In the past couple of years urban logistics has become a key investment theme, driven by the growth in ecommerce across Europe. In this article we look at why it has become so popular and how the higher rents and capital values are justified for the modern, purpose built “last mile” developments.
European ecommerce sales have grown significantly in the last five years, nearly doubling since 2015 and are forecast to continue expanding strongly, with average internet penetration rising to the mid-teens by the middle of the decade. The pandemic has obviously given a huge boost to this trend, adding up to five years of growth in some countries during 2020.
A corollary of this growth in ecommerce has been customer demand for faster delivery times, which have fallen from 4-5 days a few years ago to next day, same day and even more specific delivery slots. This has driven the need for more logistics buildings in urban locations, whether to transfer goods from trucks to vans, or for urban fulfilment to nearby consumers, via vans, scooters and bicycles.
Urban sites, close to end consumers and suitable for high volume distribution, obviously mean higher land costs, especially in major European cities. Even in secondary cities and suburban locations, tight planning and competing uses, like residential, make such land scarce and expensive. Although the European average for such sites is c.€300/sqm, there is a wide disparity between London, where land values can be as high as €2,000/sqm and less urban locations where they can be as low as c.€50/sqm.
As well as higher land values, these urban and suburban buildings tend to have very low site coverage (for the logistics building relative to land plot), normally in the region of 15-25%. This is to allow for both van and truck manoeuvrability around the building, covered loading areas and parking. This clearly increases the total cost of development again, compared with standard logistics assets, with site coverage ratios of c.50%.
On top of higher land values and low site coverage, the number of vans operating from these buildings means they require significant levels of parking. Because of the confines of space and the number of parking bays, the parking provision is increasingly multi-storey, often with integral electric charging points, to enable a fully electric van fleet, to meet planning requirements.
Combining the high specification of these buildings to the considerations above means they have substantially higher development costs than standard logistics assets. Indeed, we estimate that total development costs would start at c.€2,000 per sqm, even at land values of c.€200/sqm. Within this, multi-deck parking can account for over 40% of the total cost, even excluding charging point costs.
Higher development costs justify higher rental rates, which in turn produce higher capital values, especially where multi-level parking is required. As the chart shows, monthly rental rates range from €10/sqm to more than €30/sqm, which are c.2-3x the level of standard logistics rents. As a result, capital values can be anything from €2,000 per sqm to over €6,000 per sqm. Nevertheless, continued increases in occupier demand should still lead to further rental and capital value growth.
At the same time, we have seen record breaking yields for these assets in recent transactions. The lowest net initial yield recorded was 3.3% and even the highest was 4.3%, with an average of 3.85%. This confirms that yields are being driven by location, building quality, lease term and tenant covenant, rather than the layout or type of building, as these assets have achieved yields below prime distribution warehouses.
To conclude, the yields reported in recent transactions confirm these urban/last mile buildings have proved as desirable to investors as they are to occupiers. As a result, they can command premium yields relative to standard logistics assets, even at what appear to be high capital values. As we have shown, these capital values are justified by their urban location, low site coverage and the parking requirements of the building’s operations. Therefore, this is an asset class that is expected to continue to see intense investment demand in the years to come.