Logistics properties play a role at EXPO REAL 2015. The trade fair is an important platform for the industry. But just what is logistics, and what topics are exercising the industry in Germany when it comes to real estate? A survey and things worth knowing about a dynamic industry.
Even if insiders know that Germany’s third biggest economic sector underpins the functioning of our globalized, collaborative world. That ingenious IT systems devised for logistics are integral to controlling supply chains and transport networks. That logistics offers qualified jobs and indispensable value-added services, from customized labeling to returns and waste disposal management. That logistics can be an eminently lucrative source of business tax for a community and a source of stimulus. Wide swathes of the public have an image of the industry that largely obscures aspects of modern logistics.
Not so with real estate professionals and investors. Logistics properties are a coveted investment class and one that is playing an increasingly significant role at the leading trade fair for property and investment, EXPO REAL. Claudia Boymanns, EXPO REAL project manager at Messe München International puts it this way; “logistics properties are much sought after as an asset class, not just nationally but internationally. For us, therefore, it is important that both the companies and the topics confronting the industry are present at the leading trade fair for property and investment.” Messe München is doing its bit to ensure that this is so. More about that later.
Before turning to the specific challenges facing logistics properties, however, we would first like to clarify what logistics actually is, and its importance in a globalized, collaborative world.
What is logistics?
Logisticians plan, design and control the international flow of merchandise and information for supplying production plants and disposing of their waste in equal measure, and for distributing goods in trade and services, without which no international division of labor would be possible. In addition to the transport, transshipment and storage of goods, merchandise and information, logistics services increasingly include logistic value-added services such as customized packaging/labeling, assembly, returns and information management.
A little more than 50 per cent of all logistic services take place in trade and industry:
- production planning
- assembly control
- on-site transport and merchandise management
Somewhat less than half of the value is created by logistics service providers. There is very much a trend for trade and industry to rely increasingly on logistics service providers to deliver their logistics as outsourcing partners.
- a sensible economic and efficient collaboration between business units, companies and industries. In this so-called B2B sector (“B2B” – Business to Business) a large degree of division of labor in the manufacturing of a product is the norm nowadays. Components and individual parts come from various manufacturers in different countries.
- Logistics ensures that trade and industry (over-the-counter trade and mail order) – and thus the end customer (“B2C” – Business to Customer) – are optimally supplied with
- products, consumer goods, parts, materials, etc.
- but also, for example, with spare parts.
No matter whether we make our purchases in the supermarket around the corner, order online from Amazon, look for wheel rims at Autoteile Unger or drop in at McDonald’s for a hamburger: an ingenious logistics system always ensures that the goods are in place at the right time.
Example automotive industry
Automotive production logistics, for example, is especially complex: this entails most of a vehicle’s components (e.g. engines, windscreen wipers, seats, braking system, wheels) being manufactured by suppliers around the world before being delivered pre-assembled “just in time” to the assembly line thanks to modern IT and ingenious logistics networks. The challenge already begins by gathering together the individual components. For example, a car seat is made of various individual components (upholstery, springs, frame, seat heating etc.).
This highlights just what complexity lies behind the umbrella term logistics and that only a small proportion of it takes place on the road. Virtually nothing moves between and within companies without logistics.
What is the economic importance of logistics?
Between 1950 and 2007 the worldwide trade in goods increased 29-fold whereas the production of goods in the same period grew only by a factor of 8.6. Globalization is the megatrend confronting logistics with major challenges. As already mentioned, with a market volume of around 235 billion euros and 2.9 million employees in 2014 it is Germany’s third biggest economic sector, after the automotive industry and trade.
60,000 companies operate in the logistic services arena, including global corporations such as Deutsche Post and Deutsche Bahn, but first and foremost small and medium-size companies with an annual turnover of less than 10 million euros. At the same time, logistics is high-tech with major national and international market opportunities.
The European logistics market is estimated at 930 billion euros (2013). Germany accounts for a high proportion of this with fully 20%. German logistics companies operate worldwide and are among the global market leaders. Germany is not just the football world champion but according to the World Bank’s latest study, the “Logistics Performance Index”, the EU’s strongest economy is ranked first in logistics as well. The good, albeit in parts aging, logistics infrastructure plays an important role here.
Buoyant new construction activity
Germany is a logistics country and the demand for space, and the volume of logistics real estate projects being implemented are correspondingly high. After the turbulence of the financial and economic crisis the latter are running at a consistently high level. This is evidenced by the new build volume figures which the Munich-based consultancy Logivest GmbH together with Fraunhofer SCS, Nuremberg, has compiled for the full year in its logistics property seismograph, published quarterly. It shows new logistics buildings totaling just under 3.5 million m2 being started in 2014. This figure equates to year-on-year growth of around three per cent. The annual new construction volume has been around the three million m2 mark since 2011.
In the capital market as well, logistics finally established itself in 2014 as an asset class with a new transaction best score of 3.6 billion euros. At the same time core logistics properties were in short supply and will be in even shorter supply as many developers are not making their projects available to the investment market but are transferring them into their own funds.
Logistics properties are now seen as an attractive alternative to other real estate classes such as offices and retail as they are fraught with significantly fewer risks in mature markets than was assumed. In point of fact, they exhibit relatively little volatility and are therefore a lower risk than other asset classes. And the higher concomitant yields are the actual reason why many investors, who have never previously had any dealings with this asset class, are now interested in this real estate class.
No flagging in demand
All the experts assume that the demand for logistic space – subject to normal economic development – will remain at a consistently high level. In addition to economic growth, a key driver is the development of e-commerce: experts currently see this sector as offering the biggest growth and a dynamic requiring sweeping changes in logistics. Product availability, same-day delivery, cross docking, returns logistics concepts for the ‘last mile’ are the buzzwords here. The reorganization of logistics also requires new concepts for site selection and characteristics.
The increasing shortage of space in the top regions, combined with inadequate space planning is yet another challenge. According to the federal government’s plan, the use of “greenfield” sites is to be significantly scaled back, from 130 hectares in 2002 to 30 hectares in 2020. In 2010 the average being built on was still 77 hectares. That means that the area available for new construction will probably have to reduce by a further 60 per cent by the target year. At the same time, the need for plots, essentially driven by the upheaval to logistics infrastructure as a result of e-commerce, will increase yet further.
Logistics is attractive
Logistics sites frequently encounter a critical response from neighbors and the authorities involved in the planning and approval process. The latest study by Munich-based consultancy Logivest and the Fraunhofer Supply Chain Services working group in Nuremberg “LoGe 2015: Germany’s most successful logistics estates” demonstrates on the basis of comparisons with existing surveys that a whole string of frequently encountered prejudices against logistics should be viewed in a very much more nuanced light.