Manage-to-core takes centre stage  

Both in spite and because of sustained macro uncertainty, European logistics remains in favour at this point in the cycle.

Evert Castelein, head of logistics and industrial, Europe, at Savills Investment Management

A heightened requirement for geographical and asset class diversification is placing an even sharper focus on defensive real sectors supported by structural tailwinds, inflation-linked income and low correlation with public markets. Notwithstanding its own headwinds, we believe European logistics comfortably meets this criteria and has the added benefit of proven resilience during cyclical downturns.

The opportunity to access core real estate, where the return profile sits neatly between the bond and equity markets, is also driving interest. As part of a wider and diversified real estate sleeve, core logistics remains a product of choice for investors seeking best-in-class, future-proof and ESG compliant assets delivering stable income, steady capital appreciation and rental growth potential.

But with macro volatility and its impact on rates, prices and construction muting transaction volumes – of built stock and new development opportunities - an increased focus on manage-to-core strategies has emerged as a means to satisfy that demand.

Undersupply of existing stock continues to put upward pressure on prices and is fuelling mismatch in buyer-seller expectations. Build-to-core opportunities in the form of forward-funding or forward-commit agreements - despite still occupying a small allocation in many core and core+ fund strategies - are, at this point in the cycle, less prevalent in the face of inflationary pressures.

Finance, material and labour costs are challenging the viability of new development, with planning policy and a general lack of investment in the surrounding infrastructure supporting logistics development being further headwinds that prevent new stock coming online.

The result of these two pre-eminent features is an often futile search for core at the correct price point.

In response, manage-to-core strategies are becoming more prevalent in this cycle, providing an opportunity to acquire non-core assets - typically at value-add prices – before executing refurbishment and repositioning programmes.

Introducing characteristics of a traditional core logistics building - modern specification; best-in-class sustainability profile; pioneering technology features; and layout flexibility being some examples – can attract stronger covenants, better lease terms and value uplift. This can support a core exit opportunity when repeated at scale.

Product delivery is inextricably linked to asset management capabilities. This reflects part of a broader trend within real estate, where an increasingly operational asset class allows for return enhancement through asset optimisation at multiple stages of the investment lifecycle.

Manage-to-core asset management initiatives in logistics appear in varied forms, but broadly fall into the three pillars of lease optimisation, land optimisation and specification-enhancing cap-ex programmes with a strong ESG focus.  

Gearing, leasing of vacant space and innovation in green leasing - which could include making roof space and solar panels available to the market – are examples of effective lease optimisation. An owner’s proficiency in tenant engagement is highly relevant here, as well as their comprehension of occupier requirements.

Capex programmes are principally deployed into sustainability-related enhancements, ensuring the building supports the energy performance aspirations of core investors. Renewable energy technology, solar panel installation and EV charging facilities are all common features. Due consideration is also given to technology that can support AI and automation to maximise future demand prospects.

Specialised knowledge in development is key to unlocking value through land optimisation. Some investors show a preference for assets with conventional IOS site characteristics, where a small industrial building and lots of outdoor storage makes for a redevelopment opportunity.

There are opportunities to buy schemes with low site cover and extending it to the standard of around 50%-60%, which could help retain a tenant that needs more space or realise a multi-tenanted situation. A sector with plenty of older industrial sites defined by fragmented ownership also means there are opportunities to acquire a couple of plots (or with an adjacent piece of land) before combining them together and building something entirely new.

A successful execution of manage-to-core requires experience across the logistics risk-spectrum, where traditional value-add capabilities such as development, refurbishment and active asset management are contextualised within a core occupier and investor setting. Only through an intimate understanding of both can investors create a product and portfolio that appeals to segments of the market with plenty of dry powder to deploy.

Evert Castelein is head of logistics and industrial, Europe, at Savills Investment Management