Community of Inquiry article series

Article in English language   2016.05.29 • published on LinkedIn   LinkedIn Networks

Logistics industry from the institutional investor's perspective

Article 1: starting the community of inquiry and why an institutional investor puts money in the logistics industry

1. With respect to this article series

I'm planning to write a series of short articles on the logistics industry, that in the first instance will be used for internal purposes within our company.
I'm currently working for DekaBank, one of the largest investment banks worldwide, headquartered in Frankfurt, Germany. One of the many asset classes DekaBank invests in is the logistics and light industrial housing.
Although being a niche-player in this specific market, the company already owns more as fifty buildings spread over 12 countries, mainly in Europe. The logistics investment volume of DekaBank meanwhile reaching approx. 2 billion Euros.

However, to get the best possible and accurate information on logistics matters I like to introduce a CoI (Community of Inquiry) principle in the following four LinkedIn groups:
LinkedIn Group Logistics Network LinkedIn Group Global Logistics & Supply Chain Professional Group LinkedIn Group Logistics Executive LinkedIn Pulse Group
Logistics Network Global Logistics & Supply
Chain Professional Group
Logistics Executive LinkedIn Pulse
A joint effort in evaluating, enhancing and extending the articles' contents will eventually lead to a multi-disciplinary insight and highlighting of the institutional investment side of logistics housing. For my company it would mean that I can share the insights of numerous professionals out of the industry, being it executives out of the C-Suite, supply chain specialists, constructors, developers and so on.

This joint effort within the CoI gives the participating logistics provider also the opportunity to get a unique understanding of the financial and economic behaviour of the institutional investor in the logistics housing business, where in normal cases these insights are not shared. In my opinion, mutual sharing of our bodies of knowledge, being transparent to each other instead of working from behind closed doors, creates a win-win situation in the end for both the institutional investor and the logistics specialist.

2. Purpose of a Community of Inquiry

Within general public as well as professional and academic circles the use of communities of inquiry are well-known and wide spread. The academic society was the first one that has been relatively successful in identifying the properties of asynchronous learning networks, and one of the constructs that has attracted considerable attention in higher education that serves this purpose is that of a community of learners.

Higher education has consistently viewed community as essential to support collaborative learning and discourse associated with higher levels of learning. Moreover, the asynchronous nature of online communication and the potential for disconnectedness has focused attention on the issue of community. In support of this perspective, there is evidence that a sense of community can be created online.

This is where the structure of the community of inquiry framework comes in, as defined by Garrison, Cleveland-Innes and Fung (2004) and Arbaugh and Hwang (2006).

Figure 1: Community of inquiry Framework (source: Garrison, D.R., 2007)

Without turning this CoI into a seven-headed monster that steers into a rudderless destination, we should not attempt to make it a scientific monstrosity. I propose that everybody who wants to join this effort simply gives his professional opinion and input, thus helping and striving with the complete article series to a useful extension of our body of knowledge.

3. Investment considerations

Figure 2: Investment volumes in logistics premises in 2014 (source: BNP Paribas, DekaBank, 2015)

The logistics industry provides investment banks such as DekaBank a possibility to a risk-spread in their global property portfolios, diversifying the asset liability matching, participating in a strong growth potential of the logistics housing category, still facing an acceptable investment yield with stable pricing, and with most of the time a very good tenant's solvency and credibility.

Next to the already mentioned advantages of maintaining a logistics portfolio as a separate asset class, we see the specific benefits regarding regular high dividend payouts to the shareholders because of a high after-tax income, and an increasing importance of the logistics asset class because of the steady rise of e-commerce and globalisation.

Decision-making with the institutional investor is firmly grounded in scientific research, combined with extensive market reconnaissance, state-of-the art consultancy and the use of internal resources, the latter for an investment bank as DekaBank, around in 23 countries worldwide, being a priceless asset. Some evidence to DekaBank that indicates to whether or not invest in the logistics industry premises is elaborated out of macro-economic figures and analysis.

Figure 3: Total world merchandise trade 1999-2010 (source: Ratliff & Ramudhin, 2012)
Figure 4: Total B2C E-sales 2014 of goods and services (source: Ecommerce Foundation, 2015)
Figure 5: Top 10 E-Commerce countries (source: Ecommerce Foundation, 2015)

Mentioned statistics are only a few of the multiple data that are combined and interpreted to make a judgment about investments in the logistics premises industry or not. A short summary of data that are collected and analysed, where international comparisons are made of macroeconomic conditions on the basis of a number of elementary performance indicators:
  • Development of inflation;
  • Long-term interest rate;
  • Net borrowing/lending of consolidated general government sector;
  • General government debt;
  • Unemployment rates;
  • Imports and exports, related to Gross Domestic Product (GDP);
  • Goods trade with (non)-EU countries;
  • Container transport moves.
These indicators give an overall picture of the international competitive position of a country. The macroeconomic circumstances define the basic climate within which companies develop their activities. Good macroeconomic conditions ensure a favourable climate in which enterprises can function well.
(source: Dataportaal van de Nederlandse Overheid, 2015)

A secondary dataset is established in relation to specific logistics locations. There are various critical site selection factors that determine if the logistics industry is situated in a true winner spot or not. In this case it is very important for the institutional investor to get first-class consultancy, especially when operating on non-common grounds. To name but a few location key elements:
  • Highway access, for most of the time rated the No. 1 critical site selector in due diligence processes. Access to a high-quality highway infrastructure will definitely improve a company's profitability. Mark Crawford, business writing specialist and logistics consultant, stated in 2015 that: "When companies undertake a site search, they are evaluating three key elements:
    1) How to reduce the total cost of operation
    2) How to reduce the risk of business interruption
    3) How to improve speed to market for customer deliveries.
    All three of these elements can be greatly impacted by proximity to high-quality transportation systems, especially highways. Transportation costs are easier to manage with good access to highways, particularly for supply chain and manufacturing operations. Therefore, it is no surprise that highway access is a top concern for companies that are locating or expanding their facilities.

    Highways need to be multi-lane roads with some limited access and speeds of 55 mph or higher. Interstates are even better. Trucks use fuel more efficiently when they are traveling at 60 miles an hour, compared to sitting at traffic lights or in stop-and-go traffic congestion. Faster speed to market improves a company's overall profitability."
  • Proximity to major markets provides access to customers and workforce talent.
    Richard H. Thompson, who leads the Global Supply Chain & Logistics Solutions team for JLL, observes: Ten years ago when you ordered a shirt online, or a book, it got to you in five to seven days and you were pretty happy. Now, you're kind of thinking you're going to get it next-day. The customer-service requirements continue to escalate.
    Enabling next-day delivery once meant locating distribution within reasonable proximity to an airfreight hub, such as the major FedEx facilities in Memphis or Indianapolis.
    But back in the day, next-day customers were more willing to pay extra for such a quick turnaround. Now that buyers not only want faster, but also cheaper, fulfilment needs to happen with the kind of proximity that allows next-day delivery at regular parcel rates."
    In any case, close proximity allows better access, but not just access to the buyer, but also access to talent, access to customers, and for logistics service providers headquarters, access to other major facilities.
  • Labour cost and availability are other key factors to consider. General labour conditions bear watching, but a more difficult area to evaluate is the market for specialized logistics and supply chain management skills and talent. Areas with substantial logistics operations may have a strong talent pool, but there may be more competition for that limited resource, which can add cost. Constant turnover can also disrupt operations.
  • Locations need to provide access to the largest and/or most rapidly growing consumer bases.
  • A locations should have strong multimodal connections (highway, ship, rail and air transport).
  • There should be ongoing investments in logistics infrastructure in the area, in e.g. new manufacturing facilities, port expansion necessitates and rapid transportation growth that have converged to drive a major need for investment in the distribution network. A stalled infrastructure project or the addition of tools, taxes, or fees to cover costs can dramatically change the original assumption.
  • No contradiction with governmental guidelines and environmental regulation. The willingness of the government and other authorities to invest in the area or support private and institutional initiatives.

Figure 6: Map with the European blue and gold banana regions (source: author)

The Blue Banana (also known as the Hot Banana, Bluemerang, European Megalopolis, Manchester-Milan Axis or European Backbone) is a discontinuous corridor of urbanisation in Western Europe, with a population of around 111 million. It stretches approximately from North West England in the north to Northern Italy in the south. The more southerly Golden Banana is known for its modern industries, such as electronics, aeroplane manufacture, and research centres.

On the map you find in orange the established economic axes and in green you find the developing eastern-Europe axes. If assessing a location knowledge of the logistics axes, hubs and sub-hubs is very important.

A third data set needed to assess a potential investment in logistics premises consist of building data, derived from architectural plans, construction drawings, technical and contract documents, the building permit, fire department regulations, current market developments, perhaps specific tenant assumptions and wishes (build-to-suit buildings), environmental challenges, sustainability matters and so forth. This data set is most of the time compiled by a technical due diligence. Some interesting data are crosslinked with the commercial survey and assessment of the building. Trying to get a feeling with the building and its original construction costs is one of the standard issues.

Table 1: Overview general building costs worldwide (source: Bond University., Turner & Townsend, adapted by author)

Table 2: Entwurfsmerkmale "ideale" Lagerhalle (source: author)

A fourth data set consists of important legal and tax issues, where amongst others a thorough assessment takes place regarding:
  • Preceding purchase acts
  • Land registry documents
  • Zoning plan/zoning violation issues
  • Environmental hazards
  • Covenants or restrictions on the property that would limit the use of the property
  • Potential issues with the chain of title to the premises that may interfere with the full ownership
  • Accurate property value estimate
  • Release or retention of deposits
  • Limitations on remedies and liability
  • Covenants and equitable servitudes/rights
  • Lease agreements (risk assessment)
  • SLA agreements with property managers, technical companies etc.
  • Guarantees
  • Insurance
  • VAT, corporation taxes, capital transfer taxes, real estate taxes, grants, tax rulings.
So the combination of the above data sets cover all the considerations that are prior to purchase an investment by an institutional investor.

4. The initial first year of investment

I will shortly explain the strategic follow up after the logistics building is purchased. Of course the job is not done with only a successful purchase, the property investment evaluation is an ongoing internal process. There are various ways to look at the performance of the building, being it from one side functionality and utilisation by the user/tenant, being it from the other side an investors benchmark towards ROI (Return on Investment).

To connect to the utilisation of the building a lot of objective and independent tools are at one's disposal. Although most of the time the investor doesn't really care about the utilisation of the building, or simply doesn't want to participate with the tenant to make the building better operational, you could think of benchmarking operational environmental elements like energy, water, carbon, waste, transport, wellbeing. These are good tangible and measurable factors that can be easily evaluated and benchmarked.

There are also a lot of possibilities for assessing the building to get a good insight into performance based on building design and equipment, actual assessment on current use and operations and potential future performance. The results should help tenants and investors regarding acquisition, disposal, renovation or leases.

Figure 7: example of performance indicator, showing the gap between top and poor performers (source: Green Rating Alliance, 2012)

DekaBank is an investor that already builds a mindset around pro-active logistics tenant participation. A nice tool that could be in place to get a common tenant/landlord understanding of the building performance is the Green Rating™ assessment tool from the Green Rating Alliance (see picture 7). Although very time consuming and expensive the tool delivers valuable performance information.

Next to the building utilisation the financial and economic performance in the overall property portfolio needs to be considered. Within DekaBank a lot of special developed tools are in place, but mostly aimed at internal use with only half an eye on the developments in competing portfolios.

Interesting though, also for internal reasons, to take once a while a look at the IPD Pan-European Annual Logistics Consultative Index, to see if logistics assets are still a performance booster in the portfolio.

Figure 7: example of performance indicator, showing the gap between top and poor performers (source: Green Rating Alliance, 2012)

As you can see with the Total Return Index, logistics and industrial investments is not beaten by any other asset class if it comes to capital growth and total return.
So this is one of the information sources that, combined with several internal and external others, gives reassurance about logistics investments. Internal analysis relates to IRR (Internal Rate of Return), DCR (Debt Coverage Ratio), LTV (Loan-to-value Ratio), ROE (Return on Equity) and ROI (Return on Investment & Leverage principle).

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