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Evert Castelein, Investment Manager, abrdn European Logistics Income plc
Spain’s regional cities are waking up to the need to redesign their urban centres to accommodate a rapidly rising appetite for e-commerce.
But can those cities, especially Madrid, Barcelona and Valencia, pivot to urban and last mile logistics quickly enough to keep up with demand?
The transition from manufacturing-led to consumer-led logistics is at an earlier stage in Spain than in many other European countries, with e-commerce penetration at around 7% of retail sales. By comparison, online sales are as high as 27% in the UK. The level of e-commerce in Spain today is roughly equal to the level the UK had in 2010, according to data from Savills.
But this is changing rapidly, driven by the rise of Amazon and the substantial investment in supply chains by the major incumbent retailers.
Amazon currently employs over 15,000 people in Spain, more than double the 7,000 it employed in 2019. It is now Spain’s biggest e-commerce player, with revenues reaching $4.4 billion in 2020. Prior to 2020, Amazon’s annual sales in Spain had not exceeded $400 million, highlighting the surge in demand for goods on the platform.
Amazon invested over €7 billion in its platform in Spain between 2011 and 2020, and currently operates eight fulfilment centres with more to be completed this year. One of these in the pipeline is at Gavilanes, Madrid, where Amazon is one of five tenants in a last mile logistics hub acquired by abrdn European Logistics Income plc (ASLI) in December 2021 for €227 million.
The asset comprises seven last-mile logistics facilities constructed between 2019 and 2021, alongside one state-of-the-art logistics warehouse which, which is under construction and is pre-let to Amazon. It will feature a multi-level delivery van parking station fully prepared for electric charging capability, optimised for last-mile parcel delivery. On completion, Amazon will account for 43% of the total Gavilanes portfolio’s rental income.
Located on Madrid’s first ring road, the hub can serve 6 million people within 30 minutes’ drive-time, or 87% of Madrid’s population. The acquisition underlines our conviction both in Amazon’s future growth and the location’s suitability for last-mile. But modern last-mile logistics hubs of this quality in such a location are rare, and occupier demand will continue to grow.
Amazon’s growth in Spain has lit a tinder box under existing retailers, which are fighting to retain market share by developing their own e-commerce platforms.
Yet constraints on development and delivering new facilities quickly, particularly in inner ring road locations like Gavilanes, is creating a race for space in last mile logistics.
Just 500,000 square metres of new logistics space was completed in Spain in the second half of 2021, much of which was already pre-let. Completions have been gradually rising since 2016, but only exceeded take-up in one of the last 13 years. This has led to a gradual reduction in vacancy rates and now both Barcelona and Madrid face a shortage of available modern logistics stock.
This is creating rental pressures and rents are rising as a result. Prior to the start of the Ukraine crisis, we had forecast total returns for the Spanish logistics market to reach 9% per annum over the next three years, driven by stable income returns and capital growth. This puts Spain fourth out of 17 markets in our logistics forecasts in Europe, over a three-year time horizon (although it is likely that current geopolitical issues will see these forecasts downgraded).
While demand is strong across the supply chain, pure e-commerce players have become the most active in leasing space in Spain. Around 37% of total take-up in the first half of 2021 was for e-commerce purposes, while contract logistics operators, such as DHL, were the second-most active with 28% of leasing, and retail came in at 14%.
Modern logistics facilities are a new breed of industrial property. They have high specifications and the investment in the automation and digital information systems is often higher than the value of the buildings themselves. When a tenant invests heavily in machinery and robotics, it usually implies that the tenant has long-term plans to remain in the location.
This is helping prime logistics yields to converge with office yields across Europe, reflecting the income durability and tenant quality in the sector.
Demand will remain high across the logistics spectrum, but we believe the fringe urban areas and the mid-box part of the market will be where the greatest leasing and investor demand will be focused.
But while the dynamics of Spain’s fast growing e-commerce market is attracting capital to Spain, the challenge remains for investors and developers to rapidly identify, secure, and deliver the modern urban logistics facilities that occupiers will need in the years ahead.
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