U.S. private equity giant Blackstone Group LP plans to grow its already sizable European logistics portfolio through acquisitions, as the company believes the recent boom in the warehouse market has staying power.
The New York-headquartered firm still has a long position in the sector after several years of massive investment in industrial and logistics assets, Samir Amichi, Blackstone's head of European real estate acquisitions, said May 21 during a conference in London. Blackstone owns around €20 billion of logistics property in Europe, with Germany, the U.K. and France its largest markets for investments in the sector, a company spokesperson told S&P Global Market Intelligence.
"The logistics sector has just fundamentally changed. For the first time in its history, it's decorrelated from GDP; it's driven by something else," Amichi said. "From our perspective if we have a logistics asset for 10 years and an office asset for 10 years, we'll get a better income yield from the logistics asset than the office asset. So we are still very much buyers in the logistics sector."
Investment in European industrial and logistics assets was down 11% in 2018 from the previous year, according to a February report from BNP Paribas Real Estate. However, the drop had been expected following a record year in 2017, the report said, with investment volumes having doubled since 2014. Demand for logistics space is strong, it added, with newly leased space 15% above the five-year average, helping to push rents up during 2018 by an average of 4% across 38 European cities studied.
Amichi identified the growth of e-commerce as the driving force behind the sector's strong performance globally in recent years. But relatively low online sales penetration in Europe compared with the U.S. and China meant that the European market still had room for further growth, he added.
He noted that Europe is averaging about 7% online sales penetration compared to roughly 15% in the U.S. and 30% in China. The online penetration in Europe can vary by market. For instance, Spain is around 4%, and the U.K. is approximately 15%, Amichi said.
"So we still see that pressure from e-commerce coming in," Amichi said.
Blackstone sees the greatest opportunity for further growth in the last-mile urban logistics segment, particularly in densely populated markets where demand is not being met with supply, Amichi said. The company has already invested around €6 billion in urban logistics across Europe, the spokesperson told SPGMI. Amichi said supply is particularly tight in Greater London, as developers would rather build office or residential assets because their values per square foot and the rents per square foot are still higher than logistics.
Over the past three years, vacancy in the Greater London logistics market has dropped to 3% from 10%, and rents have increased 10% year over year, said Amichi. "You can't say that of really many sectors in Europe today," he said.
The U.K. logistics market enjoyed another strong year in 2018 as £6.7 billion worth of property was transacted, just above the five-year average of £6.5 billion, according to fourth quarter of 2018 data from Cushman & Wakefield. Newly leased space for the year stood at 35.9 million square feet, the highest level since 2008, it said. Prime industrial and logistics yields hit a low of 4% in the Heathrow area of London and 4.25% in the city's Croydon area, it added.
Amichi said he expects to see the spread between European office and logistics yields continue to close in the near future.
Logicor Europe Ltd., the European logistics business in which Blackstone owns a 10% stake, will eventually be spun off, Amichi said. Blackstone sold Logicor for €12.25 billion in 2017 to sovereign wealth fund China Investment Corp., before buying a 10% stake back later that year.
"We don't really have a choice but to monetize the assets," Amichi said. "I can't tell you when that will be. We're still in acquisition mode, we're still improving performance, we're still seeing very good income growth. I can't tell you whether Logicor will be a private market exit, public market exit, but it feels like it should go as one business."