Scale and quality

Rafał Ostrowski, ’Eurobuild CEE’: What is Prologis’ strategy for the company’s growth in the CEE region?

Martin Polák, managing director, regional head, Prologis, Central and Eastern Europe: Our global strategy is to construct premises in high-barrier, high-growth markets. Mainly due to urbanisation and growing e-commerce requirements, fulfilling consumers’ expectations with speedy last mile delivery has become critical. Therefore we focus on established markets and locations close to the main population and consumption centres. Currently we have nine logistics facilities totalling 200,000 sqm under construction in all four countries in the CEE region. This is strong evidence of how the CEE market is among the best performing of those we are active in and is also a reflection of the commitment of Prologis CEE’s whole team to turning focused strategy into market-leading performance.

Which countries and markets within the CEE region are now the most important for you and why?

With an operating portfolio of 4.5 mln sqm, we see this as a region without borders. Each of the four CEE markets we are present in is important for us. Of course, they differ by size – from the biggest, Poland, where our operating portfolio totals 2.3 mln sqm, to Slovakia with 371,000 sqm – but they all benefit from their excellent geographic location and the infrastructure connecting them with the most important Western and Eastern markets. As for how they are performing, we have seen the CEE markets follow the most positive market trends. For example, the Czech Republic is increasingly establishing itself as equivalent to a highly developed Western European market. Also, our CEE customers have matured over the last few years: they are more articulate and aware when it comes to logistics properties and are seeking high quality units with sustainable features, exceptional customer care and solutions that help them to reduce their operating costs.

What are the greatest challenges of the CEE market in your opinion?

There is a scarcity of land, as well as increasing construction costs and a lack of available labour. In past centuries, labour tending to migrate to where the work was; but in the current climate of record high employment rates, its availability is increasingly bringing the location of distribution facilities closer to the main population and education centres.

What kind of opportunities does this market provide? And why is it so attractive to you?

The CEE market is one of the four European regions we are present in at the moment – and it’s among our top locations overall. We want to grow in the region, strengthen our operations in its current sub-markets and maintain our long-term strategic approach to this portfolio. One of the biggest opportunities we have here is the growth of e-commerce. Currently, e-commerce accounts for app. 20 pct of new leasing, compared to earlier this decade, when it was only 5 pct. It still continues to enjoy double-digit annual growth rates according to our research data, and in the CEE region the biggest boom is yet to come. Demand for logistics and industrial space from e-commerce companies is still growing strongly, despite the decreasing supply of available land and space. Our aim is to accommodate e-commerce requirements, and so we are seeking to find the right solutions for our customers.

What goals have you set yourself for the future?

We want to expand through development, constantly improving our product and services. Our goal is to strengthen our position in the core and highly in-demand CEE locations where we are already present, without necessarily seeking out completely new ones.

Rents are growing. How is this changing the logistics scene – and what will be the results of this trend?

Logistics rental growth is a global phenomenon. In 2017, rents rose globally by almost 7 pct. In Europe it was almost 3 pct on a net effective basis. Rent growth is more significant on markets with limited land availability, but the high rental rates do not seem to be depressing the demand, especially when it comes to top-tier locations. The low vacancy rates are intensifying the competition between customers, too. Thanks to the healthy operating conditions and overall economic growth, rent growth has been continuous through 2018. Customers are willing to expand and invest in their properties. At the same time, they expect the state-of-the-art, sustainable facilities associated with modern supply chains, along with high quality accompanying services.

How important is urban logistics in your plans?

Our focus for many years has been on the consumption end of the supply chain, not on the production end – and that focus has proven to be a sound strategy. Consumer expectations are are mainly being driven by urbanisation and e-commerce growth requirements, and so servicing these needs speedy last mile delivery has become critical. As delivery times have become the key value driver, we are seeing the greatest demand for our City and Last-Touch™ facilities. Urban logistics is therefore a key focus for Prologis. We are already developing infill sites, multi-storey and flexible small business units (SBUs) close to population centres and are using advanced analytics to enable greater supply chain efficiency. Another significant phenomenon is for the attractiveness of locations on the outskirts of expanding cities to increase over time. One excellent example of this is Prologis Park Prague-Rudná, which is located 20 km from Prague city centre. It is now one of the best performing parks in our whole CEE portfolio.

One of the main problems with urban logistics is the availability and high price of land. What’s your strategy for acquiring attractive locations?

Site selection for infill urban core is difficult. We obviously look to be close to transport networks and a dense, affluent population base. Beyond that, there is no one-size-fits-all strategy. A site could take the form of a covered land play, an aggregation play, a redevelopment play or some other variation. The reality is that these projects are complex, take lots of time and tons of capital. It requires expertise that few of our competitors have and one that we’ve been working on for decades. Today our portfolio is unrivalled in size, scale and functionality – and it’s impossible to replicate.

In the city logistics segment are you going to compete for sites within city limits or are you ok with those that just have good motorway access to the cities?

We have a precise idea of the locations we want to be in. Our internal research shows that the most important location criteria for our customers include being close to economic networks as well as the availability of a flexible, educated workforce. This is what the big cities have to offer and the closer we get to them, the better – while of course considering the availability of land in the most in-demand locations.

What do you do to make your buildings greener?

Since we are a long-term investor, the sustainability of our facilities plays a vital role for us. Sustainable features have become the standard in our buildings: advanced LED lighting, heating and ventilation systems, the use of natural light where possible, and also our own special smart metering systems monitoring and evaluating the energy consumption and efficiency inside them. We believe that sustainable environments are also pleasant for the users of our buildings. We create interior green spaces as well as take care of the biodiversity around our projects. In addition to this, we support alternative modes of transport for our parks: car sharing, facilities for cyclists, and some of our parks even have public transport stops. All our new CEE buildings are submitted for BREEAM accreditation.

What green standards will become the norm in the future?

To give one example, the use of solar energy. In a world first, in January this year we introduced a successful pilot project at our Prologis Park Budapest-Harbor in cooperation with Hungarian start-up Platio: an aesthetic and space-saving system that functions as a renewable energy source through the integration of high-performance solar cells into paving elements made of recycled plastic. We also provide charging stations for electric vehicles in some of our CEE parks.

Would you say that technology has already the main game-changer – or is there a revolution still to come in this sector?

Technology has become an integral part of the industry. While e-commerce has been grabbing the headlines, plenty of other related technological advancements are transforming supply chains and logistics real estate. Automation is already impacting our industry through the convergence of automation, robotics, data and predictive analytics. Many of our customers are using automation to sort packages and robotics to help with picking and packing. Some customers are even using data to move goods through their warehouses more efficiently. But it’s not only about logistics but also about transportation – if, for example, over the next decade freight e-vehicles or autonomous trucks emerge, it will certainly change the face of logistics facilities and distribution parks. Autonomous trucks will have a meaningful impact on the supply chain network, but this won’t be happening any time soon. However, current autonomous technology does allow for automated lane keeping and cruise control. This level of technology marginally affects network configuration and building location. Future technology, however, will be a game changer. When coupled with electrification using sustainable power and improved batteries, fully autonomous vehicles will travel greater distances than current trucking regulation allows, and they will move at night or in the early morning when the streets are uncrowded. As a result, part of the network could be located further away from population centres and still be effective. The reality, though, is that it is unlikely that this technology will be deployed for at least another ten years and some say it will take much longer, given the myriad of regulations, safety considerations and trade union objections.

Could you give us some examples of how Prologis uses technology in its business?

We use technology and we develop technology – we create intelligent buildings, not “boxes”. This includes not only the sustainable solutions I’ve already mentioned, but also the most advanced materials and construction processes, including the design of the building. Just recently, we launched the construction of a new 10,000 sqm speculative facility at Prologis Park Budapest-Harbor, which is Prologis’ first BIM (building information modelling) designed logistics facility in the CEE region. This intelligent 3D model-based process is just one of the fascinating examples of how technology is changing the industry – and it’s exciting to be able to take part in the process. We consistently invest in new technology that reduces our customers’ operating costs and helps improve their efficiency in terms of providing a premium customer service. In 2018 we are completing the implementation of a property and facility management programme that can be used in all our parks across Poland. The important benefits of Singu FM include: saving time and money through the optimisation of all FM-related tasks; instant information exchange between the tenant, the manager and the subcontractors; and full control over the data and processes, with complete documentation available in one place with one click. We have also introduced the RhinoSCADA system, which provides real-time and continuous control over the costs and consumption of utilities, resulting in significant savings.

How do you aim to differentiate yourself from your competitors?

By our scale and the quality of our products, services and people. With our 5,500 customers located across the globe and with access to their proprietary data, we have unique insights into their location and supply chain decisions. With this knowledge of our customers’ future needs, we are able to draw up the best possible location development strategy. We pride ourselves on the substantial expertise and diversity each of us brings to the team. Thanks to the unrivalled pool of experience we have accumulated from our global portfolio and the open environment, where everyone’s opinions matter and where every idea is appreciated, we are able to deliver flexible, innovative and effective solutions that our customers greatly appreciate. The quality and range of our services goes side-by-side with our state-of-the-art construction methods, and this is achieved through intense and close cooperation between our highly professional project management and property management teams on each project – from its initial planning to the operational running of the facility. ν