In cooperation with DO AMAZING THINGS WITH DATA Marketing Material* November 2019 Research Report LAST HOUR LOGISTICS The brand DWS represents DWS Group GmbH & Co. KGaA and any of its subsidiaries, such as DWS Distributors, Inc., which offers investment products, or DWS Investment Management Americas Inc. and RREEF America L.L.C., which offer advisory services. There may be references in this document which do not yet reflect the DWS Brand. Please note certain information in this presentation constitutes forward-looking statements. Due to various risks, uncertainties and assumptions made in our analysis, actual events or results or the actual performance of the markets covered by this presentation report may differ materially from those described. The information herein reflects our current views only, is subject to change, and is not intended to be promissory or relied upon by the reader. There can be no certainty that events will turn out as we have opined herein. 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Last Hour Logistics Last Hour Logistics The demand for urban logistics facilities is unabating as occupiers reconfigure supply chains to meet fast delivery. But increasingly to deliver on the promise of fast delivery, it’s not the distance that matters but more so the time; a concept we have coined the “Last Hour”. But where should occupiers locate, particularly in a context where rents are accelerating and supply is limited, and where should investors focus? Our analysis, conducted jointly with the location and customer analytics specialist, CACI, has sought to map the locations with the highest online spend potential in the United Kingdom and Germany within a 60 minute drive time. We have overlayed this with analysis on rents and land values to unearth those locations where occupiers can find relative value and where investors could well benefit from potential rental outperformance. The ugly duckling of real estate Outperformance but not everywhere For years the logistics sector was the ugly duckling of real Over the coming years we continue to expect the logistics estate. A vital part of the economy, logistics rarely elicited sector to be one of the top performing parts of the excitement. A cog in the machine, a necessary but dreary European real estate market. However, the double-digit part of the supply chain, logistics dwelled deep in the shadow returns experienced over the past five years are unlikely to of the glamorous worlds of retail and office. The performance be sustained. With less room for further yield compression, of the real estate was equally uninspiring. Solid income but we expect performance to be driven by occupier easily replicable. High yielding but with little rental growth. fundamentals rather than capital markets — opening up scope Rarely underperforming, rarely outperforming. Today the ugly for greater divergence in performance between the most and duckling has become a beautiful and powerful swan. least sought after locations. Logistics is now the darling of the industry. For the past Indeed, over the past few years we have already seen this five years, the performance, and perhaps more importantly, divergence, with urban locations substantially outperforming the perception of the sector has been transformed. While the market average. certainly not the sole reason, the catalyst for this is clear; the growth of e-commerce. This change is clearly evident in the We’re also conscious that the risk of oversupply remains a investment market. Today industrial and logistics properties persistent threat for the sector. Strong demand and low levels account for close to a fifth of all Europe commercial of development have substantially reduced logistics vacancy transactions, up from around 12% at the start of the decade.1 in recent years. However this does not take away from the With this, yields have fallen and performance has surged. fact that in many cases logistics facilities can be built quickly, According to INREV, European logistics has far outperformed at relatively low cost and in places fairly free from land the market average over the past five years, recording annual constraints. fund level returns of close to 15%, well in advance of office and retail, and even outperforming the highly favoured Not only are returns likely to moderate, the outperformance residential sector.2 of the sector certainly cannot be guaranteed over the 1 Real Capital Analytics, August 2019 2 INREV, June 2019 Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. Past performance is not a reliable indicator of future returns. 2 Last Hour Logistics RENTAL GROWTH INDEX (2007 = 100) 125 120 115 110 105 100 95 90 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Market Average Urban Area Average Source: DWS, PMA, July 2019. Note: Based on Antwerp, Brussels, Lyon, Paris, Berlin, Dusseldorf, Frankfurt, Hamburg, Munich, Warsaw, Birmingham, London, Manchester long-run, and indeed in certain locations there will almost Over the past decades the way people shop has been certainly be underperformance. Despite this, the segment transformed by the growth of e-commerce, with almost a is benefitting from structural drivers, compensating fifth of all U.K. retail sales now going online. Not only has for cyclical factors which should sustain long-term this been driven by competitive pricing, the convenience performance. Nonetheless it is therefore important that we of online shopping is a key component of this growth. understand the factors driving the future location decisions This desired convenience is increasingly manifest in an of logistics occupiers. expectation of same and next day delivery. A trend which survey evidence suggests will only intensify. Changing consumer expectations Some retailers, particularly the largest pure play online retailers, are already responding to the challenge of faster Consumer preference is the bedrock of the logistics sector. delivery. They are reconfiguring supply chains, opening new Whether it be fulfilling retailer store networks, or delivering urban logistics facilities while also trialling multiple points of direct to home, the way people shop has a huge bearing delivery including click & collect, parcel lockers and home / upon the location decisions of logistics operators. out-of-home deliveries. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. Past performance is not a reliable indicator of future returns. 3 Last Hour Logistics THE ONLINE DELIVERY JOURNEY Order Hub Spokes Final Delivery _ Customer places order _ Distribution Hub _ 2nd Stage Sortation _ Customer Home _ Order processed _ E-Fulfilment Centre Facility Delivery _ Order sent for fulfilment _ Trucks move goods _ Last Mile Station / _ Customer Office to spokes Customer Delivery Delivery Centre / Dark Store _ Parcel Locker _ X-Dock Parcel _ Click & Collect Delivery Hub (Store) _ Store Pick & _ Click & Collect Packing (3rd Party) _ Vans (or bikes) _ Click & Drive move goods to customers Source this as DWS, October 2019 DELIVERY PREFERENCES, GLOBAL SURVEY % 45 40 35 30 25 20 15 10 5 0 Specific 1-2 Less than Same day Next day 2 days 3-5 1 week More than hour time of 3 hours business days 1 week my choosing Expect goods to arrive Willing to pay for Source: PWC Global Insights Survey, 2018 Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. Past performance is not a reliable indicator of future returns. 4 Last Hour Logistics The cost to serve a logistics facility should help to lower labour costs, reducing the need to be located close to large pools of Meeting this demand for faster delivery is challenging low cost employees, perhaps the bigger change will be and costly — particularly for smaller retailers, e-commerce within the vehicles. For example, electric vehicle fuel costs companies and parcel operators. Operators must find are estimated to be 75% cheaper than the current petrol a balance between maximising the number of potential equivalent.3 We expect these cost savings to have a material customers with the cost of serving their needs. In almost all impact on the location of logistics operations. cases, the bulk of these costs are fuel and labour, with real estate rents tending to be only a small fraction of the total. While thin operating margins are likely to present an impediment to strong rental growth, there is clear evidence Lower fuel costs and eventually autonomous that operators will pay a significant premium for locations vehicles may open up more peripheral that significantly reduce overall costs – particularly fuel costs. fulfilment locations. However, on balance we As of today, this would suggest that shorter travel distance expect the bigger impact will be on urban to the maximum number of customers should be a key locations, enabling logistics operators to both determinant of location decisions. pay higher rents and to fulfil home delivery ever more quickly. Changing technology Looking forward we expect that technological improvements to automation and electric vehicles will alter the balance of costs for logistics operators.