Globalization, global trade and urbanization have supported European logistics sector growth over the last few decades. Global trade has outperformed the global economy over the long term, and trade within Europe still takes the lion’s share of worldwide commerce.
Those trends have helped logistics to grow into one of the biggest industries in Europe. According to Eurostat and the Alliance for European Logistics, it generates more than €900 billion in revenue annually, represents just under 7 percent of total GDP and employs more than seven million people.
Moreover, the European logistics market has benefitted from the steady recovery of European economies since the global financial crisis. Global GDP has picked up momentum, producing stronger tailwinds for the EU. GDP growth has become broad based, with both consumer spending and investment posting gains.
Growth is strong outside the eurozone, too, with the strongest rates expected in Poland and Sweden going forward. Depending on geographic location and size of national industrial sector, European logistics sector proportion of GDP ranges from 6 percent in Denmark, France, Ireland, Italy and Switzerland to 10 percent in Poland.
The ‘purple banana’
Two primary logistics corridors have emerged in Europe. The first – the so-called ‘Blue Banana’ – stretches from north of London through Belgium, the Netherlands, western Germany and Switzerland, ending in Milan. This corridor is home to more than 110 million people and includes the most important traditional European economic centers and logistics hubs.
According to consulting firm bulwiengesa, the other established corridor – known as the ‘Golden Banana’ – refers to a southern European extended urban area lying between Valencia, Spain and Genoa, Italy, along the Mediterranean coast.
“For investors in the logistics and industrial sector, the development of new corridors means an expansion of the investible universe”
European logistics is expected to continue operating in a borderless, more pan-European rather than national environment, which is supporting the emergence of new industrial and logistics corridors, such as that connecting Germany’s Ruhr area with Berlin and Warsaw – in our view, the purple banana above – and linking the Ruhr area, Leipzig and Prague. This corridor benefits from lower operating costs and supply chain efficiency, so Central Europe will remain a popular destination for all types of logistics and light industrial purposes, at least to the extent that the distance from the final destination remains manageable.
Central European labor costs, today four times lower than in western Europe, should increase, which will have the advantage of boosting local spending power. However, the remuneration gap between the west and east will remain significant and will probably not disappear in the foreseeable future. Within Central Europe, Poland is one of the most important countries for the logistics business due to its connectivity, operating costs, availability of development sites and the overall importance of the sector for the Polish economy.
Meanwhile, digitalization and automation are transforming how warehouses and logistics supply chains operate. Robots and other automated solutions are replacing manual labor and reducing operating costs.
Furthermore, emerging trade routes and economic development initiatives such as the New Silk Road offer opportunities for expanded transportation and logistics networks in Europe. The New Silk Road – or One Belt, One Road initiative – is an emerging network of railways, highways, pipelines, special economic zones, commercial centers and logistics hubs spanning from central China to Western Europe. According to the Royal Institution of Chartered Surveyors, the area connected by the New Silk Road includes about 70 percent of the world’s population, 75 percent of world energy resources and 70 percent of global GDP.
According to the Mercator Institute for China Studies, OBOR projects in the EU often involve container terminals and railways. For example, the China Shipping Group Company, a logistics giant, acquired a controlling share in the Greek Piraeus Port Authority in 2016. COSCO and other Chinese port companies have also invested or announced intent to invest in seaports in Belgium, the Netherlands, Italy, Portugal, Spain, Croatia, Slovenia, Latvia and Lithuania.
Whereas the OBOR has not been picked up at the level of national discourse in countries such as Germany or France, local or regional authorities in Duisburg, Hamburg and Lyon have been proactive. For example, Hamburg is now the leading European seaport for China’s foreign trade: almost one in three containers handled in the Port of Hamburg is bound for China. Reciprocally, with almost 2.6 million 20-foot equivalent units in 2016, China is already Hamburg’s top partner for container transport. In providing rail transport between Hamburg and China, OBOR offers promising potential to boost trade and associated logistics capacity between Europe and Asia.
Chinese e-commerce giant Alibaba’s decision to target locations along the New Silk Road train route for its European expansion also creates possible demand for a considerable number of logistics hubs along the way. According to Reuters, Alibaba has already contacted property developers across the continent that have assets in locations close to the railway track.
For the European real estate market, this has a large positive impact as prices tend to rise along with GDP growth. More specifically, this unique period of ample infrastructure investment offers opportunities for real estate investors to participate in the positive dynamics that follow such investment cycles. Firms involved in industries such as logistics and retail could benefit from business opportunities created by new transport infrastructure. The OBOR initiative could have a greater impact on industries involved in infrastructure projects due to the multiplier effect of investment in local economies.
For investors in the logistics and industrial sector, the development of new corridors means an expansion of the investible universe. According to property consultancy PMA, in most of Europe’s top 30 logistics markets investible stock totals less than 54 million square feet. Only the metropolitan areas of London, Madrid, Milan and Paris have investible stock in quantities above this threshold.
However, the traditional logistics corridors of Europe could move eastwards to meet the New Silk Road’s westward reach, forming a new economic corridor. This could give rise to new economic centers and logistics hubs outside of the UK, Benelux, France, Germany and Italy.
Investor demand for logistics properties in these new corridors reflects ongoing structural undersupply in traditional logistics hotspots, especially as European e-commerce sales continue to accelerate while brick-and-mortar stores increasingly hold their goods in warehouses. Indeed, there is robust demand for modern facilities – which typically feature modern and efficient designs including multiple high floors and entrances – that can cater to last-mile deliveries. In the future, global capital will continue to be allocated to logistics property as economic development initiatives such as OBOR allow for more efficient trade flow.
This article is sponsored by Savills. It appeared in the Investing in Logistics supplement with the February 2018 issue of PERE.