retailer Amazon.de for the development of a 70,000m2 warehouse. Leipzig has recently attracted big German industries such as BMW, Porsche and DHL.

In Italy, Eurinpro is expanding its existing logistics centre in Anagni for Silvano Chiapparoli Logistica SpA, an Italian logistics service provider specialising in pharmaceuticals and cosmetics. For Chiapparoli, this agreement is the second venture with Eurinpro in the past five months. Last October, the companies agreed to develop a 11,082m2 warehouse in Anagni. However, growing demand for Chiapparoli’s services have required the development of a second facility, that will double its space under development by Eurinpro. The projects will be developed on a 105,000 sq m parcel purchased by Eurinpro.

Following the signing of an initial agreement last October, Eurinpro had begun work on the development of a warehouse covering 11,082m2, but recently received a request from Chiapparoli to add a second unit and extend the total surface area to about 23,000m2.

ProLogis’s activity in Italy includes the expansion of its largest industrial park in Italy following the lease of 11,150m2 to Alvi Srl, an Italian distributor of food and other products and a subsidiary of Gruppo Marazzina. Alvi has leased the space at ProLogis Park Lodi, a 220,000m2 industrial park outside Milan. ‘This transaction underscores the demand we are seeing in Milan for high-quality industrial space,’ said Ranald Hahn, ProLogis managing director
for southern Europe.

ProLogis has also leased 16,100m2 of newly completed industrial space to Y2K Logistica Europa SpA, an Italian thirdparty logistics provider. Y2K will open a new distribution centre at ProLogis Park Romentino, a state-of-the-art industrial park outside Milan. Y2K will use the space to serve its customer, paper products distributor, Burgo Distribuzione Srl.

This tale of solid demand by well-known names continues in Belgium. As part of the implementation of its strategy as logistics service provider, DHL Exel Supply Chain has decided to consolidate its logistics activities in the Food business within Belgium. A new logistics centre will be created in Tisselt (Kersdonk) and this will be designed specifically as a Mega Food Centre that meets the requirements with regard to integrated quality and efficiency. It will move into 32,000m2 with a maximum extension of 40,000m2 planned for the period 2006-2009.

To see where warehouse demand is going look at what the big warehouse developers are building. Outside Paris – one of the most traditional locations for warehouses in Europe – ProLogis is putting up a new industrial park next to Charles De Gaulle Airport. It will comprise five distribution centres and more than 176,750m2 of industrial space. Construction of the first three buildings is expected to begin in the first half of 2007.

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