The relevance of integrating this promising asset class into your portfolio.
The growth of digital consumption has led to a change in consumer habits: products and services are available online 24 hours a day, 7 days a week. As a result of these new habits, delivery times have been drastically reduced. This change in practice has a concrete impact on trade logistics and infrastructure. Economic players must be able to deliver goods directly to consumers as quickly and efficiently as possible. In particular, we are talking about the last mile. In order to keep its promise, a company delivering a product needs a reliable and efficient physical infrastructure and well-established logistics. This means locating your operations in efficient and flexible buildings to efficiently manage the supply, storage, preparation and delivery of goods.
There is a second movement that directly affects the industrial sector: the shift of part of the economic activity. Aspects of optimizing distances, sustainability criteria, and sometimes even ethical and social issues are taken into account when choosing these industries strategically. The Covid-19 pandemic and geopolitical tensions have further exacerbated this trend.
Today, two main criteria are taken into account for the physical location of infrastructure and, therefore, real estate and buildings:
- proximity of infrastructure and buildings to vehicles
- Proximity to areas with high population density to reduce delivery distances.
The undeniable impact of the COVID-19 pandemic on the logistics and industrial sector
The restrictions have heightened the urgency of having local infrastructure to deliver goods quickly. The acceleration of consumer digital habits has led some companies to look for new ways to connect with their customers and deliver their products.
The health crisis has highlighted the strategic role of global logistics, especially European logistics. From this logic follows the previously mentioned repatriation of some strategic activities for business and consumers. A side effect during the crisis was an increase in product inventories, which directly affected the management of buildings and infrastructure.
Today it is extremely important to track consumer behavior and corporate strategies in relation to global problems and challenges, whether it be armed conflicts or the fight against climate change. These surface wells will create new needs in terms of logistics and industrial infrastructure. This new way of thinking and looking at the industrial and logistics market as close to the population as possible has been given a name: urban logistics.
Trends in the logistics and industrial real estate market
This results in rent increases due to growing market demand and supply shortages (capacity of existing infrastructure and/or lack of land). The scarcity of raw materials and rising construction costs make it difficult to build new infrastructure in a reasonable amount of time. Thus, the pressure on rents is strong and should continue in the coming years. In urban areas, demand for storage and logistics buildings and infrastructure is supported by the last mile mentioned above. These factors contribute to the presence of permanent tenants.
In recent years, the performance of large logistics platforms has declined, while the smallest buildings, called small logistics, maintain a higher level of performance even if they also fall.
However, investment volumes in light industry and small logistics remain limited for these buildings, necessitating the development of portfolios with much more assets to make up for this low volume by increasing quantity. Daily monitoring of the market and the presence of local teams are necessary to identify investments and thus increase the volume of transactions. Moreover, the number of players in the infrastructure and logistics market has increased significantly in recent years, which has led to a much larger amount of investment.
A mature and profitable asset class for investors
Investing in this asset class provides institutional investors with many opportunities:
- The industrial and logistics sector, which was already growing before 2020, continues to grow today. There is no logical or predictable reason for the depreciation in the coming years.
- Although they have fallen, the yield nevertheless remains attractive to institutional investors. Detailed knowledge of the market allows you to make a reasonable choice in terms of investment.
- Diversifying the types of tenants in the portfolio reduces the risks inherent in any investment and enhances the overall sustainability of the fund. This risk is lower the more the tenants in the industrial sector are aware of the economic situation. The result is a situation of market stability, which manifests itself, in particular, in long-term leases, which allows for the forecasting of tangible profits and provides good transparency of cash flows. The tenants are generally small and medium enterprises with good financial stability, operating in various sectors and industries.
The evolution of the market in recent years reinforces the relevance of this choice of asset class. The investment logic must be long-term and stable, but also resilient to major current and future challenges. The phenomena of globalization and the movement of a large number of goods and strategic activities, the problems associated with the necessary proximity of buildings to the population, the concept of the last mile, the pressure on rent and the restrictions associated with the construction of new infrastructure confirm the relevance of investments in industrial and logistics real estate.
April 2022 This document was prepared by Edmond de Rothschild (Suisse) SA (“Edmond de Rothschild”), 18 rue de Hesse, 1204 Geneva, Switzerland, a Swiss bank authorized and regulated by the Federal Financial Markets Authority. supervision (FINMA). It is not intended for individuals who are citizens, resident or permanent residents, or organizations registered in a country or jurisdiction in which its distribution, publication, availability or use would be contrary to applicable law or regulation. This non-contractual document is provided to you for informational purposes only and should not be construed as personalized investment advice or recommendation, an inducement or offer to buy, sell or hold any transferable security or financial instrument, or the implementation of any investment strategy. The figures, comments and analyzes contained in this document reflect the views of the Edmond de Rothschild group on the markets based on their experience, their economic analysis and the information they had at the time of publication, which is therefore subject to change. The figures, comments, analysis and investment research contained in this document may not be correct, outdated or out of date when read by investors due to the date of publication of the document or changes in the market. Any investment involves risk, in particular the risk of fluctuations in prices and returns. Past performance and volatility do not indicate future performance and volatility and are not constant over time.
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