PL

More than just the rent

Warehouse & industrial
Paweł Sapek, the central Europe regional head of Prologis, and Paweł Kowalczyk, the real estate and customer experience senior manager of Prologis Poland, spoke to Eurobuild about ways to manage the growth in building and utility costs for tenants as well as the benefits of clear rules and honesty in business.

The warehouse market keeps on growing, but what are the main costs that this wave of new wave of tenants will have to contend with?

Paweł Sapek, Prologis head for Central Europe: Real estate costs are only one component of the overall cost of supply chain management. Based on the data we are receiving from our customers, we estimate that these are no more than 7–10 pct of the total cost of the overall supply chain. This might seem like a relatively small percentage, but property cost management is a very important aspect of running an efficient logistics operation. We are talking about more than just the rent itself. Unfortunately, in terms of the rental costs, many tenants (and also advisors) in real estate are still focused on the rental rates alone. But the important thing is to analyse the total operating costs related to the leasing of the warehouse space.

So what should your customers be focusing on the most?

Paweł Sapek: First of all, they need to take note of the operating and utility costs. If you take any monthly customer invoice, for example, you can see that rent makes up about 65 pct of the cost. The remaining 35 pct are service charges and utilities – electricity, gas, etc. We expect this share to grow in the next few years, in line with rising electricity and gas prices. That’s why the professional management of these costs is so important from both the point of view of the landlord and the customer.

Is it possible to even prepare any kind of budget for the operating costs in such a situation?

Paweł Sapek: Not only can you prepare a budget for these costs, you definitely should. Our customers today expect a transparent rental process as well as predictable costs that they can expect to have to pay throughout their entire lease term. Low advance payments for service charges can be illusory – you need to analyse the full detailed budget of operating costs. That’s why Prologis is the only company on the market that offers a ‘Clear Lease’ agreement, based on which we set flat-rate operating costs.

How does such an agreement work in practice?

Paweł Sapek: First of all, it is transparent and follows a simple formula. In addition to the rental terms, it also specifies the fixed service charges for the entire duration of the contract. These include all standard operating costs, contractual maintenance and repair costs, and administration fees. Only public charges – for example, property taxes and utility costs – are billed directly based on the official charges and actual consumption. Before signing the contract, customers can be sure of the costs that will be applicable throughout the rental period, meaning there are no surprises.

Could you give us an example?

Paweł Sapek: One example are the fees for the maintenance of the common space: the green areas, the installations and the external devices, as well as for the snow removal, roof maintenance, and other factors. With Clear Lease, the fee for these services is known in advance and included in the contract. In comparison, in a lease agreement with triple net rent (NNN), this cost is variable and estimated on an annual basis. We have no hidden costs in our contracts.

Why did you decide to introduce this type of contract?

Paweł Sapek: At Prologis, we have our own specialised property and facility management team. This is made up of experts with many years of experience in managing our properties and extensive practical knowledge. Among many other advantages, their property knowledge means that they can accurately estimate all the costs for our customers. This helps us to map out the contract budgets for flat-rate operating and maintenance costs. With this scope, we are also able to take on the risk of rising costs. In addition, our customers can rely on tidy, properly maintained parks and leased space thanks to our internal team of property management specialists.

What are the other benefits of such a solution for your customers?

Paweł Sapek: Clear Lease has many direct advantages for our customers. First of all, it allows for simple budgeting certainty as to the agreed costs and, as a result, a reduced financial risk. We also provide a transparent calculation with no need for annual cost verification, because the fixed service charge means that it’s unnecessary to settle service fees later, which ensures that costs remain comparable throughout the rental period. In a nutshell: customers are given extra assurance when it comes to cost planning. Only public charges and utility costs are billed separately.

Are the utility costs currently among the most pressing issues for customers when it comes to the operation of their buildings?

Paweł Kowalczyk, senior manager, real estate and customer experience, Prologis: Definitely, yes. We have been observing a steady increase in electricity prices and distribution costs for a long time. In 2019, Polish electricity prices fluctuated at around PLN 160 / MWh, but currently we are at the level of PLN 390 / MWh. Energy prices this year, specifically the distribution costs, rose even further due to a PLN 76.20 / MWh capacity fee. All of this significantly increases the costs of running a business for our customers. As a result of things like this, our customers have been asking us about price forecasts for the years ahead more often.

The hike in electricity prices has been truly enormous. What's behind it?

Paweł Kowalczyk: The main reason for the price increases has been climate change. The climate policies being pursued in Europe (and the rest of the world), along with the general economic situation, are pushing up the rates. Globalisation entails that when planning energy purchases we have to analyse the situation everywhere, not only in Poland. The factors influencing the increase in electricity prices and its distribution include the increases in the prices of CO2 emission allowances (a 140 pct increase y/y), the increase in property rights pricing in support of clean energy producers, and the increases in coal prices as the result of the high demand in Asian markets. Since January, such bills have also been significantly influenced by the price of energy distribution. In 2022, this is set to be modified depending on the customer’s consumption profile. It remains to be seen who will benefit from all this, and who will lose out as a result of the changes.

In such a situation, does Prologis have any influence on the price of electricity?

Paweł Kowalczyk: To some extent we do. Globally, we consume more than 5.5 mln MWh*, so we try to make the most of our influence for the benefit of our customers. In Poland alone we buy about 123,000 MWh of electricity for our parks each year. By consolidating all our entities, we are only slightly behind such large consumers as steel mills or mines, which gives you some idea of our scale, while having such a large purchasing volume improves our negotiating position. Additionally, we have devised and implemented several different purchasing models. We insist on using detailed market analysis to allow us to adopt the best purchasing model for any given situation. We are aware that in the second half of the year most customers are in their budgeting periods, and so this is when we publish any expected increase in utility costs. In the last few years we’ve seen that this approach provides more transparency and insights for our customers.

Paweł Sapek: Price increases are inevitable given the variable market conditions, which is why we aim to be open about this, make our expectations clear, and limit the risks for our customers.

Paweł Kowalczyk: Exactly. For years we have been actively taking steps to purchase electricity and gas for our parks at attractive prices. In order to minimise the risk of purchasing energy in an unfavourable period, we have decided to buy energy for 2022 in tranches. Already we have purchased 75 pct of the total volume in this way.

Are there any other ways to reduce these costs?

Paweł Sapek: As a company we invest heavily in photovoltaics. In 2020 alone, we installed systems worldwide capable of creating more than 40 MW. Over the next four years, we want to increase the total power of our solar systems globally from 252 MW** to 400 MW.
Prologis’ parks in Europe are making a major contribution to achieving this goal, including through our SolarSmart programme. In our buildings, we also go beyond the market standard in terms of energy efficiency by equipping them with installations that lower consumption rates. We use LED lighting with sensor systems that react to daylight and movement. We have specialised innovations and ESG teams specifically tasked with looking into how to optimise our buildings’ performance, carbon footprint and energy consumption.

To sum up, are the most important issues for your tenants right nowgetting a good price for electricity and the pursuit of carbon neutrality?

Paweł Kowalczyk: Most of our customers are focused on reducing the environmental impact of their activities. In Poland this has been especially clear due to the growing number of enquiries we have been getting about using green energy from renewable sources.

Have you managed to meet such expectations?

Paweł Kowalczyk: Absolutely. Along with the fact that we focus on purchasing energy at good prices, we also take measures to support green energy producers while at the same time significantly reducing our CO2 emissions. For 2021, we have bought 107,000 MWh of electricity for our parks with guarantees of origin from Tauron. This is a way of confirming that the electricity purchased has been generated in installations using renewable energy sources.

Paweł Sapek: As a leader in green construction, we want to continue to increase our commitment to environmental protection. Purchasing energy with guarantees of origin was another important step in the implementation of this strategy. Sustainable development and a focus on customers’ needs are core pillars of our business. Thanks to green energy, we are getting closer to our goal of achieving CO2 neutrality for our warehouse building processes by 2025, and at the same time we are making it easier for our customers to achieve similar climate targets.

Electricity is one thing, but how about gas? Do you use this to heat your warehouses?

Paweł Kowalczyk: Yes, we do – gas is used for most of the heating in our warehouses. Prologis’ parks in Poland consume app. 143,000 MWh of gas annually – as much as around 6,000 single-family houses.

Is the situation with gas prices as bad as it is for electricity?

Paweł Kowalczyk: In the current geo-political landscape the gas market is very unpredictable. Gas prices are hitting record highs, which is being predominantly driven by political factors, the approaching winter, and concerns around securing the gas supply. We are constantly monitoring the market for this very reason, analysing a range of factors that could influence prices.

And what have been your conclusions from this?

Paweł Kowalczyk: The main reason for the increase in gas prices has been the shortages on the European market. At the moment, the gas storage in Europe is at 67 pct. By comparison, in the same period last year the storage was at 91 pct. This has been compounded by the political situation around the construction and commissioning of the Nord Stream 2 gas pipeline, as well as reduced supplies of LNG to Europe and the rising oil prices on global exchanges.

Do you have a way of protecting your tenants from all this?

Paweł Kowalczyk: As we did for the electricity supply, we have established a purchasing group and devised various purchasing models. Once again, having a large volume improves our negotiating position, although unfortunately the consumption profile is less favourable than in the case of electricity. Most logistics parks have a typical heating profile. As a result, the situation this year has forced us to develop a new purchasing model for 2022. We expect that, as in previous years, we will achieve positive results.

Why such openness on this topic? The sector usually tends to avoid talking about such details.

Paweł Sapek: Integrity is one of Prologis’ core values and the foundation of all our business relationships. Transparency, clear standards and simple rules of operation – these are what make us a trustworthy partner in Poland. For us, signing a contract is just the beginning of the journey. We work with our customers for years and we care about their satisfaction at each stage of our cooperation. For this, it is necessary to understand their needs and to be flexible in our approach. But knowing the resources and possibilities are also important. Our global scale helps us in this, allowing us offer high-quality products and services at attractive prices. This is our unique selling point – we offer not only space, but also services, thanks to which our customers can operate in a cost-effective and sustainable manner in our parks.

What are you planning next? There’s no point in expecting utility prices to fall, and there are also EU requirements for reducing emissions...

Paweł Sapek: In Poland, we will certainly continue our cooperation with Tauron in 2022 – and we are going one step further than guarantees of origin. For most of our companies, we have already contracted purchases of electricity produced directly from RES, which have zero CO2 emissions. This means that real green energy will flow into our parks directly from wind and hydro-power plants. Europe will also, in turn, see a further increase in the power generated by photovoltaics, especially in Germany and the Benelux countries. I also hope that we will finally implement our first large-scale photovoltaic installation project in Poland. Unlike superficial measures often referred to as “green washing”, we don’t paint the grass green. Our environmental goals – including reducing CO2 emissions – are fully measurable and we evaluate our progress in real terms each year. Our plans for the future are clear: we will continue, consistently and in line with our strategy, to build and manage our properties so that they have the lowest possible impact on the environment, while bringing the greatest possible benefit for our customers.

* CY 2020 Estimated Total Energy Consumption used for Carbon Footprint calculation of Scope 3 – Downstream Leased Assets emissions

** 2020 Data

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