Industrial and logistics property a good news sector amid global difficulties
Despite global inflation and global peace concerns, the MIPIM International real estate conference shows record investor appetite for the industrial and logistics sector.
MIPIM, the world’s leading international real estate event in Cannes, France, signalled a return to normality after the covid health crisis. Under the shadow of a Russian Ukrainian war, MIPIM’s recovery from a two-year covid break revealed good news for certain property sectors amid clear global difficulties.
Both listed and unlisted companies worldwide were represented at the event. Many countries, cities and property developers use MIPIM to showcase investment opportunities. There were many invaluable lessons for the South African property market, despite the visible lack of African representation.
For Inospace, it further validated the significant value in the industrial and logistics sector, which is booming worldwide with growing investor and tenant demand. Many trends in the sector were particularly exciting for Inospace. Our business model satisfies many international strategies that the world’s largest investors crave. More critically, the global trend of strong industrial rental growth is in most first and second-tier investment markets.
Inospace’s R2,25Billion portfolio, which was recently boosted through a joint venture with Fortress REIT, has seen its rental rates for smaller micro-logistics units reach over R100 per square metre. This type of growth is unique in South Africa but commonplace in other markets.
It was reasonably obvious to participants at MIPIM that the industrial logistics sector had a pretty good pandemic in business terms; the sector, or at least many of the companies occupying logistics and delivery spaces, provided a vital service for locked down consumers as the pandemic accelerated the trends towards omnichannel retailing and gaps in supply chains. Providing the space to facilitate product delivery has elevated the industrial and logistics sector from an unglamorous outsider to a sector of choice, with yield compression to match. Rental growth has been growing and is projected to intensify further. Several sectoral specialists believe that there will be double-digit rental increases in 2022.
Prologis is the world's largest REIT
Several industrial operators, including Prologis, reported occupancy of 100% in many markets. Many big-box owners and managers said that they had run out of space, pushing the need for new-build developments to alleviate supply constraints.
A few days before the MIPIM event began, pan-European last-mile logistics real estate owner, Mileway, was recapitalised to the tune of over R300Billion ($21Billion). This was billed as the largest private equity real estate ever.
The intense investor appetite in logistics real estate was a theme that ran throughout the conference, despite warehouse owner, Prologis, the world’s biggest REIT, being a MIPIM headline sponsor. The Prologis Europe team was out in full force at MIPIM, and several of their experts moderated or spoke at panel sessions. Prologis shares are more than 60 per cent up on their pre-pandemic level, giving the company a market capitalisation of close to $120bn.
After the conference, it was announced that Prologis made a non-binding offer of a little over $23.14 billion for Mileway. If the Prologis bid is successful, it will give the company a dominant position in European “last-mile” facilities — smaller warehouses that serve customers in cities.
The strength of logistics real estate investors’ enthusiasm for what it offers gave the sector’s other bigger participants credibility to wield when raising money. P3 Logistics Parks, based in Prague, debuted on the bond market with a €1billion green-bond issue in January. Another industrial and logistics fund, CTP, one of Europe’s largest developers and managers of logistics and industrial real estate by gross lettable area, reported a 306% rise in net profit from 12 months to 31 December 2021, exceeding its March 2021 IPO targets with a total annual return of 47%.
Russian-Ukrainian conflict driving inflation
Under a cloud of the Russian invasion of Ukrainian and a spectre of wider European conflict, there was an even larger emphasis on operational property players that could outperform inflationary pressure. Most investors are eyeing sectors where operators can add value instead of investing in traditional steady yield income that would not be able to keep up with inflationary pressure. Reflecting this is a growing interest in second-tier geographies – especially in Ukraine’s prosperous neighbour, Poland.
It was concerning that there was little African representation at MIPIM, and the continent did not overtly appear to be on investors’ radars. However, it was recognised that South Africa has a sophisticated and established corporate, institutional real estate environment and should be on the international investment radar, despite its unreliable electricity supply and negative business sentiment.
Niched property operators in high demand
With investors focusing on thematic investments, following trends such as urban logistics and omnichannel transformation, real estate growth is expected to be primarily driven by sectors outside of retail and offices. Self-storage, last-mile logistics and data centres are expected to gain in importance.
Renovating and repurposing redundant real estate was interrogated as part of a broad effort to new working and shopping patterns that have changed dramatically since the pandemic. This is exactly what Inospace has been doing since 2017. In Europe and North America, some shopping centres have been converted into last-mile delivery areas to accommodate the increase in e-commerce. This change has been a long time coming, and the crisis has accelerated trends that were already there.
Environmental sustainability, particularly energy efficiency, was a major theme of MIPIM. It was noted that the large roof areas of industrial and big-box logistics properties provide an ideal platform for solar panels. With its unique electricity constraint, South Africa seems ahead of many international investors, where we lead by feeding electricity into the electricity network.
What was clear is that the future evolution of logistics and industrial real estate is not just physical in terms of location and design. Several commentators believe that industrial and logistics real estate will become a turnkey product akin to serviced offices.
Leading companies have focused on providing customers with products and services beyond four walls and a roof. Value-adds such as racking systems, handling equipment and forklifts are added to their customer offerings. “Warehouse-as-a service” was touted as a concept where customers can turn up, open their doors, and everything they need is already covered by one transparent rent.
Despite the spectre of an escalating Eastern European war, the outlook for 2022 is positive, and the economic context is favourable. There was a sense of relief and optimism at MIPIM, and it appears that commercial real estate will grow as a favoured asset class. Several property economists believe that the impact of inflation could act as a positive driver for real estate, which many investors view as an inflationary defensive asset class.
About MIPIM: MIPIM is the world’s leading property market event. Held in Cannes, in March, MIPIM brings together the most influential players from all international property sectors, offering unrivalled access to the greatest number of development projects and sources of capital worldwide.