Sander Breugelmans, who was promoted to head of capital deployment for Europe at Prologis at the start of this year, has stepped into his new role at a time when occupier and investor demand for industrial stock splits the market.
Occupational demand has been “extremely strong”, Breugelmans tells EG. The European arm’s portfolio is nearly 99% occupied, with rents continuing to grow. “Even with demand potentially coming down a little bit over time, I still feel very good about it,” he says.
It has been a more turbulent time on the capital markets side, which is enduring falling values, rising interest rates and growing cap rates. But Breugelmans senses that change is afoot.
“There are quite a few parties that feel that we are now getting close to logistics real estate valuations bottoming out,” Breugelmans says. “Nobody really can call where the turn of the market is, but it feels like you can be price-ready.”
Breugelmans is hopeful that buyers and sellers are “getting a lot closer”, and that transaction volumes will rise over the next quarter, if only fractionally.
“Some markets will probably take a bit longer,” he says, adding that both the Southern and Central Europe markets will likely take “a few more quarters to adjust”.
“I feel cautiously optimistic that transaction volumes will at least go up a little bit, and buyers and sellers will be able to find each other,” he says.
With the dynamics for both markets driving his strategy for capital deployment across the continent, Breugelmans’ initial approach towards acquisitions will be “careful” while the business continues to take stock of pricing. Instead, his strategy will mostly centre on enhancing the developer’s existing landbank.
“Compelling” UK market
Prologis’ European arm has shifted its investment focus to include last-mile logistics as well as big-box properties. In urban areas, the business targets lot sizes of up to 100,000 sq ft, but the owner is sticking with a cautious approach for now.
“There is still a discrepancy between buyers and sellers, and price discovery going on,” says Breugelmans. “The UK is probably closest to finding equilibrium – a lot of markets are not there yet.”
As the UK nears that balance, he notes that the market is starting to look “compelling” for acquisitions.
“With some of the repricing, there could be interesting opportunities out there,” he says. “We look at how an opportunity stacks up for us in replacement cost. If you look at some of the pricing, we are starting to get to the level where we see discount to replacement cost again.”
The European business deployed roughly €4bn (£3.5bn) of capital last year, with €3bn channelled into third-party acquisitions and €1bn into developments. Spending activity will be more restrained this year. “2023 will be a little more quiet,” Breugelmans says. “2022 was an extraordinary year.”
When it comes to acquisitions, Prologis is opportunistic. “We don’t really have a target,” says Breugelmans. “We can do €1bn, we can do zero – there’s no number. It’s all about the opportunity that’s there.
“That said, our mid to longer-term plan involves growing our platform across Europe. Scale is important for us. We want to keep growing and that can be via our own developments, acquiring land, developing and buying buildings, buying portfolios or M&A-type deals.”
Banking on the landbank
In a time of uncertainty, much of Prologis’ capital will be focused on its existing landbank. Globally, the landbank build-out potential in the developer’s portfolio was valued at $39bn (£31.7bn) at the end of 2022.
“Our strategy is really [focusing] on monetising our landbank, getting it in title, finding customers that are build-to-suit and adding value to the company that way,” he says. “We have a great landbank across the major population areas in Europe, and that’s the best focus right now.” Nonetheless, Breugelmans adds that Prologis is also looking to source other “interesting plots of land”.
“There are some markets where we are fairly dry, and we can use more to fuel our development pipeline over the next few years,” he says. “We have been careful over the last quarter, after an extremely busy 2022. But over the next few quarters, we will start to see more activity from our sites.”
Slowing down spec
In the meantime, Prologis is slowing its speculative development programme, in case demand goes “down with time” in a recessionary environment.
“We started a lot of spec development last year,” says Breugelmans. “We want to be a bit careful. But we will still develop on a speculative basis in the right pockets, especially where it’s closer to major population areas, because we see the most sustained demand there.”
Some traditional e-commerce players – most notably Amazon – are scaling back ambitions for warehousing expansion. However, Breugelmans says that slowdown in demand for space has been offset by a range of occupiers seeking space for a variety of uses, including grocery retailing, near-shoring, and storage for ESG-related materials, such as lithium batteries and heat pumps. That demand “more than makes up” for the decrease from the traditional occupier types, says Breugelmans.
With ESG becoming an increasing priority for occupiers, Breugelmans is preparing to factor in more demand for both clean energy and mobility.
“We are going towards a future with clean mobility,” he says. “Having energy on site and being able to cater to what your customers want 10 years from now is going to be absolutely crucial.”
To send feedback, e-mail pui-guan.man@eg.co.uk or tweet @PuiGuanM or @EGPropertyNews
