Marketing Material

Research Report

European Urban Logistics: When,

Where and How
November 2017

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Table of Contents

1 Summary 3

2 Key trends shaping urban logistics 5

3 Outlook for urban logistics: key trends 9

4 Investment recommendations 12

5 Summary 15

Important Information 16

Research & Strategy – Alternatives 18

European Urban Logistics | November 2017 2

1 Summary
Consumer habits are changing. Whether it be fast food or fast fashion, in-store or online, the ability to receive
goods in an ever shorter and more defined period of time is transforming the way we live. Underlying these
changes is a vast and complex network of logistics. These logistics operation cannot stand still without risking
being overwhelmed by the incessant demand for consumer convenience, and with this will almost certainly come
a sustained rise in occupier requirements for urban logistics space.

In this paper we present our key findings on the urban logistics segment. We chart the growth of this sub-sector,
outlining our view of how the megatrends of urbanisation and technological change have transformed the urban
logistics landscape and offer our thoughts on how we envisage the future evolving.

Proximity to consumer catchments and the desire to match customer expectations for same and next day delivery
will underpin a trend of localisation of parcel couriers and e-commerce / omni-channel retailers. These occupiers,
competing with grocers, suppliers and manufacturers, in our view will increasingly take space within, around and
on corridor locations between small, medium and large urban agglomerations across Europe, supporting the
long-term rental picture here as space availability along the most favourable and well-connected hubs decrease.

We focus the discussion on two types of urban logistics. Urban delivery centres located in the heart of major
conurbations, and what we have coined “Last Hour” facilities.

Urbanisation and technological change should continue to support the long-term outlook for urban logistics,
setting the scene for growing occupancy and a continuation of low availability of suitable stock for occupation,
likely fuelled by demand-driven erosion and cross-competition from residential land use. This will likely encourage
innovation in the sector and in densely populated cities we expect to see further moves towards facilities such as
multi-storey warehousing and mixed-use logistics / residential schemes, as well as a further blurring of the lines
between retail and industrial – potentially breathing life back into the high street and weaker shopping centres.

Despite challenges posed by technology which could make certain assets, particularly in peripheral locations,
obsolete, we see that parcel operators, omni-channel retailers and other types of occupiers should continue to
seek to be located in close proximity to customers regardless of the modality of transport, whether by road, air,
or underground, supporting the rental outlook. As a result we think investors should embrace urban logistics –
particularly in those cities that are large, growing, densely populated and with a high proclivity to online spending.

While in recent years retailers and service providers have made great strides in seeking to fulfil the “Last Mile”,
considerable challenges remain. Indeed, we expect as pressure to deliver more quickly increases, and as
transport costs (electrification / automation) decrease, there may be a shift in focus to the “Last Hour” rather than
the “Last Mile”.

In some large and congested urban areas this may make little difference to location decisions, but in multi-nodal
locations like the North West of England, Randstad or the Rhine-Ruhr this should almost certainly boost demand
for well-connected inter-city locations with large one-hour drive time catchments.

Given the strength of underlying demand, in addition to the natural barriers to supply that come from being located
in urban areas, we believe these types of investment could support above average net operating income growth.
And while industrial property has outperformed the average return for most European real estate markets in
recent years – we expect this subset of industrials to be a strong performer for a sustained period of time to come.

Focusing on markets with positive long-term demand fundamentals while maintaining disciplined focus on quality
locations that are well-connected and serve large catchment areas, whether across a single large metropolitan
area or serving a number of towns and cities, may generate long-term outperformance.

Accessing stock is likely to be a barrier for some investors, as it is typically both in short-supply and of too small
a lot size. In time we feel developers will correct this, however for investors willing to move up the risk curve, we
advise gaining exposure through both forward funding and actively managing existing infill multi and single-let
industrial estates and assets with excellent accessibility, offering opportunity across the risk-reward spectrum.

3 European Urban Logistics | November 2017

Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or
analysis which may prove to be incorrect. This information is intended for informational purposes only and does not constitute investment
advice, a recommendation, an offer or solicitation. No assurance can be given that investment objectives will be achieved.
Assets in Focus

Urban Delivery Assets “Last Hour” Facilities

Infill or edge of town asset used principally for the delivery Similar to Urban Delivery but also includes assets in loca-
of goods and packages to both store network and directly tions that can serve multiple urban areas. Drive time catch-
Overview to customers. Typically looking to service the “Last Mile”. ment rather than distance taking precedents. Benefitting
Focus on both purpose built logistics assets and well lo- in time from falling fuel costs and greater vehicle auton-
cated multi-let industrial. omy.

 Infill / Edge of Town or City  Maximisation of catchment within a one hour drive
Location
Attribute  Arterial road access  Key corridor location in or between urban areas
 Nearby residential development  Quick motorway and regional trunk road access

 Omni-channel retailer  Omni-channel retailer

 E-commerce pure play  E-commerce pure play
User Type  Grocery (dark store)  Grocery (dark store)
 Parcel operators (PDCs)  Parcel operators (PDCs or sortation hubs) / 3PLs
 Suppliers and Wholesalers  Suppliers, Wholesalers and Manufacturers

 Size sub- 10k sqm for urban delivery centres (larger  Typically larger than Urban Delivery Assets
for “dark stores” up to 30,000 sqm)
 Often cross-docked
 Often cross-docked with low site cover, high
Asset
yardage, and automation for modern stock  Low site cover
Features
 Multi-let industrial assets typically outdated but well  Expected significant internal automation
located in infill locations. May require capex.  Low eaves for parcel operators, high bay for retail
 Low eaves for parcel operators, high bay for retail.

 Acquisition  Acquisition
 Forward Funding  Forward Funding
How to Invest
 Speculative Development  Speculative Development
 Refurbishment and Repositioning

Lot Size  €10 - 40 million (single asset)  €20 -100 million (single asset)

Top 20 Markets

1. London 11. Berlin

2. Paris 12. Hamburg

3. Dublin 13. Brussels

4. Oslo 14. Birmingham

5. Stockholm 15. Manchester

6. Amsterdam 16. Dusseldorf

7. Munich 17. Milan

8. Copenhagen 18. Cologne

9. Madrid 19. Vienna

10. Frankfurt 20. Barcelona

Source: Deutsche Asset Management, October 2017.

European Urban Logistics | November 2017 4

Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or
analysis which may prove to be incorrect. This information is intended for informational purposes only and does not constitute investment
advice, a recommendation, an offer or solicitation. No assurance can be given that investment objectives will be achieved.
2 Key trends shaping urban logistics
Urban logistics is not a new part of the real estate landscape, however we believe its emergence as a major
component of the industrials market is in its infancy. With the support of growing demand from both online and
traditional retailers and underpinned by mega-trends and changing methods of delivery, we see these trends
sustaining growth for urban logistics, particularly for assets that can both facilitate delivery speed while also
maximising the number of consumers that can be serviced from that location.

Demand
The major sources of demand for modern urban logistics include both large and small retailers, e-commerce
companies, parcel delivery operators and grocers. In an environment of consumer expectation for speed and
flexibility, we see these players continuing to demand edge of town and infill urban logistics space.

While hub distribution logistics remain an integral part of the supply chain network, demand for urban logistics
space is growing rapidly, reflecting in upward pressure on land prices and rents.1

Omni-channel retailers
E-commerce acts as a major demand driver, with pure play retailers long recognising the importance of proximity
to customer. Indeed, Amazon has a network of growing sortation, delivery station and Prime Now facilities in
urban locations, servicing near real-time, same day and next day customer deliveries.

The trend towards omni-channel retailing is necessitating the reconfiguration of retail supply chains. With
customers requiring more flexibility in how and when they receive goods for online orders, almost all retailers are
responding through building “agile” supply chain networks that are responsive to customer needs. Traditional
retailers, undertaking an omni-channel strategy, are increasingly seeking to broaden logistics operations, to
include store based click & collect as well as direct online orders for home delivery.

While larger retailers are most likely to already be taking urban warehousing and distribution facilities for these
purposes, some smaller online outfits have also demonstrated a willingness to undertake the necessary
investment in urban logistics.2

In recent years we have also observed some start-up retailers willing to take older but well located industrial
space to support their growth and expansion plans or even using self-storage in the initial stages of their
development. Indeed, as we discuss later, this may also lead to an increased usage of under-utilised and vacant
office, business-park or basement / underground car parking space.

Parcel delivery
Online retailing has been the major driver behind the recent growth in parcel volumes. Global and regional parcel
delivery operators have seen significant growth in demand for parcel fulfilment.

While historically these businesses had relied on Business-to-Business (B2B) and mail deliveries, increasingly
they are shifting focus to Business-to-Consumer (B2C). To do this parcel operators are evolving their operating
models, necessitating changes in their space requirements. There is increasing demand for cross-docked parcel
sortation hubs and parcel delivery centres. With this they are increasingly having to compete for similar space in
infrastructure-linked urban locations.

Those parcel companies most focused on the locational aspects of delivery are taking older stock in industrial
parks and retrofitting these to serve “last mile” delivery. With this we have seen industrial units coming back into
vogue with a more diverse array of demand from occupiers. This should sustain demand for inner city multi-let
industrial estate spaces, leading to further erosion in availability and upwards pressure on rents given competition
from alternative uses.

1
Colliers, Industrial Rents Map, October 2017.
2
Addleshaw Goddard & Blackstock, How Soon is Now? The disruption and evolution of logistics and industrial property, January 2017.

5 European Urban Logistics | November 2017

Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or
analysis which may prove to be incorrect. This information is intended for informational purposes only and does not constitute investment
advice, a recommendation, an offer or solicitation. No assurance can be given that investment objectives will be achieved.
As shown below, this relationship has been clearly observed in London over recent years, with a close correlation
between land values and prime industrial rents.

Land Values and Prime Industrial Rents (£)

Park Royal Enfield
Land Value, Park Royal (£mn) Land Value. Enfield (£mn) Rent, Enfield (£psf, rhs)
Rent, Park Royal (£psf, rhs)
4.0 16.0 2.5 11.0

2.0 10.5
3.0 15.0
10.0
1.5
2.0 14.0 9.5
1.0
9.0
1.0 13.0 0.5 8.5

0.0 12.0 0.0 8.0

Mar-14 Oct-14 Mar-15 Oct-15 Mar-16 Mar-17 Mar-14 Oct-14 Mar-15 Oct-15 Mar-16 Mar-17

Source: GVA Grimley, Industrial Intelligence, March 2017. Note: (Assumed on 50,000 sq ft unit / Assumed 5 acre land plot).

Similar to trends observed in the suburbs of London, where limited space is preventing the development of
purpose built cross-docked parcel delivery hubs, major parcel operators have re-configured standard industrial
space and used these to fulfil last mile requirements in Paris, with for example UPS and Geodis taking space at
Bercy Business Park.

Parcel operators are increasingly realising that they need to make the necessary investments in automated
systems which require costly upfront investment. Efficiencies could be derived through cross-docked urban
logistics, enabling increased throughput. Often these are built-to-suit and customised to operator requirements,
typically with high levels of automation. These assets have low site density to enable circulation of trucks and
vans with developers leasing these assets significantly above market rents to account for these factors.

This is impacting on margins, with the cost of delivery also compounded by missed deliveries. In addition last
mile couriers are facing upwards rental pressure.

Inevitably these challenges could well result in some consolidation in the sector. We have seen tie ups between
the likes of Sainsbury’s and Argos on the retail side in addition to FedEx’s acquisition of TNT and this is a trend
we expect will continue. Also, as CityLink demonstrated, there could be failures in the industry, and as such
investors should not be complacent when evaluating the covenants of this type of tenant.

Food grocery
Food grocery majors are increasingly recognising the importance of urban location to support online food grocery,
a crucial battleground for market share through developing “dark stores” 3, particularly in light of the growing
competition being posed by discount supermarkets and pure play online players.

Proximity to urban population centres also enables the re-stocking efforts of a growing network of urban
convenience stores. In Germany, REWE, the supermarket retailer announced plans in August 2016 to locate a
grocery warehouse for online fulfilment to the district of Niehl in Cologne with an intention to build a 16,000 square
metre hub to enable fast delivery to customers.4 The warehouse is scheduled to open in 2018.

Given that food grocers are delivering perishable goods, their requirements for space storage are often highly
customised and built-to-suit, typically requiring chilled and refrigerated space. These costs are usually recovered
by the developer through higher rent levels - similar to parcel delivery.

3
J Sainsbury plc, https://www.about.sainsburys.co.uk/news/latest-news/2016/21-09-2016, September 2016.
4
Logistik Heute, August 2016.

European Urban Logistics | November 2017 6

Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or
analysis which may prove to be incorrect. This information is intended for informational purposes only and does not constitute investment
advice, a recommendation, an offer or solicitation. No assurance can be given that investment objectives will be achieved.
Megatrends
Megatrends will continue for some time to shape the urban logistics landscape. Urbanisation remains a key driver
as does the impact from technological change. Rising digital connectivity in combination with advances in data-
driven customer analytics will further underpin online retailing. While automation could in time revolutionise the
supply chain, in the future we also expect rising efficiencies in battery storage and advances in autonomous
electric vehicles to lead to further disruptive changes in how we consume and receive goods and services.

Urbanisation
Throughout the last few decades, populations have coalesced around the largest urban agglomerations, attracted
by work opportunities and an improving lifestyle. With cities becoming thriving cultural hubs and the engines of
jobs growth, young urban professionals are increasingly moving to live within city limits. Larger metropolitan
centres and well as the majority of mid-sized cities are forecast to experience above average population, GDP
and consumer spending growth; a trend we expect to continue.

Not only will urbanisation, in the form of population and economic growth, drive demand for greater consumption
and deliveries, it may inevitably create further competition for space. Rising demand in a supply constrained
environment is the bedrock for rental growth.

Digitalisation
With rising adoption of internet-enabled smartphones, evolution in payment technologies and a rapid growth in
mobile e-commerce applications, consumers are empowered to research products, compare prices and make
more online purchases. According to the IMRG, over half of online sales in the United Kingdom are now
undertaken on mobile devices such as smartphones and tablets. 5

The imminent arrival of 5G will likely accelerate the arrival of the “Internet of Things”, enabling machine to
machine (M2M) connectivity. With an anticipated rise in future-ready household appliances such as “smart”
fridges or “smart” washing machines that can order grocery supplies and consumer goods as they run out, we
expect this will be another driver of home delivery demand, particularly the rapid fulfilment of everyday essentials.

Big Data
The increased ability of retailers to tap into vast pools of data, spurred by technological advances in cloud
computing and big data analytics, allow forward thinking online retailers to derive insights into consumer
behaviours, enabling deeper and more meaningful customer engagement. These changes have so far translated
in double digit online retail growth as customers embrace this evolving shopping channel and respond positively
to personalisation and data-driven targeted marketing.

The deployment of data analytics is also enabling greater visibility across supply chains, driving efficiencies and
supporting responsive distribution strategies.

Automation and Autonomous Electric Vehicles

Over the medium term we anticipate advances in robotics and artificial intelligence will further reshape supply
chains, driving efficiencies in the entire production-to-consumer cycle. These efficiencies should help to grow
profitability for logistics operators, potentially allowing for additional rental growth.

The long-term evolution in autonomous electric vehicles (AEVs) will likely spur major changes in terms of live,
work and play choices. In addition, this could mark a significant reduction in delivery costs. Not only could it lower
costs and spur additional consumer demand, it could also influence the location decisions of residents and
logistics tenants. Over time, such changes will likely have a marked impact on the urban landscape. Here
however there is much debate, over which push (easier commuting) and pull (improved urban lifestyles) factors
will win out.

5
IMRG / Capgemini, January 2017.

7 European Urban Logistics | November 2017

Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or
analysis which may prove to be incorrect. This information is intended for informational purposes only and does not constitute investment
advice, a recommendation, an offer or solicitation. No assurance can be given that investment objectives will be achieved.
Changing methods of delivery
As these technological advances facilitate a more seamless digital purchase experience, online retail sales are
set to see double digit growth across Europe. Projections from Forrester estimate an 11% compound annual
growth over the next five years6 while according to a report by ParcelHero, online retail sales could account for
40% of all retail sales in the United Kingdom by 2030.7

Pure play retailers across various segments such as fashion, electronics, furniture and increasingly grocery have
established themselves as online market leaders. However, some traditional retailers are now fighting back,
pioneering concepts in omni-channel retailing.

Perhaps more importantly, in the age of technologically empowered consumers, one area where traditional
retailers have historically maintained an advantage has been the ability to satisfy customer demand for immediacy
and convenience. However online retailers, both pure play and omni-channel are responding to these demands
through innovation in delivery channels to service the “last mile”.8

We anticipate in time most pure play retailers could become omni-channel, necessitating innovations in delivery
modes. For some this may include offering a “Click & Collect” service – buy online and collect in-store. Most
leading omni-channel retailers offer this service, and indeed it is often viewed as a preferred delivery method
from a retailer perspective, given it supports store footfall while reducing delivery costs.9

YouGov / Ampersand U.K. Consumer Survey Preferred Delivery Options by Age Band (April 2017)

18-24 year olds Average

Click and
Collect

Same day
delivery

Next day
delivery

0% 10% 20% 30% 40% 50% 60%

Source: YouGov / Ampersand Consumer Survey, April 2017.

However, home delivery remains by far the dominant method of receiving goods bought online. Here we see
some of the greatest drivers of change to urban logistics demand. Not only is demand for home delivery growing,
preferences are clearly for next day delivery, and for the younger generation same day and instant delivery is
increasingly sought after. McKinsey forecasts that this type of “On demand” and same day delivery in the United
States is expected to grow from less than 1% of total parcel revenues in 2016 to around 20% by 2025.10

The growth in same and next day delivery could continue to drive widespread reconfigurations of supply chains
as retailers, third party logistics providers and e-commerce companies respond to this new normal. Furthermore
with increasing demand for near real-time delivery and same-day delivery within one or two hour windows and
customer expectations for immediate satisfaction, retailers and parcel couriers by necessity will have to be
located within urban areas. Consequently, demand for urban logistics space from retailers and 3PLs focused on
parcel delivery should continue to grow rapidly.

6
Forrester, December 2016.
7
ParcelHero, Death of the High Street, January 2017.
8
DHL Logistics Trend Radar, 2016.
9
CBRE, Last Mile / City Logistics, February 2017.
10
McKinsey & Company, Logistics Management, October 2016.

European Urban Logistics | November 2017 8

Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or
analysis which may prove to be incorrect. This information is intended for informational purposes only and does not constitute investment
advice, a recommendation, an offer or solicitation. No assurance can be given that investment objectives will be achieved.
While retailers and service providers have made great strides in adjusting to these new challenges, the landscape
is in constant flux.

We expect that as transport costs falls due to electrification and automation, there this may lead to a shift in focus
to the “Last Hour” rather than the “Last Mile”. In some large and congested urban areas this may make little
difference to location decisions, but in multi-city locations like the North West of England, Randstad and the
Rhine-Ruhr this will boost demand for inter-city locations with the largest one-hour drive time catchment.

3 Drivers of future performance

In this section we detail what we see as the key drivers of future urban logistics performance. Building on what
we’ve discussed in previous sections, the combination of growing demand, competition for space and the delivery
of institutional quality space, should all help to drive rental and capital growth outperformance.

Over the past decade, logistics as a whole has seen some of the highest sector level real estate returns in
Europe.11 In part this is already being driven by the outperformance of urban logistics.

Indeed, over the past decade London industrial rental growth has outperformed the national industrial average
by 100 basis points per annum, and in Paris, the MSCI data shows an outperformance of nearly 250 basis
points.12

With supply constrained, demand increasing and technology helping to reduce costs, we believe there remains
considerable room for further rental growth and outperformance.

Competition for space supporting stronger rent growth

Across Europe we continue to see an erosion in the supply of urban logistics land. This is expected to continue
given both the projections for online sales growth and continued competition from urbanisation.

In London for example, serviceable industrial land has been shrinking over the last fifteen years despite strong
tenant demand for this space. And London is not alone in this as we have also witnessed significant pressure on
land availability in places such as Paris, Amsterdam and Barcelona in recent years.

Total Industrial Land (2001 – 2015, hectares) Rent Growth Relationship (2001 = 100)

2001 2006 2010 2015 300 Ealing Industrial Rent Index

750
Ealing House Price Index
700 250
650 200
600
150
550
100
500
450 50

400 0
Barking and Ealing Enfield Havering Hounslow Newham
Dagenham (Heathrow)

Source: AECOM / GLA, March 2016. Source: CoStar, Land Registry, March 2017.

Adding pressure on industrial land is rising population growth which has the twin effect of inducing further demand
from online retail-driven tenants to take more space while at the same time leading to long-term increase in
residential house price growth.
11
MSCI, April 2017.
12
MSCI, May 2017.

9 European Urban Logistics | November 2017

Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or
analysis which may prove to be incorrect. This information is intended for informational purposes only and does not constitute investment
advice, a recommendation, an offer or solicitation. No assurance can be given that investment objectives will be achieved.
Urban logistics locations are increasingly seeing cross-competition from residential, given that most often they
are located in areas surrounded by residential, and we expect to see continued shrinkages of industrial land for
development.

As shown in the chart above, in our analysis of the key London boroughs, we identify a close relationship between
house price growth and industrial rental values.

The drivers for urban logistics demand should continue to accelerate. Fuelled by low supply and growing demand
for same day delivery, this will almost certainly require occupiers to pay additional rent.

Importantly as well we don’t see rents reaching a level that will trigger developers to convert residential into urban
logistics space. This in our view supports prospects for urban logistics and industrial rent growth.

In some instances we may also see operators taking well-located light industrial space in supply constrained
markets – opening up the opportunity for investors to acquire these sites with the possibility of repurposing for
logistics operators.

Affordability and cost constraints to drive innovation

Pressure on rents, wages, land values and other affordability constraints on occupiers could well induce
innovation in the urban logistics. In turn this innovation should help to sustain margins, and ability to pay higher
rents, despite the increase in other costs.

Densification in the form of multi-storey warehousing could become a key feature of such supply constrained
markets. While the story of Asian multi-storey is well-told we are now beginning to see examples in Europe.

SEGRO, the specialist logistics developer is building a two-storey 15,000 square metre scheme in Daglfing in
Munich while SEGRO-owned Vialog plans to develop a two-storey 64,000 square metre warehouse in
Gennevilliers as part of a new park called Paris Air2 in the Paris suburbs. 13 The same developer is also
considering a 450,000 square foot multi-storey warehouse in Enfield, London. 14

Furthermore, while land values continue to rise and developers prefer residential development over industrial,
this could well create the opportunity to engage in mixed-use industrial and residential schemes.

At the extremes, plans have been submitted and approved for a 1.9 million square feet of underground warehouse
in the London Borough of Hounslow. While construction costs are likely to be significant, this is likely to reflect in
higher rental levels.15

While innovations may well touch the scheme specifics of “Last Mile” facilities, we also envisage further innovation
across the logistics industry as a whole. Parcel lockers are growing in popularity and start-up companies such as
Bring Me are seeking to disrupt the space through offering a mobile-app based solution that integrates with mobile
parcel lockers in office developments.

Technological change and obsolescence

This need for innovation should ensure that technological change is embraced across the urban logistics sector.
In some locations however, these changes could increase the possibility that certain facilities and locations may
become redundant. Innovation in transportation such as driverless trucks, a move towards electric-powered
vehicles and “uberisation” through peer-to-peer delivery, could have a material impact upon supply chains.

Driverless trucks could well reduce the labour costs associated with trucking, increasing vehicle utilisation with
the efficiencies generated supporting 3PL margins. Furthermore driverless vehicles, combined with technologies
such as artificial intelligence and machine learning, could enable real-time route optimisation.

A move towards electric vehicles could also enhance fuel economy, reducing one of the largest operational
costs.16

13
Colliers, March 2017.
14
SHD Logistics, http://www.shdlogistics.com/news/european-style-multi-storey-warehouse-is-coming-to-the-uk, April 2017.
15
SHD Logistics, http://www.shdlogistics.com/news/breaking-planners-give-go-ahead-for-a-1.9m-sq-ft-underground-warehouse, July 2017.
16
McKinsey, Parcel delivery: The future of logistics, September 2016.

European Urban Logistics | November 2017 10

Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or
analysis which may prove to be incorrect. This information is intended for informational purposes only and does not constitute investment
advice, a recommendation, an offer or solicitation. No assurance can be given that investment objectives will be achieved.
As time to delivery rather than distance to delivery becomes a more prominent feature of the urban logistics
market, in our view the advent of electric vehicles (EVs) could mean occupiers should place more emphasis on
locations which enable quick delivery to the maximum number of end-users particularly as these vehicles become
autonomous in the longer-term thereby reducing operational costs further.

In this environment, the risk of obsolescence seems greatest for corridor locations. If automation removes the
restrictions on drive time and need for access to labour and electrification reduces running costs, then the
locations benefits of traditional hubs such as the French “Backbone” or the U.K. “Golden Triangle” will lessen.
However, as a theme we think logistics assets well entrenched within urban locations should be relatively well
protected against these risks – and should even benefit. They are however not without risk.

A key risk to last mile operators from the parcel segment is the emerging “on-demand” delivery players that are
using mobile apps and peer-to-peer networks, reducing overhead costs.

However peer to peer operators are facing increasing regulatory hurdles which could stymie their long-term
growth trajectory. Despite this, we will continue to monitor their impact particularly on 3PLs and parcel operators.
Some have already responded with Geopost recently acquiring Stuart. 17

One risk that could make road transport connectivity less relevant is the rise of unmanned aerial vehicles (UAVs),
also known as delivery drones. However there are significant regulatory barriers and while some locations may
not require road connectivity for delivery of parcels, proximity to catchments to fulfil immediate delivery may still
remain a key requirement in order to deliver products in the most cost-effective and efficient way.18

Increased focus on “Last Hour” locations

As mentioned previously in the paper, we believe competition for space, a focus on speed and the reduction in
operating costs will lead occupiers to start thinking about the “Last Hour” rather than the “Last Mile”.

In some cases this change in mind set will have little impact upon location decisions, particularly within urban
areas where last mile and last hour are a similar metric. However, in other urban or near urban locations, this
demand for “Last Hour” is likely to see demand rise in those locations which can serve a maximum catchment of
consumers.

While perhaps less supply constrained than inner-urban, location will remain key. Excellent accessibility near key
motorways and arterial road routes, as well as close proximity to residential areas could ensure the highest
possible number of delivery points. Indeed, in multi-city locations, such as the North West of England, Randstad
and the Rhine-Ruhr areas, these facilities may also comfortably sit between locations.

The Omega Park scheme in Warrington in the North West of England is a good example of this type of facility.
From here the large urban areas of Manchester, Liverpool and the towns of Lancashire and Cheshire are easily
reachable within an hour’s drive.

Blurring of the lines between urban real estate sectors

Finally, we see a closer relationship between retail and logistics space as retail parks, 19 high street retail and
shopping centres increasingly fulfilling last-mile roles both as click & collect pick-up points and micro warehouses.

With increased demands for “Last Mile” spaces to enable the delivery of packages, under-utilised retail assets
such as certain shopping centres, retail parks, business parks, supermarket premises, inner city office space and
car parks could potentially be used for the storage and distribution of goods to proximate companies particularly
as industrial space within city limits becomes increasingly constrained.

Indeed this may already be offering up opportunities for investors to access the urban logistics market, through
purchase with the intent to convert.

17
Techcrunch, March 2017.
18
McKinsey, Parcel Delivery: The last mile, September 2016.
19
Addleshaw Goddard & Blackstock, How Soon is Now? The disruption and evolution of logistics and industrial property, January 2017.

11 European Urban Logistics | November 2017

Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or
analysis which may prove to be incorrect. This information is intended for informational purposes only and does not constitute investment
advice, a recommendation, an offer or solicitation. No assurance can be given that investment objectives will be achieved.
Should retailers and logistics operators see merit in this approach to servicing delivery requirements, this will help
to relieve some of the supply pressures on the urban logistics sector. However, the line between what is logistics
and what is retail will have become blurred.

Retail stores are already utilised for click & collect activities. We anticipate hybrid uses be-
tween shopping centres, retail warehouses and retail parks which could increasingly be
used as both last mile premises from where deliveries to customers will take place in addi-
tion to their traditional store-front role. Indeed, Amazon is using a former ProMarkt store in
the Ku’Damm Karree shopping centre in Berlin for prime deliveries.

Basement office spaces typically face high vacancy and void rates. While some spaces are
used for gyms, bike lockers or mail rooms, in many cases they are left empty. In the City of
London, typical basement office rents range between £15-20 per square foot on a headline
basis (higher if used for third party gyms) while Park Royal industrial rents stand at £15 per
square foot.

Chronopost has two “Last Mile” facilities in inner Paris, with the most recent one being an
unused parking garage redeveloped in Beaugrenelle in 2013 allowing the operator to cover
the 7th and 15th districts of Paris. As car ownership declines due to car sharing trends, some
inner city car parks could be used for last mile delivery.

The Sainsbury’s / Argos and Amazon / Whole Foods tie up indicate growing recognition in
merging grocery and online retail. Convenience stores could act as urban facilities for click
& collect while out of town supermarkets in excess of 100,000 square feet in size are under
pressure – indeed some of these spaces could be suited for “last mile” distribution.

4 Investment opportunities
We have outlined our reasons why we view there to be an attractive investment opportunity in urban logistics. In
this final section of the paper we expand upon how an urban logistics strategy could be implemented. Specifically,
we answer the question, what, where and how to invest in urban logistics.

What to invest in
According to JLL, there is approximately 60 million square metres of investable logistics space in Germany while
total logistics stock is estimated to stand at 330 million square metres. 20

In the United Kingdom and France, there is estimated to be around 40 million square metres of warehousing
stock for storage and distribution.

With much of this stock in corridor locations this leads to the question, how do you invest in this urban logistics?

Firstly, it’s worth noting that 56% of all industrial transactions over the last ten years has been completed across
Europe’s major metropolitan areas – although not all of this stock would have been suitable for urban logistics
operations. 21

Second, with rapidly growing demand for modern urban logistics stock, current supply is unlikely to meet future
occupier demand. Where this demand cannot be met, this is leading developers to seek to deliver new stock,
opening opportunities for investors to partner and forward fund or acquire modern stock once let and stabilised.

As discussed in the paper, investors could look to focus on standard urban delivery assets located within infill
and edge of town locations, but also what we have coined “Last Hour” facilities that are able to service multiple
urban areas located within close proximity.

20
JLL, Logistics Property Report, 2017.
21
Real Capital Analytics, Trend and Trades Report, August 2017.

European Urban Logistics | November 2017 12

Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or
analysis which may prove to be incorrect. This information is intended for informational purposes only and does not constitute investment
advice, a recommendation, an offer or solicitation. No assurance can be given that investment objectives will be achieved.
The table below, provides more detail on the type of assets in focus:
Urban Delivery Assets “Last Hour” Facilities
Infill or edge of town asset used principally for the delivery Similar to Urban Delivery but also includes assets in loca-
of goods and packages to both store network and directly to tions that can serve multiple urban areas. Drive time catch-
Overview customers. Typically looking to service the “Last Mile”. Fo- ment rather than distance taking precedence. Benefitting in
cus on both purpose built logistics assets and well located time from falling fuel costs and greater vehicle autonomy.
multi-let industrial.

 Infill / Edge of Town or City  Maximisation of catchment within a one hour drive
Location
Attribute  Arterial road access  Key corridor location in or between urban areas
 Nearby residential development  Quick motorway and regional trunk road access
 Omni-channel retailer  Omni-channel retailer
 E-commerce pure play  E-commerce pure play
User Type  Grocery (dark store)  Grocery (dark store)
 Parcel operators (PDCs)  Parcel operators (PDCs or sortation hubs) / 3PLs
 Suppliers and Wholesalers  Suppliers, Wholesalers and Manufacturers

 Size sub- 10k sqm for urban delivery centres (larger  Typically larger than Urban Delivery Assets
for “dark stores” up to 30,000 sqm)  Often cross-docked
 Often cross-docked with low site cover, high yardage,  Low site cover
Asset
and automation for modern stock
Features  Expected significant internal automation
 Multi-let industrial assets typically outdated but well
located in infill locations. May require capex.
 Low eaves for parcel operators, high bay for retail
 Low eaves for parcel operators, high bay for retail.

 Acquisition  Acquisition
 Forward Funding  Forward Funding
How to Invest
 Speculative Development  Speculative Development
 Refurbishment and Repositioning

Lot Size  €10 - 40 million (single asset)  €20 -100 million (single asset)

Urban Delivery Centres

Investors may consider acquiring, forward funding or speculatively developing urban edge of town / city or infill
delivery centres across major cities and regional / smaller cities. These assets are typically let to retailers, third
party logistics companies, grocers or parcel delivery operators on long-leases. Scheme specifications are usually
tailored to user requirements if build-to-suit or standard specification if speculatively built.

Investors with higher risk tolerance could well consider refurbishing well-located single-let or multi-let industrial
assets. These assets, usually located within the city / town limits and facing strong competition from alternative
uses in large metropolitan areas, are often in need of capital expenditure to bring them up to modern occupier
requirements but can offer strong return opportunities given higher entry yields and strong rental growth pressure.

However these assets are asset management intensive and will require a hands on approach while may only
meet the needs of a certain tenant base willing to compromise on some asset specifications. Investors should
maintain a disciplined approach to both markets and micro location.

“Last Hour” Delivery Centres

Investors could also look at “Last Hour” facilities. These are distribution or delivery centres that sit in hub logistics
locations with excellent motorway access, and are often multi-modal, but enable fast delivery to two or more cities
/ towns. For investors looking at these assets location is imperative, with access to the maximum number of
people within the shortest drive time expected to prove increasingly important for delivery services.

While rent growth is likely to be lower than in urban areas, in the most well-connected locations we expect
sustained long-term upward rental pressure.

13 European Urban Logistics | November 2017

Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or
analysis which may prove to be incorrect. This information is intended for informational purposes only and does not constitute investment
advice, a recommendation, an offer or solicitation. No assurance can be given that investment objectives will be achieved.
Where to invest

The same urbanisation and technological drivers are impacting online retail in Europe, leading to increased
demand for urban logistics space across the major European metropolitan centres.

With expectations of rental growth exceeding that of distribution logistics, we anticipate a significant inflow of
capital to the segment over the coming years.

While large metropolitan areas are set to see the strongest concentration of urban logistics activity, we would not
rule out growing provincial cities, particularly as cross-competition intensifies in these locations.

We are encouraged by the long-term attractiveness of these markets, supported by favourable demographics,
increased infrastructure connectivity and rising business investment.

Initially, mature and “Online Potential” markets (as shown in the chart below) will likely see the proliferation in
tenant demand for urban logistics as supply chains respond to the e-commerce-driven “new normal”.

Here, as both pure play and omni-channel retailers grow we expect to see demand for both XXL distribution and
urban logistics facilities grow. While some operators will take existing space, many will seek modern stock.

Online Usage and Purchase Behaviour Matrix (%, previous 12 months)

100
Approaching Maturity
90
U.K. Denmark
Online Purchase

80 Germany Finland Norway

Online Potential
70 Sweden Netherlands
EU (28 countries) France
60 Austria
Ireland
Online Laggards
50 Spain Belgium
Poland
Greece Czech Republic
40 Hungary
Portugal
30
Italy
20
65 70 75 80 85 90 95 100

Internet Use

Source: Eurostat, December 2016.

Finally we have looked at a number of key characteristics at the city level to determine which are likely to support
above average performance for urban logistics space.

Looking at a combination of factors including population size, growth and density, productivity, consumer
spending, and the prevalence of online usage, we provided the major metropolitan areas in Europe with a score
and a rank.

It was notable in this analysis of just how far ahead both London and Paris are away from the rest of the pack.
However, on reflection this does not seem out of place given their size, competition for space and agglomeration
benefits that come from being Europe’s only two true global gateway cities.

This does not undermine the case for urban logistics in the other centres. It is notable today that the Nordic
countries are reporting some of the highest online penetrations rates, and industrial vacancy in Oslo is now just
3.5%. 22

22
Akershus Eiendom, March 2017.

European Urban Logistics | November 2017 14

Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or
analysis which may prove to be incorrect. This information is intended for informational purposes only and does not constitute investment
advice, a recommendation, an offer or solicitation. No assurance can be given that investment objectives will be achieved.
 Target Cities
1. London 11. Berlin

2. Paris 12. Hamburg

3. Dublin 13. Brussels

4. Oslo 14. Birmingham

5. Stockholm 15. Manchester

6. Amsterdam 16. Dusseldorf

7. Munich 17. Milan

8. Copenhagen 18. Cologne

9. Madrid 19. Vienna

10. Frankfurt 20. Barcelona

Source: Deutsche Asset Management, October 2017.

How to access the market

According to Cushman & Wakefield, the total stock of investable industrial real estate stood at €2.9 trillion in
Europe while €1.2 trillion of this was invested, with industrials representing 30% of the total available investable
universe in Europe.23 In 2016 alone, almost €29 billion of industrial and logistics transactions were undertaken in
Europe across all logistics and industrial segments.

Assets sub-10,000 sqm in size as a proxy for urban logistics, around €3 billion of this bracket was transacted in
2016 in Europe. 24

Over the last decade, the United Kingdom, Germany, Netherlands and Sweden have been the most active market
in this segment. Increasingly we would expect activity to pick up significantly in markets such as France and
Spain going forward. Undoubtedly while these trades are usually at lower lot sizes, particularly for more dated
and smaller assets, we do see single asset opportunities up to circa €40 million for larger urban delivery centres.

The typical investment path for institutional capital would be through the portfolio acquisition route where larger
pools of capital can be deployed. Depending on the point in the cycle, up and let portfolios may trade at a
premium, with investors willing to pay a higher price in order to gain access to stock.

As we have alluded to previously, much of this modern urban or “Last Hour” stock is yet to be built particularly in
markets where e-commerce penetration is low. Here, investors can partner with developers to forward fund or
joint venture on built-to-suit or speculative developments. Indeed Tritax acquired a site in Dartford London, a
decommissioned power station for £65 million in the third quarter of 2017 with a view to developing a mix of XXL
distribution and urban logistics facilities to serve the London market.

For investors with higher risk tolerance, a “refurbish to core” strategy of taking existing single and multi-let
industrial assets typically on shorter WALTs within infill locations which have excellent accessibility but require
upgrading could yield strong performance. In Q4 2016, CNP acquired a 150,000 urban logistics complex within
Paris comprising of 48 units each covering 3,000 sqm for a reported €144 million. However as with any strategy,
this would require a careful understanding of micro location specific considerations.

5 Summary
There is significant investment interest in urban logistics today. With strong occupier demand and low availability,
partly driven by industrial land lost to alternative use such as residential, the outlook for rental growth remains
strongly positive. Investors in our view will likely continue to be attracted by this relatively high yielding sector but
we anticipate the yield gap to narrow. There are clear investment routes and product that can be acquired, forward
funded or speculatively developed and in line with different risk tolerances.

23
Cushman & Wakefield, Money into Property, 2016.
24
Real Capital Analytics, Trend and Trades, August 2017.

15 European Urban Logistics | November 2017

Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models or
analysis which may prove to be incorrect. This information is intended for informational purposes only and does not constitute investment
advice, a recommendation, an offer or solicitation. No assurance can be given that investment objectives will be achieved.
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