The crucial role of capex

Imagine that you own a beautiful house that you rent out to tenants. It’s set in an ideal and highly popular location, and is equipped with the latest comforts and living solutions. But as time passes, the property starts looking old and tired; what was once state-of-the-art has simply become run-of-the-mill, and eventually seems distinctly old-fashioned. And so, a wonderful opportunity for some healthy rental revenue where residents can enjoy an excellent quality of life ends up squandered through inactivity and an unwillingness to invest in this real estate.

This is one of the traps that many industrial real estate developers and operators fall into with their warehouses. The fault lies in their neglect to commit capital expenditure, also known as capex, as this is one of the most important activities incumbent on any real estate developer who cares about providing excellent space to tenants.

Simply put, capex is money invested in physical assets. For real estate developers such as Prologis, this involves continuous investment in maintaining warehouses and other areas of our parks, to ensure they remain exemplary premises for clients for decades.

Longer-term thinking needed

Managing capex requires a different type of skillset, requiring developers to think about their portfolios through the lens of asset management. Developers draw up short-term, detailed budgets for the next year or two, as well as longer-term budgets covering improvements for the coming decade. Typically, capex varies from 7–15 pct of the net operational income of a developer’s portfolio, depending on its age and any additional initiatives or company priorities that drive specific improvements.

Today, such additional motivations often include investment in ESG initiatives, decarbonisation and automation, among others. Heat pumps are being installed in many facilities, while developers are also investing in roof insulation with extended durability of up to 30 years with a view to being solar power ready. In taking such a long-term view, developers are willing to bear the additional costs of using the best materials. Logistics parks are also being prepared for a new era in transportation, through the installation of electric vehicle charging stations, while smart meters have become a vitally important tool for tenants, allowing remote monitoring and control over the utilities usage. And so, developers are now undertaking feasibility studies in order to understand the impact of all this potential capex investment.

When it comes to ESG-related capex spending, developers don’t have to go it alone. Subsidy schemes at the national and EU level have been introduced to support such investment, thus helping logistics real estate and supply chains as a whole to operate in more sustainable and environmentally-friendly ways.

One example of this approach can be found at Prologis Park Prague-Rudná in the Czech Republic, where investments have been made in cutting energy consumption and promoting sustainability, all of which has been co-financed by the European Union. This has resulted in the comprehensive modernisation of the heating and lighting systems across four project phases undertaken in 2019–2022. This EU support has allowed us to implement a programme to significantly reduce CO2, particulate, SO2 and NOx emissions. It’s a project that we’re proud of, and one which demonstrates what can be achieved when public subsidies are combined with the ambition of private enterprise to drive sustainable change.

Nevertheless, a significant amount of capex investment is still necessary, for one simple yet all-important reason: providing the best space for our customers. With some justification, tenants are not keen on operating from parks where a lack of investment has led to poor working conditions. Indeed, a lack of capex investment in such basic areas as roof replacements, floor renovations, improvements to docking bays, doors and external pavement areas, as well as new fire alarm systems results in unsafe and unhealthy working conditions. Other vital but perhaps less “glamorous” capex investment includes ANPR (automatic number plate recognition) systems, the installation and maintenance of CCTV camera systems, “combs” for pumping stations, fast access gates, graphics for the fire alarms, underground retention pools for capturing rainwater runoff, and shared facilities to improve the quality of life of drivers and hauliers, among many others.

Value for everyone

In this sense, the benefits of capex are felt by everyone who uses the logistics park: from the developer and operator, to the tenants, their employees, and external park users. One of the chief goals of capex is to create space where companies want to locate their businesses and where people want to come to work.

To this end, a major portion of Prologis’ capex budget is allocated towards improving the quality of life at our parks. Our name for this area of our activity is Parklife. Throughout Central Europe, we’ve built five-a-side football pitches in our parks, we’ve landscaped attractive green areas and relaxation zones, installed book boxes, bike shelters, barbecue areas, and we’ve organised regular events to make the most of all these amenities. Believe it or not, such investment forms part of the capex too – and we think it’s vital. By making our parks better places to be in and work in, they help our clients attract the right workforce, which brings added benefits to their operations. If developers aren’t willing to invest in their locations in this way, they won’t be able to pass on these benefits to their customers, and as a result will lose their competitiveness.

Capex is vital to ensuring an optimal tenant experience. As such, it makes sense for developers to listen to them when deciding how to allocate their capex budgets. After all, they are the ones who are going to use the warehouses and their accompanying facilities day after day, week after week, year after year. While developers have the expertise to create ideal logistics space, the views and requirements of users must be taken into account – especially as customised, build-to-suit developments are becoming an increasingly important part of our business.

Capex budgets are, therefore, devised by combining insights from across various teams. Real estate customer experience teams lead this process, but they draw on input from their leasing and development colleagues. One thing that you can be sure of when it comes to capex budgets is that they’re never the same twice: every year there are different priorities, and each space and location has its own requirements that change over time.

In 2024, Prologis is investing even more heavily in capex than usual. The competition in the marketplace is strong, and we know that investing in our space is the key to retaining our existing customers while attracting new ones to our parks. Ultimately, we believe that superb ideal logistics real estate, just like a beautiful home, is something to cherish and be proud of. It’s something to maintain and continuously improve – because only by doing so can we provide real added value to our customers.

Directing the action

As a director and real estate and customer experience lead at Prologis, Pavla Procházková leads a team of ten people in the Czech Republic and Slovakia. She and her team manage an almost 2 mln sqm portfolio in those countries. Pavla has been part of the Prologis team since 2010. She graduated in building structures at the faculty of civil engineering of the Czech Technical University in Prague. She also spent part of her studies in Sweden at the Chalmers University of Technology.