Macro hardship will reveal survival of the fittest

The strongest managers will still create value in these challenging macroeconomic times, writes Logistics Capital Partners’ managing partner and co-founder, James Markby.

James Markby of Logistics Capital Partners
James Markby, Logistics Capital Partners

The decade-long bull run of easy value creation is over – we no longer have perpetually low interest rates and an ever-compressing yield environment. Long gone are the rapid price rises for weak assets with the lightest of touch asset management. Long-term specialist experience and quality of approach are back at the fore, and we can reassess how to (and who can) really create value, unaided by easy market conditions.

At Logistics Capital Partners (LCP), we think of value creation in several interconnected ways. First, as a logistics developer, we are focused on occupiers. Despite current market challenges, the end-users of our properties are best served to create value with well-located, intelligently designed and efficient buildings with best-in-class environmental credentials. By doing so, we allow our occupiers to thrive and create value in their own industries, many of which are facing their own challenges.

Secondly, we focus on creating value for our capital partners. We do this by continuing to source good sites in supply-constrained markets, by developing in a cost-conscious way and keeping a tight focus on what occupiers and buyers are looking for in the new interest rate environment. Environmental credentials are a major focus as capital partners and buyers look to long-term value creation from green buildings and staying ahead of regulation.

Getting the balance right

The daily conundrum for LCP is that at a market level we still see values and sentiment as weak and volatile, but as an entrepreneurial partnership we also see real value in specific areas. The leasing take-up and rental value growth in the sector is continuing. It is a tight balance considering the new opportunities when the consequences have become more apparent – and punishing if wrongly assessed.

As a developer, finance and leverage have also not been major components of how we generate returns and create our value. When we buy land speculatively it is usually without debt, and by the time we have solved any issues and got it construction-ready with permits and consents in place, there is usually only a 12-month period where debt is incrementally deployed alongside the equity as costs are spent. This adds approximately 100-200bps to the total levered internal rate of return result. If we are financing a new build-to-suit project, most of the value has already been created by securing the site and the pre-let, not in the incremental financing component once we have done our work.

As a private developer, we work across real estate through the most diverse stages of its life cycle and risk spectrum, from its most base form, including agricultural land or derelict contaminated brownfield sites, right through to the delivery and commercialization of some of the largest and most technologically advanced logistics facilities in Europe.

For LCP, value creation as a developer remains a direct function of leveraging our experienced team for the sourcing of attractive opportunities, risk mitigation and technical solutions. By spending our time tackling project risks, we are permanently de-risking our positions and capturing the most significant areas of value creation, as each risk gets solved and each project milestone is achieved.