cbre view point l xxl warehouses l november 2013

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THE MARKET FOR XXLBy Richard Holberton, Director, EMEA and Amaury Gariel, Managing Director, EMEA Industrial and Logistics

SUMMARY

One consequence of the growth in online retailing, and otherof operations into fewer larger units: XXL-warehouses. This reflectsnetwork optimisation - notably economies of scale, inventoryinformation management, closer links with the customer basestrong drivers.

INTRODUCTION

The twin challenges of the continuing growth of onlineretailing, and weak economic conditions across much

strong drivers.

High quality, preferably multi-modal, infrastructure is seen asClear eaves heights and vehicle circulation space are importantgoods handling and inventory management. Given their scale,to satisfying occupier needs, and is an area where specialist developersand contract management.

These drivers have pushed take-up within this size band in Europerepresenting around 14% of the total industrial market. TheXXL-warehouses are accounting for a growing proportion of totalfor at least two-thirds of take-up in this size bracket, with third party

In investment terms XXL-warehouses have accounted for nearlywith the UK, France and Germany again to the fore. This scaleby supply chain managers and retailers towards XXL-warehousesre-letting concerns do have an impact on appetite and pricingPac) and the United States (US) are that investor demand for thisa result.

retailing, and weak economic conditions across muchof Europe, are forcing ever-greater scrutiny andreconfiguration of supply chains across a whole rangeof components and goods distributors.

In the early phases of the downturn, with economicactivity contracting steeply, the overwhelmingemphasis was on cost-containment. More recently,attention has been focussing on a broader range ofsupply chain issues. These include visibility andtransparency; disaster resilience; growth in numbers ofproduct lines and order complexity; much-reducedcustomer tolerance on delivery times; flexibility to copewith demand volatility; supplier integration; expansionin service range and the globalisation of networks.

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CBRE

THE MARKET FOR XXL-WAREHOUSES IN EUROPEBy Richard Holberton, Director, EMEA Research

, Managing Director, EMEA Industrial and Logistics

pressures on logistics supply chains, is increasing centralisationreflects a range of factors stemming from a general desire for

inventory management and expansion in service range. Crucially,base and a greater understanding of buying behaviour are also

Thus while slow demand growth remains a concern inmany markets, it is already clear that these challenges

as a vital attribute of sites and buildings that satisfy these aims.important features in allowing XXL-warehouses to support innovations in

scale, the availability and deliverability of suitable large sites is vitaldevelopers have advantages in site identification and acquisition,

Europe to over 4 million sq m since the beginning of 2012,The UK, France and Germany dominate, but almost everywheretotal leasing activity. Retailing, including online retailing, accountsparty logistics operators (3PLs) also prominent.

nearly 20% of the European market since the beginning of 2012,scale of activity reflects widespread recognition of the structural shiftwarehouses but at the same time single asset risk and

pricing among European investors. Indications from Asia Pacific (Asia-this type of asset is growing strongly and pricing is improving as

© 2013 CBRE Limited

many markets, it is already clear that these challengeswill outlast the current recession-recovery cycle, andthat the quest for the ultimate smart supply chain willbe a key driver of logistics markets for years to come.Solutions to this range of issues also imply the need forlonger-term occupier commitments, at least at the beststrategic locations.

At the same time, online retailing remains a significantdriver of logistics market activity, and its future growthwill introduce significant challenges and opportunitiesfor the logistics networks needed to support it. Internetaccess in Europe has risen by nearly 400% since theyear 2000, and credible estimates put the rate offuture growth in online retailing in Europe at 12-15%per annum over the next five years1 .

1. Forrester Research

This is not merely a matter of scale. Future growth willrequire the development of more dedicated andspecialised logistics platforms with sufficient processcapability to cope with the enormous number ofpermutations around the method and location oforder and fulfilment, and ever-growing customerdemand for more choice of cost-effective deliveryoptions.

In some ways, these challenges reflect an evenbroader shift: the growing realisation that supplychains, if efficiently managed, are a strategic asset thatcan boost profitability for retailers and others. So, withthese issues now sharply in focus, how might retailers,manufacturers, distributors and others address thisarray of challenges in real estate terms? Clearly, thereis not a simple one-size-fits-all solution, but oneincreasingly popular response is the consolidation ofoperations into fewer, larger centralised hub units,supplying a large hinterland area more cost-effectivelythan might be possible from traditional networks. At50,000 sq m or more, these are XXL-warehouses.

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50,000 sq m or more, these are XXL-warehouses.

REALISING HIDDEN VALUE: THE CASE FORCENTRALISATION

One of the ways in which supply chains are beingreconfigured is through a process of polarisationgiving rise to demand for both local high-throughputfacilities close to the final point of consumption2, andXXL-warehouses providing very large-scale capacity

Figure 1: Example of an XXL-Warehouse Supply Chain

2. See also: “Parcel Delivery Centres: A Growth Opportunity”, CBRE May 2013


November 2013

Source: CBRE

willand

processofof

customerdelivery

evensupplythatwith

retailers,this

thereoneof

units,effectively

At

at one site. So, depending on the scale and structureof a given network, either or both of aregional/national distribution centre or e-commercewarehouse could come into the XXL-warehousecategory. What are the advantages of such large unitsfrom a theoretical and practical perspective? In someways demand for XXL-warehouses can be seen as anexpression of the greater merits of centralisation overfragmentation. This in turn is the result of the interplayof a variety of factors, each of which may impact to adifferent degree on the thinking and decision-makingof specific parties. While their effects may not beuniform certain key factors can be identified:

• ChangesChangesChangesChanges inininin ProductionProductionProductionProduction:::: Producers across a widerange of industries now operate froma locationally-complex network of facilities,supported by suppliers which are not alwaysclose to the main production facility. Giventhe widespread adoption of on-demandmanufacturing and just-in-time delivery, thesechanges heighten the importance of the transport

FOR

beingpolarisationthroughput

and

changes heighten the importance of the transportelement of the supply chain and encourage atendency towards centralisation of distributionat strategically-accessible points. Centralisedfacilities also allow manufacturers greater directcontact with their customer base - hence allowingthem to counteract the procurement power ofretailers - particularly where the facility forms partof a “direct to customer” supply chain.

Supply Chain

2. See also: “Parcel Delivery Centres: A Growth Opportunity”, CBRE May 2013

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• TransportTransportTransportTransport CostsCostsCostsCosts:::: The cost of transport has risenfrom around a third of overall logistics costs in the1980s to around two thirds of costs currently. Thisis largely the result of an increase in transport-related costs – such as fuel, tolls, regulation – aswell as higher underlying demand arising frommore dispersed production strategies. At the sametime, progressive reduction or removal of customsand other frictional barriers, and improvements inthe quality of road infrastructure in Europe havealtered the economics of long-distance transport.The changes favour large consignments on biggervehicles covering most of their journey betweenmajor hubs – thus favouring centralisation. Thisstrategy also facilitates reduction in the absolutenumber of trips required, since schedules are betterorganised and delivery quality improved. Theremaining 35-40% of costs relate to premises,inventory holding, labour etc. In many of theseareas, improved productivity and systemsareas, improved productivity and systemsintegration - aided by innovations supported bycentralisation - have held these costs downand reduced their overall contribution.

• SupplySupplySupplySupply ChainChainChainChain ConsolidationConsolidationConsolidationConsolidation:::: In part this relatessimply to the need to reduce the cost of inventory -and also improving the ease of managing it - byconsolidating from a multi-locational site networkinto a smaller number of large strategic sites. Insome ways this reflects the logic behind “supplierhubs” that have long been used in some sectorssuch as car manufacture and high-tech, wherebylogistics companies run a hub facility for multiplesuppliers close to the production plant. Perhapsmost importantly the use of XXL-warehouses allowsspare inventory (“safety stocks”) to be heldcollectively and efficiently as a means of mitigatingthe risks in a just-in-time supply chain, and also asa way of accommodating the greater flow ofreturned goods that occurs with online retailing.

• EconomiesEconomiesEconomiesEconomies ofofofof ScaleScaleScaleScale:::: Consolidation and inventoryreduction allow process and procurementreduction allow process and procurementcentralisation, and hence contribute to a reductionin unit costs. In the case of retailers, who are a verysignificant segment of the occupier market for thissize of unit, the benefits also include reduction inthe amount of storage space needed at shops sincestocks can be held centrally, sometimes for severaldifferent retailers, at one site. In conjunction withtechnology improvements inside the building,centralisation also allows greater flexibility inresponding to changes in consumer behaviour andbuying preferences by simplifying configuration andmix of inventory at one site.

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• ExpansionExpansionExpansionExpansion inininin ServiceServiceServiceService RangeRangeRangeRange:::: Outsourceddistribution arrangements have evolved away fromlocal transactional relationships towards globalsupply chain management partnerships covering abroad range of integrated services and genuinerisk-sharing. The major 3PLs are increasinglyoffering a range of multi-regional or global supplychain services, which include order validation, pre-order checking and information control. Theseplace higher demands on IT systems and skills, andhence favour centralisation. Retailers themselvessee centralised distribution facilities as part of their“big data” strategy to improve understanding ofcustomers’ buying behaviour. By owning andmanaging the complete flow of information from adistribution centre to point of consumption (whetherthat is a shop or household), retailers can exploit ahidden advantage to refine their commercial andmarketing strategies. This is becoming ever moreimportant due to expansion in the range of productimportant due to expansion in the range of productlines needing to be held, in response to thedemands of e-commerce.

Some of these advantages have been apparent forsome time, but have only recently come to beworkable because of improvements in buildingtechnology and specification which enhance the agilityand responsiveness of the supply chain. Theseimprovements may include more advanced internalclimate control which allow higher goods handlingvolumes; more internal automation such as barcodescanners, voice-picking and conveyor equipment;innovative storage configurations such as”double-deep” stacking; increased use of radiofrequency identification (RFID) to track productsthrough the supply chain; and integral cross-dockingat the XXL-warehouse for high-throughput productlines.

There are of course risks. Clearly a business needs tobe of sufficient scale and scope of operation in the firstplace to consider taking this course, and theconcentration of inventory to a single site presents therisk of supply chain disruption from, for instance,


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risk of supply chain disruption from, for instance,natural disasters. Further challenges revolve arounddeploying technology and manpower appropriately toensure that warehouses run as efficiently as planned.

To explore the relative importance of these apparentadvantages, we sought feedback from a sample ofmajor 3PLs.

The main locational criteria are similar to those forconventional warehouses, with general accessibilityand quality of infrastructure as the dominant factor,although labour availability and proximity tocustomers are also highly significant (See Figure 2).

Figure 2: Main XXL-Warehouse Locational Criteria from an Occupier’s Perspective

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This is consistent with evidence from Asia-Pac whereoccupier demand for buildings of this size isoverwhelmingly driven by growth in online retailing,the associated need for rapid throughput of stock, andhence the ease of access to both origin and finaldestination points.

Multi-modal access is seen as especially important forthis type of operation. In some areas this reflects hightraffic volumes and congestion, which makeaccess to rail increasingly important. Equally,360 degree accessibility from the hub distributionpoint is vital to the ability to move inventory in alldirections quickly – and more likely to be favoured bygood multi-modal infrastructure. In turn this reflectsthe fact that cost base of the final part ofthe supply chain - from distribution centre to customer– is becoming an increasingly important differentiator.

Source: CBRE

– is becoming an increasingly important differentiator.Other evidence indicates that - given increasedautomation and process complexity - the quality andskills profile of the local labour pool (as much as itsabsolute size) is of increasing importance.

Overwhelmingly, centralisation of operations is seenas the main advantage of locating at aXXL-warehouse along with associated economies ofscale. Cost considerations also play a role, withreduced transport and reduction in unit storage coststhrough efficiency gains also prominent (See Figure 3).

A further notable advantage of XXL-warehouses is thatthey allow some 3PLs to operate an integrated“pooling” strategy for multiple clients from the same


November 2013

foraccessibility

factor,to

facility. The benefits of such an approach includeenhanced flexibility for end clients; optimisation ofarrangements for shared use of assets such as vehiclesin order to reduce transport costs; and bettermanagement of seasonal or other changes in clientvolumes. Of course such an approach also requiresan ability to take a long-term strategic approach to theacquisition and management of such assets, and awillingness to take controlled risks without extendingthe length of commitment from individual clients.

“A vital advantage of XXL-warehouses is that theyallow the ability to operate multiple client contractsfrom a single location. This does impose additionaldemands in terms of locational criteria, financialresources and strategic asset planning, but it alsobrings great value and flexibility benefits to clients.For instance it allows shared use of trucks and bettermanagement of volume fluctuations.”

whereis

retailing,andfinal

forhighmake

Equally,distribution

allby

reflectsof

customer.

Given the size of these assets and their land demands,it is perhaps not surprising that the availability ofsites of sufficient scale and locational qualityconstitutes a key challenge in pursuing this route.Choice of location is essential, particularly where it isenvisaged that multiple clients - perhaps with slightlydifferent locational needs from one another - willoperate from the same site. Consideration needs tobe given to the size of the local labour pool, notleast to avoid excessive competition for labouramong co-located occupiers. Planning issues are alsoprominent, reflecting a combination of strict zoning insome areas and concerns over traffic generation, roadcapacity and proximity to residential areas, albeit thatin other respects planning authorities are oftenfavourably-disposed to such large employment-generating uses.

JeanJeanJeanJean Poujol,Poujol,Poujol,Poujol, CFO,CFO,CFO,CFO, FMFMFMFM HoldingsHoldingsHoldingsHoldings

.increased

andits

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thatintegrated

Figure 3: Main Advantages for Occupier Operating From XXL-Warehouses

Source: CBRE

The challenge of securing and developing sites thatcan support the requisite level of heavy traffic usageand truck staging is also a significant issue, even inmarkets that are not highly land-constrained suchas the US and Australia. Overall, “deliverability” is

Figure 4: Main Challenges in Securing and Developing Sites Suitable for XXL

Source: CBRE

as the US and Australia. Overall, “deliverability” iscritical for occupiers who are seeking build-to-suit unitswith a high degree of specialism, and it is this that islikely to preclude widespread speculative developmentin the sector. Interestingly, finance and funding issuesplay a relatively minor role despite the high single-asset risk involved.

Specialist developers can build quickly enough thatthey can satisfy occupiers on deliverability at the best

Figure 5: XXL-Warehouse Key Features

Figure 4: Main Challenges in Securing and Developing Sites Suitable for XXL-Warehouses

sites. They are also well-placed to manage pre-qualification and the sub-contractor chain (securingconstruction materials, production capacity,management and equipment capacity etc.) which iscrucial to avoiding complications in planning and

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crucial to avoiding complications in planning anddelivery.

Multi-customer phased developments can last severalyears, as the mix and needs of customers change overtime. In these instances the development approachrequires that planning for future phases is secured, orat least discussed, at the outset so as not to delay anyfuture adaptations.


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This tends to increase initial fixed costs and hence hasfinancing implications, but also requires a flexiblelong-term approach to planning and management ofthe asset. Taken together, these points represent asignificant competitive opportunity for well-capitaliseddevelopers who understand the dynamics of the sectorand can deliver build-to-suit schemes quickly enoughso as not to delay strategic requirements, and alsoconsider longer-term issues such as possible extensionneeds.

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“Given the size of site involved and the degree ofspecialism required by many occupiers,deliverability is critical and includes quality ofmotorway access and likelihood of securingplanning permission. The ability to manage thewhole development process, and hence developquickly enough on a build-to-suit basis, is a keyrequirement in satisfying occupier needs.”

As noted above, the ability of XXL-warehouses tosupport innovations in goods handling and inventorymanagement is one of their major attractions and inturn reflects occupiers’ evolving demands. The specificfeature considered most attractive is clear height toeaves, with developers in some markets evaluating the

Figure 6: Key Aspects of Physical Design and Specification for XXL

NigelNigelNigelNigel Godfrey,Godfrey,Godfrey,Godfrey, SeniorSeniorSeniorSenior ViceViceViceVice PresidentPresidentPresidentPresident –––– UKUKUKUK andandandandSpain,Spain,Spain,Spain, GazeleyGazeleyGazeleyGazeley


November 2013

Source: CBRE

hasflexible

ofa

capitalisedsector

enoughalso

extension

need for heights of up to 12 metres, or even more incertain circumstances, to broaden the user market andattract e-commerce users with heavy mechanization ormezzanine needs. Vehicle circulation and docking, flatfloors and high loading door density are alsosignificant, and site security and power capability alsofeature (See Figure 6). Personnel safety, social spaceand ability to support a range of racking and sortingsystems are also regarded as important.

Taken together, these are features that allow optimalsolutions to be implemented for internal rackingconfiguration, order picking, load assembly andgoods movement, and the flexibility to alter theseprocesses in line with changes in demand conditionssuch as seasonal fluctuations or unforeseen spikes indemand. Generally, column spacing should be asgenerous as economics will allow, so as to minimiseobstructions to goods movement and facilitate processreconfiguration.

toinventory

inspecific

tothe

Overall these findings support the view that thelocational drivers for XXL-warehouse operation mostlyreinforce the existing concentration pattern fordistribution and logistics at European level, given theirheavy dependence on infrastructure, labour andproximity to centres of population. The emergence ofentirely new locations for such operations woulddepend on major changes in, for instance, the qualityof infrastructure or require the additional developmentof smaller interim hubs which could undermine thelogic of centralisation.

Figure 6: Key Aspects of Physical Design and Specification for XXL-Warehouses

Figure 7: Most Desirable European Logistics Locations

OCCUPIER ACTIVITY

Looking at the principal European markets3, take-up inthis size bracket had been running at 1-1.5 million sqm per year through 2010-11, but rose to over 2.5million sq m in 2012, and appears to be running at asimilar level in the first half of 2013. Consistently,around 75% of this has taken place in the UK,Germany and France, with Germany’s contributiongrowing at the expense of the UK over time.

Source: ProLogis Research

Figure 8: XXL-Warehouse Take-up 2010-13 (Million Sq M)

3. UK, France, Germany, Netherlands, Italy, Poland, Czech Republic, Russia

Source: CBRE

Desirable European Logistics Locations

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13 (Million Sq M)

Information on leasing activity in this market segmenttends to be uneven and “lumpy” because of the longdelivery times and build-to-suit nature of the assets, sointerpretation of data for short time periods should beapproached with caution. Moreover, in somecountries there is no activity at all in this size bracket asit is either too large for the size, not a current priority,or able to serve strategic needs from an adjacentcountry.

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Figure 9: XXL-Warehouse Take-up by Country (2010-13)

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The contribution of this size segment to overall activityvaries significantly, both from year to year and fromone country to another. For instance in the UK andItaly it has typically accounted for around 5-6% of themarket whereas in France, Germany and theNetherlands the corresponding figure is over 10%Significantly, the proportion of the leasing market(represented by transactions over 50,000 sq m) hasbeen higher in the past couple of years thanpreviously. In France, for example, the proportionhas risen from around 8.5% in the period 2010-11 toover 18% since the beginning of 2012. Taking thisgroup of countries together, the contribution of dealsof this size has risen from around 6% of the market in2010-11 to around 14% in the past 18 months,indicating a rising demand for larger buildings inresponse to the combined impact of developingrecovery and the logic of centralisation.

Figure 11: XXL-Warehouse Take-up by Sector (2010

Source: CBRE


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Source: CBRE

up by Country Figure 10: XXL-Warehouse Take-up as a % of Total

activityfromandthethe%.

markethasthan

proportionto

thisdeals

inmonths,

indeveloping

up by Sector (2010-13)

Source: CBRE

With regard to sector composition of demand, theretail sector has been a very prominent adopter oflarge buildings and, as noted above, the growth ofonline retailing is a major catalyst for supply chainreconfiguration. This is reflected in the fact thatretailing in its various forms accounts for around two-thirds of take-up in this size bracket, with 3PLsrepresenting a further 22%. Since in such cases the3PL will be operating on behalf of one or morecontract customers, this split probably understates thecontribution of retailers to overall demand. Anothernotable feature is that manufacturing (only 8% of thetotal over the past four years) accounted for 25% ofleasing activity in the first half of this year, withsignificant transactions in Germany, Russia and theNetherlands.

INVESTMENT CONSIDERATIONS

Investment purchases of logistics buildings over50,000 sq m in Europe totalled just under €3 billionin the 18 months from the beginning of 2012 orroughly 19% of the overall industrial market. Theaverage transaction size of €52 million compares withless than €15 million for all industrial assets. Thisscale of activity reflects widespread recognition byinvestors of the structural shift by supply chainmanagers and retailers towards XXL-warehouses.

The geographic distribution of investment in thissegment is broadly similar to that for the industrialsector as a whole over the recent past, albeit withslightly lower combined representation from theUK, Germany and France (53% inXXL-warehouses compared with 67% for the sector asa whole).a whole).

It should be noted that the data relates to transactionsof completed assets, and that significant additionalcapital is entering the sector via the funding of newbuild-to-suit schemes. The greater impact of largesingle transactions pushes up the contribution ofSweden in particular and to a lesser extent Turkey.

DateDateDateDate LocationLocationLocationLocation Size Size Size Size

June 2013 St Martin de Crau, France 117,000

Oct 2012 Daventry, UK 92,903

February 2012 Reading, UK 86,558

January 2013 Karlsruhe, Germany 85,340

April 2013 St Joost, Netherlands 77,000

February 2013 Milton Keynes, UK 62,710

Table 1: Example XXL-Warehouse Leasing Transactions (2012

February 2013 Milton Keynes, UK 62,710

August 2013 Derby, UK 58,715

June 2012 Monticelli, Italy 57,000

September 2012 Stryków, Poland 56,000

June 2013 Heudebouville, France 53,000

Source: CBRE

Figure 12: XXL-Warehouse Take-up by Country (2010-13)

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Size Size Size Size (sq (sq (sq (sq mmmm)))) OccupierOccupierOccupierOccupier SectorSectorSectorSector

117,000 Castorama Non-food retail

92,903 Sainsbury plc Food retail

86,558 Tesco Food retail

85,340 Daimler Manufacturing

77,000 Action Non-food retail

62,710 John Lewis Non-food retail

Warehouse Leasing Transactions (2012-13)

Source: CBRE

62,710 John Lewis Non-food retail

58,715 Kuehne & Nagel 3PL

57,000 Gruppo Scerni 3PL

56,000 Leroy Merlin Non-food retail

53,000 Intermarché Food retail


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UK28%

France6%

Germany19%

Netherlands2%

Spain7%

CEE12%

Sweden20%

Turkey6%

Figure 13: Investment Distribution, XXL-Warehouses (2012-H1 2013)

EMEA ViewPoint

Activity in this size segment is mostly the domain ofdomestic purchasers, which have accounted foraround 52% of purchases over the past 18 months,compared with nearly 60% for industrial assets of allsizes. The fact that there is significant cross-borderinvestment activity in this segment suggests thatadding high single-asset risk to the other usual risks ofoverseas acquisitions – including exchange rate orinformation-acquisition risks – is not a major deterrent,or at least can be priced appropriately.

There are various characteristics of this sub-sector thatwe would expect investors to consider. Typical leaselengths for new XXL-warehouse are 10-15 yrs so offergreater income security. The tenant commitment to thewarehouse in terms of fit out spend is significantlyhigher partly due to their size, but also due toadditional technologies they tend to incorporate, sothere is a greater likelihood of long-term commitmentsto the facilities.

Source: RCA

Against this, single asset-risk is typically high, andlocational and design attributes can be unusual,resulting in a high degree of specialism that couldrestrict liquidity and value on exit. Many investors willapply a premium on entry yields to reflect liquidity andre-letting risks. The investor pool for XXL-warehouseassets is clearly smaller than for the industrial marketgenerally, and the impact of potential vacancy on suchunits could be significant if there is no existing portfolioto offset this.

The balance between these factors is lookingincreasingly favourable in Europe, and we are seeingyields compress for the large facilities as investorsbecome less worried about size and scale. Yields forthe best buildings are sub-7% in core Western Europe,and in the low 7%s in core CEE.


November 2013

There are various aspects to this that are worthconsidering. While there are clearly lot-size issues, therelationship between development cost and size is notlinear. There are clearly economies of scale andbuying synergies available, and unit developmentcosts are generally higher up to a threshold of around25,000 sq m, suggesting that XXL-warehouses occupya position in the cost-value curve whereby unit price

France

0

“We see a structural shift towards XXL-warehouses,and they form a key element of our investmentstrategy. Currently we would require a yieldpremium over smaller warehouse assets to reflectadditional risks relating to liquidity and reletting,although it is possible that these will diminish as thesector matures”

RemyRemyRemyRemy Vertupier,Vertupier,Vertupier,Vertupier, FundFundFundFund Manager,Manager,Manager,Manager, LOGISTIS,LOGISTIS,LOGISTIS,LOGISTIS,AEWAEWAEWAEW EuropeEuropeEuropeEurope

offor

months,all

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thatleaseofferthe

significantlytoso

commitments

a position in the cost-value curve whereby unit priceshould not rise directly in proportion to size.

There are also good indications from other regionsthat at least some of the potential buyer profile for thistype of asset (large pension funds, sovereign wealthfunds and other institutional investors) regardXXL-warehouse assets as a positive opportunity todeploy capital on a scale that would otherwise involvemultiple acquisitions.

In parts of Asia-Pac for instance, such as Hong Kongand China, warehouses of this size are common (andin Hong Kong are likely to be multi-floor buildings)and may attract prices of well over $US100 million,but this is not a general deterrent to prospectivebuyers. Similarly in Australia some investors,particularly overseas buyers from Europe or otherparts of Asia-Pac, actively favour larger assets over$US60 million partly because they allow theiracquisition teams to function more efficiently. Yieldsfor this type of asset on Australia’s east coast havenarrowed by 25-50 basis points over the past year. Inthe US, there is strong appetite among institutional

andunusual,

couldwilland

warehousemarketsuch

portfolio

lookingseeing

investorsfor

Europe,

investors for large bulk distribution centres, activitylevels in this sector are rising and there are examplesof transactions completing this year at entry yields ofsub-6%.

Moreover, innovation in building specification andcapability supports investment flow and landacquisition, as successive waves of building stockmean that relative quality of earlier stock degradesrapidly and is of less interest to institutional investors.For instance in China, most of the current investorfocus is on acquiring sites for build-to-suits or evenspeculative development, as much of the secondarystock is mostly of too low a quality to attractinstitutional investors.

CONCLUSIONS

The logic of centralisation of stock holding and inventoryacross Europe, and the potential exists for this to continueoffer significant advantages for occupiers that include a rangecrucially, gains in information management and customer analysishas been a prominent source of demand and we expect thisalso apply to manufacturing and there is evidence that thiswarehouse market in recent months.

The scale of investment activity in the sector reflects widespreadmanagers and retailers towards XXL-warehouses. Indicationspremium currently required - to reflect single asset risk and

CBRE GLOBAL RESEARCH AND CONSULTINGThis report was prepared by the CBRE EMEA Research TeamConsulting – a network of preeminent researchers and consultantsmarket research, econometric forecasting and consultingaround the globe.

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Richard HolbertonRichard HolbertonRichard HolbertonRichard HolbertonDirector, EMEA ResearchHenrietta House Henrietta PlaceLondon W1G 0NB UKt: t: t: t: +44 20 7182 3348 eeee:::: [email protected]

is generating significant demand for XXL-warehousesand indeed spread to other markets. Such buildings

range of technical and operational efficiencies but also,analysis. As a result, retailing, including online retail,

this to remain the case. Equally, some of the key driversthis sector has become a larger constituent of the XXL-

widespread recognition of the structural shift by supply chainIndications from the US and Asia-Pac suggest that the yield

re-letting concerns - will narrow over time.

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Team which forms part of CBRE Global Research andconsultants who collaborate to provide real estate

consulting solutions to real estate investors and occupiers

, please contact:

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November 2

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James MarkbyJames MarkbyJames MarkbyJames MarkbyHead of EMEA Industrial and Logistics InvestmentEMEA Capital Markets Henrietta HouseHenrietta PlaceLondon W1G 0NBUK

AmauryAmauryAmauryAmaury GarielGarielGarielGarielManaging DirectorEMEA Industrial and Logistics145/151 rue de Courcelles75017 ParisFrancetttt: : : : +33 1 53 64 36 85e:e:e:e: [email protected]

For more information on the global industrial and logistics market please contact:

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Darren Benson Darren Benson Darren Benson Darren Benson Senior Director,Industrial and Logistics Services - Hong Kong, Macau & TaiwanSuites 1201-3 & 14, 12/FTower 6, The Gateway Kowloon, Hong Kong, SARt: t: t: t: +852 2989 5173e: e: e: e: [email protected]

Jack Fraker Jack Fraker Jack Fraker Jack Fraker Vice Chairman, Managing Director -Investment PropertiesInstitutional Group2100 McKinney Ave.Suite 700Dallas , TX 75201

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Garrett Garrett Garrett Garrett McCleanMcCleanMcCleanMcCleanSenior DirectorEMEA Industrial and Logistics3rd Floor, Connaught House1 Burlington RoadDublin 4Ireland

Guy FramptonGuy FramptonGuy FramptonGuy FramptonExecutive DirectorEMEA Industrial and LogisticsHenrietta HouseHenrietta PlaceLondon W1G 0NBUKt: t: t: t: +44 20 7182 2150e: e: e: e: [email protected]

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Irelandt: t: t: t: +353 1 618 5557e: e: e: e: [email protected]

Scott Marshall Scott Marshall Scott Marshall Scott Marshall Executive Managing DirectorIndustrial Services Leader - Americas 700 Commerce DriveSuite 550 Oak Brook, IL 60523 USA

Joshua Charles Joshua Charles Joshua Charles Joshua Charles Regional Director, Industrial and Logistics Services 363 George St. Level 21 Sydney , NSW 2000Australiat: t: t: t: +61 2 9333 3333e: e: e: e: [email protected]

CBRE Limited confirms that information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt their accuracy, we have not verified them and make no guarantee, warranty or representation about them. It is your responsibility to confirm independently their accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

USAt: t: t: t: +1 630 5737026e: e: e: e: [email protected]

cbre view point l xxl warehouses l november 2013

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