German logistics funds 'springing up like mushrooms'
Following on from decades of mixed property portfolios enjoying enormous popularity among universal investment companies in Germany and the establishment of the first German investment company specialising in logistics property in 2014, logistics funds are now springing up like mushrooms, according to RLI Investors.
The company, the investment and asset manager responsible for two German special logistics funds, says it is becoming more and more difficult for investors to keep track of the situation. These investors are increasingly institutional, but include wealthy private individuals as well. At the same time, it is difficult to avoid the impression that a lot of money is being made with logistics property itself, and more than in the other commercial asset classes of retail and office property in particular at the moment.
Umut Ertan, founder of RLI Investors, explains the differences and what risks lie in wait. 'Over the past five years, Germany has witnessed the emergence of a growing number of funds solely for new-build logistics property with long lease terms of up to 15 years,' he says. 'This has led to the misconception that logistics property is an easy way to make money. However, it is not enough simply to sign a long-term lease with a DAX-listed company. That does not call for any special expertise.
'Many transaction managers make purchases using nothing more than Google Maps, because they don't want to make the effort to view the properties or because they believe that there is no need to worry about details when it comes to a rectangular building,' says Ertan. However, his view is that working in the logistics sector requires at least 15 years of expertise, because events from the boom years prior to the 2008 financial crisis were very different from current developments.
Even insight from the related field of industrial property is applicable to the world of logistics property only to a limited extent. 'Industrial property is not quite as fungible in tougher times,' says Ertan. 'Although logistics property can appeal to a lot of buyers in any market phase, it is a practical option only if you work well with the needs of tenants on an ongoing basis. The age of pure yield play is over. Some have sought to use these purely actuarial tricks to build reputations for themselves as logistics specialists. Doing so is useful only if there is no imminent large-scale modification or extension work or re-letting due.'
'If you have to use only external planners during the design stage, the costs to investors rapidly mount up. It becomes even more expensive for investors if the expertise of project development specialists is factored in,' explains Ertan. That is because these pass on the costs for the external planners to the investment funds with their own mark-up. In other words, there is a service charge on top of a service charge. 'There are barely a handful of logistics investors on the German market with genuine in-house development expertise,' says Ertan.
Investment managers have long compensated for their ignorance of the matter with long-term blue chips. Yield compression of 6.67 per cent to 3.75 per cent peak returns in the logistics property asset class between 2011 and 2020 has meant that these funds are still going well even at the end of their terms. Ertan comments, 'Investors' money could nonetheless have been used to earn a lot more between 2014 and 2020. However, that is possible only if those involved work actively on property and asset management.'
Ertan established RLI Investors GmbH at its headquarters in Munich in 2014. His objective was to pool extensive expertise in the fields of fund management, investment management and asset management under one roof and specialise purely in logistics. With its diversified investment strategy and active approach to fund management, RLI Investors has exceeded the planned dividend yield for the last two Germany funds in the past few years and is therefore considered one of the most successful German logistics investors in terms of fund performance.
The company's ambition has always been to operate as an investment partner to the logistics sector in keeping with its significance, and one that possesses in-depth knowledge of the needs of logistics service providers and their customers. That also includes knowledge of short contract terms, which manufacturers and retailers have been agreeing with logistics service providers for more than a decade. 'Relatively short terms of one to three years are common for logistics leases. To get the most out of the capacity of existing property – we're talking about up to seven million square metres of existing premises being put up for new leases every year in Germany – it is essential to understand the industries and be proficient in asset management,' says Ertan.
'At present, even terms of five years are considered extremely long for logistics properties; three- year leases are regarded as long-term and one-year leases as short-term. This situation is one that a hands-on asset manager for logistics property funds needs to understand and accept,' explains Ertan.
'In major conurbations, one-year leases have a very high probability of more than 70 per cent of being extended in the second year after the peak of a crisis, as we saw in 2008 and 2009. According to our experiences, the same is true again now,' says Ertan.