Managers feel logistics assets will remain safe

Institutional investor demand for logistics assets should prove resilient in the face of a triumphant U.S. presidential campaign by Donald J. Trump, predicated on tearing up the country's trade agreements, industry analysts say.

Global trade is just one of three logistics industry pillars, along with consumption trends, such as the growth of e-commerce, and underlying supply-chain fundamentals, said Michael Yang, research consultant, real assets, with Boston-based investment consulting firm NEPC LLC.

The latter two pillars have kept asset owners looking at that warehouse-focused corner of the real estate market even as global trade has flatlined recently, said Mr. Yang. Mr. Trump's victory Nov. 8 has added to uncertainty, but demand from institutional investors should remain strong in the current environment of rock-bottom sovereign bond yields, he added.

“Consumption is here to stay no matter who the president of the U.S. is; e-commerce is here to stay,” said Tom Olinger, chief financial officer of Prologis Inc., a San Francisco-based real estate manager focused on logistics, with $67 billion in assets under management, during a Nov. 9 meeting with investors.

Signs have emerged in the days following the election that some investors don't share that confidence.

In NYSE trading Nov. 11, Prologis shares closed the day at $46.50, down 8.9% from the Election Day close of $51.05, before the results of the national vote were known. That compares with a 1.2% gain for the S&P 500 index over the same period.

Goodman Group, a Sydney-based logistics heavyweight, likewise saw its shares retreat on the Sydney Stock Exchange, closing Nov. 11 at A$6.38 ($4.82), down 6.5% over the past two sessions. The S&P/ASX index advanced 2.1% in the same period.

With the critical mass of uncertainty now regarding a President Trump's policies, some profit taking makes sense, said Eric Frankel, research analyst and head of industrial real estate with Green Street Advisors LLC in Newport Beach, Calif.. If Mr. Trump follows through on any of the more protectionist policies he campaigned on, the fallout will weigh on owners of logistics assets, and particularly those like Prologis with material global operations in countries such as Mexico and China, said Mr. Frankel.

Investment consultants, while conceding the outlook for global trade has become murkier, predict logistics will continue to benefit from underlying trends, both in absolute terms and relative to other risk assets.

There are “definitely concerns” for all risk assets from potential U.S. policy shifts, but a case can be made that “logistics is probably one of the least bad places to be within real estate,” said Paul Jayasingha, London-based global head of real estate manager research with investment consulting giant Willis Towers Watson.

Negative scenarios are potentially “very negative, but at the same time, people (still) need to buy their groceries” and other consumer goods, which will support demand for the warehouses operated by logistics companies, he said.

It's too soon to predict the ripple effects from policy changes, but there's no reason to conclude that recent trends underlying asset owner interest in logistics — including the growth in e-commerce and the way consumers behave — “are going to change for the worse,” agreed Meagan Nichols, Cambridge Associates' Washington-based head of global real assets research.

In recent years, asset owners around the globe have turned to logistics in search of the steady yields that sovereign bonds are no longer providing in an environment where big central banks have flooded the financial markets with liquidity, analysts said.

On Nov. 7, Singapore sovereign wealth fund GIC Ltd. announced it had agreed to acquire P3, a company that has a network of warehouses in nine European countries, for e2.4 billion ($2.6 billion) from private equity firm TPG Real Estate and Ivanhoe Cambridge, the real estate asset management arm of C$254.9 billion ($189.3 billion) Caisse de depot et placement du Quebec.

Through a spokeswoman, Lee Kok Sun, chief investment officer at GIC Real Estate, declined to comment on whether Mr. Trump's election victory could have a potentially material impact on GIC's investment thesis for logistics.

In an interview last month, Mohamad Nasir Ab Latif, the deputy CEO of Malaysia's 680 billion ringgit ($161.7 billion) Employees Provident Fund, cited logistics as a focus for the EPF on account of the “stability of returns” offered — “not very high returns but reasonable,” he said. “You know, you leverage in some of the logistic assets; in Germany you borrow at low interest rates, and you get about 8%. That's decent for a pension fund like us.”

A lot of institutional money has been flowing into logistics investments over the past few years, as both a dividend play and to take advantage of evolving consumer behavior, which places a premium on warehouses located ever closer to the end consumer, said Cambridge's Ms. Nichols said. As recently as four or five years ago, deals involved logistic facilities that were a day or two away from the consumer markets being served. Now deals involve facilities that are typically within an hour's reach, she noted.

In Prologis' Nov. 9 meeting with investors, Mr. Olinger predicted those trends will support his firm's business even if new trade policies shift production back to U.S. shores.

“I know there's a lot of uncertainty ... a lot to figure out,” he said. But whether production is overseas or it returns to the “middle of the country” — where labor costs are cheaper — a company such as Prologis with warehouses close to the final consumer will be in demand, he said.

Still, demand will fall with a protectionist hit to global trade that would inevitably hurt consumption, noted Green Street Advisors' Mr. Frankel. Trends such as e-commerce will buffer demand for logistics companies, but in a negative scenario they “won't escape unscathed,” he said.

Willis Towers Watson's Mr. Jayasingha said for the moment his firm is advising clients to be cautious until the policy implications of Mr. Trump's victory become clearer.

Within the broader real estate sector, however, the consultant remains positive on logistics, and supportive of the view that clients should add exposure in segments such as logistics, health care and student housing, while reducing investments in office properties that would arguably be hit harder in negative scenarios.