Wednesday 23rd Aug 2017 - Logistics & Supply Chain

Risk and reward

You sometimes wonder about companies: do individual managers make decisions based on sense or based on fear? Perhaps it’s a healthy mixture of both. Property developers have a reputation for being seat-of-pants operators. However, the formal and grand corporatisation of property development at the top end of the market – in companies such as Gazeley Properties and ProLogis – has seen executives’ fear of making mistakes grow in importance and their old fashioned gut decisions become part of the property industry’s colourful history.

Nowhere is this more in evidence than in their behaviour in the newly-expanded EU. At Europe’s western end is a mature and, above all, safe property market. At its eastern end is a kind of corporate ‘Wild West’. Ask any business school professor: there’s no faster way for a legitimate businessperson to make money than in emerging markets. Over the last two years, land values in prime locations in Central Europe have risen by 25, compared to just 10 per cent in prime locations in Western Europe, according to research by property consultant King Sturge. It’s also a good way to lose money. King Sturge says that land values have fallen by 20 per cent in secondary locations in Central Europe while they have stayed steady in secondary locations in Western Europe, so perhaps that explains the reticence of the big developers to go there, even though their clients are falling over themselves to offer distribution networks across the east.

Moving East
Exel Logistics, for example, has just announced that it is to open a new logistics terminal at CTPark Modrice, close to Brno, the second largest city in the Czech Republic. Although a tiddler at 2,000 sq m, Exel’s Czech Republic managing director Roman Plachy says proudly that the new logistics terminal is an ‘important step’ in expanding Exel’s network in Central and Eastern Europe. Exel will use it to supply warehousing, distribution, customs management and other logistics services. To take the example to an extreme, DHL actually used as corporate promotion the news that one of its executives, with a suitcase full of cash, was among the first businessmen into Baghdad after the fall of Saddam’s government.

DHL, Swisslog and Fiege Logistics are among companies going to the second annual TLS CEE Congress in Prague in September this year. The event provides an opportunity to learn, understand and evaluate the transport, logistics and supply chain industry in Central and Eastern Europe – and it sold out in March. Christian Sorensen, European Congress director at organiser Marcus Evans says: ‘Transport and logistics in Central and Eastern Europe have undergone phenomenal change. While many of the trends can be compared with global patterns generally, the precise changes bear the hallmark of the local environment. As regional development continues, those companies investing in collaborative logistics, infrastructure development and cutting edge technologies will emerge as the dominant players in the region.’

Yet you won’t find Gazeley building in Eastern Europe. There is a strong streak of conservativism in Gazeley’s current vision of European distribution. Its current French sites stretch in a north-south line from Arras in the north, through Pagny near Metz, about equidistant to Paris and Lyon, to Fos near Marseilles in the South. It has a site in Belgium, one at Zaragoza in Spain and one east of Turin in Italy. In Germany, it sticks to the Berlin-Frankfurt corridor.

There’s a whiff of fear in Gazeley and others’ policy – but where’s the sense? The sense lies in the developers’ new-found love for schemes attached to ports. Both Gazeley and ProLogis have produced research showing why ports are the place to be if you are truly a giant among property developers. And the ports to be near are located in the safety of Western Europe.

The drive to get goods made in the Far East and Eastern Europe into shops in Western Europe is having a profound effect on big ports. Their relative scarcity on Europe’s seaboard means distribution shed development has to take place in clearly defined areas near the ports, unlike the land grab that characterises the landlocked Eastern European markets.

Ports strategy
ProLogis senior vice president of global services Bert Angel is in charge of the firm’s port strategy. ProLogis has 61.2 million sq ft of space – 21 per cent of its portfolio – in 15 ports in Asia, Europe and North America. According to the latest published figures (2003) from Containerization International, Asia has a massive 51 per cent of the container market share going through its ports. Europe comes second with 21 per cent and North America third with 14 per cent.

Although ProLogis has plans to expand in Europe, they are nothing like its plans for Asia. ProLogis is planning to build in additional ports. Among them are Antwerp in Europe and the Chinese ports of Busan, Shanghai, Lingang, Guangzhou and Shenhzen. These are ports that ProLogis believes are best positioned for growth.

China already boasts three out of the top five container ports worldwide in terms of total TEU. Hong Kong handles more than 20 million TEU a year. The biggest European ports, Rotterdam, Hamburg and Antwerp, handle 7.1 million, 6.1 million and 5.4 million TEU a year respectively.

This emphasis on the Far East over Europe also reflects ProLogis’s existing presence in six European ports. In Rotterdam, ProLogis Park Maasvlakte helps make the firm the largest developer/owner in the port with 129,600 sq m of space. Among deals it has let units of 21,367 sq m and 20,234 sq m to DHL.

That’s not all. In Hamburg, ProLogis has built 30,000 sq m for NYK and it has done deals to GEFCO and XPLog at Le Havre. Hamburg is Europe’s fastest growing port in terms of Asia traffic as well as a port of entry for Central Europe and the Baltics. Le Havre is France’s largest container port.

ProLogis has formulated its specific ports strategy because it expects world trade to grow by 6-12 per cent a year over the next five years – and 80 per cent of world trade is currently by sea. Some 46 per cent of current worldwide ship capacity is on order. There are 35 ships in service with capacity of more than 7,500 TEU with orders for 126 additional ships of this size or larger. These so-called post-Panamax ships, which are too big to fit down the Panama Canal, will find fewer ports that can cope with them. This, says Angel, will lead to satellite ports for liner operators and to shippers diversifying inbound shipments to multiple ports. He also claims that it will lead to increasing interest in intermodal rail links in Europe and North America, which will be a welcome points change for the increasingly sidelined rail lobby.

The increased growth and change in shipping goods will have an effect on the 3PLs operating in Europe, too, says Angel. Consolidation and vertical integration between terminal operators, shipping lines and 3PLs will continue and there will be more growth, especially in Europe and North America, in deconsolidation of warehouse facilities.

Fragmented market
Recent research by management consultant Frost & Sullivan backs up Angel’s assertion. Currently, the European warehousing market is fragmented with a large number of small and medium 3PLs operating across key regional markets. F&S says that, as manufacturing firms begin outsourcing a significant part of their internal logistics activities across product lines with an emphasis on lower warehousing costs and higher efficiency levels, an increase in mergers and acquisitions is likely to result. This is expected to be accompanied by heightened demand for a consistent level of warehousing services across Europe. Market consolidation amongst the 3PLs is also likely to be motivated by the falling warehousing profit margins caused by a shortage of skilled labour and rising technology costs. While small and medium 3PLs are likely to close down or be acquired by larger 3PLs, tier 1 suppliers are expected to pursue m&a strategies to advance market share and expand their product service portfolios.

At Gazeley, ports and ship canals are at the heart of development strategy – but in Southern Europe rather than ProLogis’s focus on the north. Fos is a port site and Pagny is connected to Fos via the Saune and Rhone canals.

In this, Gazeley has the backing of Frost & Sullivan. It says that the big port winners in Europe will be in Southern Europe thanks to rising imports from China. It adds that the move of manufacturing plants to Eastern Europe is expected to result in a large part of the inbound logistics functions moving eastwards and that this is likely to prompt a significant decline in the Western Europe warehousing markets. F&S says that, across Europe, the warehouse market is likely to be hit by the implementation by leading customers of leanmanufacturing techniques such as just-in-time (JIT) and just-in-sequence (JIS). This is likely to effect a reduction in the stock inventory levels.

Gazeley marketing manager Magalie Tardif says that this has been a strategic choice of sites by the company. ‘Either it’s near a port or if it’s inland it’s near a canal,’ she says. ‘This is the way forward to France. We are trying to reduce road transportation in France. The site we have in Belgium is also accessible by rail and by canal.’

She says that Gazeley is alive to the infrastructure of each country where it is active. ‘The site we have in Belgium is also accessible by rail and by canal. It depends no the infrastructure of the country,’ she says. ‘When we look at Germany, the site we have at Kassel is accessible by train. In our choice of location, we tend to look at sites where we have more than one access.

‘In the UK, it is more difficult to get multimodal sites because the rail and water network is not well developed.’

ProLogis has been a prime mover in providing rail access to its UK sites. However, for a variety of reasons stemming from lack of demand, none of the rail links are in use. France is more progressive. In Pagny, Gazeley’s customer Dut, the Kingfisher-owned DIY furniture retailer, has a rail connected building and it despatches and receives all its goods by train. ‘The infrastructure of the train transport is fairly easy to use,’ says Tardif. ‘It also depends on the requirement of the customer.’

In the short term, the outlook for property developers who have broken ground and started building is rosy. This year’s Mipim property conference in Cannes was as decadent in style and excess as the last days of the Roman Empire, according to more than one commentator. Property people had money to burn – and for the shedbuilders among them it came from industrial vacancy that is declining across Europe. According to King Sturge, average vacancy for industrial property in Western Europe has decreased from 6.1 per cent at end-2003 to 5.5 per cent at end-2004, while in Central Europe it has declined from 6.6 to 4.8 per cent. King Sturge’s latest report on the European Industrial property markets reports that occupational demand for industrial property is gradually improving across Europe while new construction has not been rising at a similar level to match the increase in demand. There is currently little speculative construction.

King Sturge forecasts rental growth in 2005 and 2006. Average industrial rental growth in Western Europe has decreased in the last three years and remained unchanged in the past year. In Central Europe, average prime industrial rents have risen by eight per cent in the past year.

Investment yields
A good indicator for the health of the warehouse market is the relative size of yields on investment sales – the lower the better. King Sturge says that prime industrial investment yields, when averaged across Western Europe, have fallen to 7.88 from 7.94 per cent (over one year) and from 8.93 per cent (over five years). In Central Europe, prime industrial yields have fallen to 9.7 from 10.4 per cent (over one year) and from 12.4 per cent (over five years). In the last year, prime industrial investment yields have moved downwards most in Central Europe, Ireland and the United Kingdom. Compared to 10-year government bond yields, average prime industrial investment yields are 390 basis points higher in Western Europe and 570 basis points higher in Central Europe. Prime industrial yields are highest in Greece, Central Europe and France. In some markets, such as London and Lille, investment yields for industrials are now lower than for offices

London and Lille may be safe but the east reigns supreme as a place to make money. The King Sturge Occupier and Investor ‘Eureka’ analysis cites Europe’s more densely populated city regions such as Madrid, London, Athens and Paris as the more cost-effective regions for occupiers and better investment opportunities for investors but, significantly, it also points to Warsaw, Budapest, Prague and Bucharest.

All the major property developers are keeping a close eye on Eastern Europe and a handful are active there. ProLogis has let and sold space to companies including Exel, Wincanton, DHL, P&O and France Marche in Poland, Hungary and the Czech Republic. Angel identifies potential multi-modal inland terminals for Europe at Duisburg, Neurenberg, Budapest, Bratislava and Southern Poland. ‘There’s nothing wrong with Eastern Europe,’ says Angel. ‘We have a very sizeable investment programme there.’

Tardif at Gazeley says that, if she had to place a bet on it, Prague and South Poland would be where Gazeley would build in Eastern Europe first. ‘The reason we are not currently in east Europe – and we are interested in it and it’s probably where future logistics will go – is because we have decided to go there only if we have a specific customer requirement,’ says Tardif and, ignoring the actions of companies such as Exel, she adds: ‘We will follow our customers, if they would like to set up their operations there.’

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