How does the biggest name in industrial stay ahead of the pack in the face of fresh competition? David Hatcher reports
Blackstone is in the midst of deciding whether to IPO or sell Logicor. GIC is buying P3. All eyes are on Brookfield to see when it will push the button on IDI Gazeley. And John Cutt’s Mountpark is buying up swathes of the UK with the backing of USAA.
With all this noise in the logistics sector, it is easy to forget about the biggest name of them all – Prologis.
The industry beast owns, manages or has under development a gargantuan 666m sq ft globally, valued at $64.9bn (£53.1bn).
In Europe, it is managed by Ben Bannatyne following the departure of Philip Dunne at the start of the year who, according to his successor, is “golfing and chilling” before deciding on his next move.
Bannatyne was managing director for Central and Eastern Europe, based in Warsaw, before taking on the role of president of Europe in January this year and is now working out of the company’s continental base in Amsterdam.
He is in charge of a $15.5bn portfolio totalling 178.7m sq ft. Logicor, its nearest rival in terms of size, was only established in 2012 and is closing in with an €11bn (£9.8bn) portfolio totalling 140m sq ft.
Size is not everything of course, and more snide observers have turned their noses up at some assets bought by Logicor in its quest to scale up. But with the insatiable institutional appetite for logistics, it is clear Prologis is not the only show in town anymore.
To stay ahead, Bannatyne is working on asserting the company’s dominance in Europe. This will mean retreating from countries that are unviable, taking on speculative development and ensuring that the company is at the forefront of the evolving demands of its e-commerce customers.
Avoiding the space race
Under Bannatyne, Austria and Romania are out, 40% of Prologis’ development this year will proceed without having secured tenants and its assets in Europe will need to be immaculately branded and landscaped with a plethora of mod cons for its evolving tenant roster.
The one thing that is off the cards is joining in a space race. “The only thing we will not do – and we probably were guilty of it in the past – is just going for size,” says Bannatyne.
“For us, I think biggest used to be best and I think now, regardless of what goes on with Logicor and P3 and such like, we have a very defined strategy that we’re just extremely focused on and we will continue to invest that way whilst we can. We’re not going to suddenly start investing in secondary just to be bigger.”
Bannatyne insists that the interest in the sector, once seen as the grubby sibling of offices and retail, should be welcomed as it steadily matures and gives rise to greater opportunity for Prologis to grow.
This has been illustrated by the world’s largest investors, including Norges Bank Investment Management, with which Prologis has a €4bn joint venture, piling in and pushing up pricing.
Investors are attracted to the broadly higher returns on offer in the sector compared to retail and offices, albeit a gap that is narrowing, and with a 96% occupancy rate and a tenant retention rate of close to 90%, the Prologis portfolio appears to be a reliable income-generator.
“The more money that comes into logistics, the better it is for us,” he says. “It has truly become an institutional product. Logistics was seen as something to only have a small allocation to historically, whereas I would say it’s now reversed; logistics is probably close to the top of most multi-sector investors’ lists because the income return’s fantastic.
“People were very worried about obsolescence and life cycle but the buildings that we lease in the States, some of them are 50 years old. Even e-commerce, which has really transformed our whole sector, they’re taking buildings that are 40, 50 years old, so a rectangular box still works.”
Bold approach
The surge in demand for well-let logistics has meant that the company has had to amend its strategy away from buying standing stock and focus predominantly on development.
“In 2013, 2014 and a bit of 2015, we were actively buying [fully let investments] across all countries in Europe. We have put the brakes on that and we started looking at value-add acquisitions where there’s vacancy, but this year acquisitions are extremely low and we are much more focused on development,” says Bannatyne.
The company aims to have a two-year supply of land in each of the countries it operates in and although it broadly has enough in the pipeline, it is still “slightly short” in the UK and hungry for more in Germany.
“We’re buying land that we can put straight into production. We used to buy large sites and take on planning risk but now we want to be able to get to market quicker.
“In the UK, we do still take on planning risk, because land is extremely difficult to acquire and planning permissions take so long with there being competition with residential and a perception issue around industrial use. You can at least option land in the UK, which we can have control of without paying for until we draw it down,” he adds.
The buoyant occupational market has meant that the company has taken a bolder approach to development, even if it is broadly shying away from planning risk.
“Around 40% of our development this year will be speculative. Of course, we have a list of customers already identified and we are normally in some sort of discussion. It is not like in 2007 when spec was, well, literally speculative.”
This somewhat more selective approach has led Prologis to slightly cut its geographical focus in Europe, having exited Romania with Austria next on the list. It now operates in 13 countries, soon to be 12.
“We had a bad experience in Romania with access to our site and it’s not as transparent as we would like it to be. We just couldn’t get the scale that we needed so we sold out to Czech developer CTP,” says Bannatyne.
“Austria is similar. We have one scheme near the airport in Himberg, just outside Vienna, and down the road in Bratislava we’ve got 300,000 sq m [3.2m sq ft] or so and we realised that actually Bratislava was a much more viable market for our business to be focusing on.”
Adapting to the times
Although Bannatyne is keen to highlight that the fundamentals of renting out a big box have remained largely consistent over the generations, there is one thing that has most certainly changed.
“Now, what they do inside the box, that has changed dramatically,” he says.
The evolution of e-commerce and rising expectations from the man on the street have led to tech giants and omnipresent third-party logistics firms taking ever more space and in turn pushing the boundaries of what is carried out within warehouses. Prologis has had to adapt accordingly.
“There are a lot more people working in warehouses today than there were in the past, which is kind of counter-intuitive. In a 1m sq ft facility, Amazon will employ 2,500 people and 4,000 at peak times.
“We have to provide a lot more parking and have a lot more social areas such as cafés, showers and lockers as our customers are all competing for the same thing – labour. You have to have the landscape and trees, the flagpoles all branded properly and really make sure they are nice places to work with more daylight. So we need to be closer to cities for deliveries but also for staff.”
Bannatyne estimates that e-commerce retailers take around three times as much logistics space as general bricks-and-mortar retailers. Tenants are also investing heavily into their warehouses as they become more high-tech, meaning that they are more likely to renew leases on expiry.
“We are putting in mezzanine floors sometimes with some facilities almost fully automated. Some of our parks used to be in the suburbs of the city but are now perfectly located closer to the city centre [as cities grow]. We are really seeing demand for smaller, multi-let facilities close to city centres which is being driven by last-mile delivery. We are keen to fund more in-fill, smaller, brownfield locations at the moment, particularly around London, Paris and the major population centres.”
With the ongoing evolution in the sector, Bannatyne’s ascension to the helm looks well timed. Its rivals might be busy plotting dramatic corporate strategies and edging up behind Prologis, but, when it comes to scale and experience, the company is still firmly ahead of the pack.
Where does the cash come from?
Prologis is a REIT listed on the New York Stock Exchange. It uses its own balance sheet to predominantly buy land and develop assets.
It also acts as a fund manager and typically the assets it develops on its own balance sheet it will sell to one of the funds it manages. The funds themselves will also selectively develop and buy land if they are nearby or associated with assets the fund already owns.
In Europe, Prologis’s main active vehicles are:
- Prologis European Properties Fund II – A pan-European evergreen fund with a large pool of investors which buys stabilised assets. It was formed in 2007 and owns 307 assets across 12 countries totalling 72.1m sq ft valued at €4.9bn. Capital is recycled when assets are sold and it is closed to new investment.
- Prologis European Logistics Partners – A 50:50 joint venture with Norges Bank Investment Management which owns 59.4m sq ft of assets valued at $4bn. The venture was formed at the end of 2012 with €2.4bn of assets which were previously owned by its Prologis Europe Properties Fund. PEPR had been listed but was taken private by Prologis following a bid by APG and Goodman in 2011.
- Prologis Targeted European Logistics Fund – Initially targeting France, Benelux and Germany, it has now expanded its geography and last year entered Central Europe. It owns a 22.4m sq ft, $2.2bn portfolio. It is open-ended and raises new capital every quarter.
Prologis determines which fund is offered assets it sources or develops partly through a rotation system. However, the Norges joint venture has first refusal on larger assets, as do any funds that own assets next door to the opportunities sourced.
“Our real estate guys on the ground have no real day-to-day view of fund ownership – they are just Prologis. They lease it, they speak to our head of asset management and he’ll speak to investors if needs be but on the ground we are just Prologis,” says Bannatyne.
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