Pricing geolocation attributes in logistics assets
In this note we highlight how geolocation attributes of transport traffic activity might impact risk characteristics and pricing of logistics real estate assets and how investors can both gain more granular insight when underwriting transactions and manage exposures more accurately on an ongoing basis.
We have published several notes on the importance of freight volumes and road transport activity across markets and geolocations as main drivers of demand and rental growth in the sector. We have also discussed the importance of those metrics in assessing competitive profile of individual assets within respective market. In this note we present analysis of geolocation attributes focused on road transport in assessing risks and pricing of assets.
Proximity to main road transport networks is a key attribute of logistics assets and naturally locations with higher transport flows in the vicinity of an asset are preferred. Also, more stable transport flows are preferred as this indicates more consistent economic activity in the area and likely also that the location is well diversified across economic sectors and tenant profiles resulting in stable and diversified demand across business cycles.
Naturally, as transport flows capture both cyclical and structural changes in activity it is critical for investors to quantify specific geolocation attributes to maximise value of assets and to manage risks efficiently. This can be done by monitoring activity and any associated migration, positive or negative. For example, improving activity and flows may allow an owner to increase rents at a relatively higher pace and inversely, deteriorating activity may guide the process of managing occupancy levels to optimise cash flow generation.
Below we present results based on analysis for Germany given it is the largest European economy (see below for other geographies). The question we ask is if assets located near main transport roads are less risky and if so what risk premium should investors require for locations with relatively lower or declining transport flows?
The figure illustrates distribution of flow and risk (flow volatility) based on over 800 geolocations across Germany; flow is defined as weekly metric and is presented in relation to average flow across all locations, e.g. a magnitude of 2 indicates that transport activity at the specific location is 2x the national (sample) average, and volatility is defined as standard deviation of the weekly flow.
There is a natural variation in the flow of transport activity of around 5%. As expected, the very large transport roads, say in excess of 2x exhibit the most consistent and steady flows and present the lowest risk in terms of flow variation. Also, although the majority of locations show similar risk range of around 5-7%, it is clear that location risks increase more rapidly starting around the average or approximately below 1.5x, i.e. generally for locations that are not directly in close vicinity to the largest road transport networks. The number of outlier locations increases rapidly as well for activity levels below the average and as the range of volatility illustrates, investors can be exposed to double or even triple risk at the same level of transport activity across locations, as shown for asset location A and B.
Geolocation specific attributes are critical in evaluating logistics real estate assets. Ongoing monitoring of transport activity in the vicinity of an asset can help to identify both potential tail-risks and structural changes early on as well as optimise cash flow generation and ultimately returns.
Additional results
In addition we evaluate which locations across Germany might present increased tail-risks and where logistics assets may become gradually less attractive based on transport traffic flows patterns. Although in-place rents create a slower response to changing conditions, it is ultimately location activity and conditions that impact rents, vacancies and therefore cash flow generation potential and returns.
If you would like to discuss or request further details related to this research or other geographies please contact us by clicking info@kaniaadvisors.com
Data and analytics
Freight volumes and road transport activity are a leading indicator of logistics rental growth with ca 1-1.5 year lead time, see previous notes.
Kania Advisors logistics analytics is built to provide allocators and investors with live access to monitor logistics activity that drives market rents and asset values from macroeconomic conditions to specific geolocation. Our analytics and data tracks any market, any location and any asset (or potential asset such as land plots), across Europe and the US, and provides;
- information of logistics activity at cargo handling locations across the continents,
- information on volume of goods flowing across any market
- road transport activity of how goods are distributed across markets and main distribution road network
- road transport activity and longer term trends in the vicinity of any asset
- asset level competitive metrics such as population reach within 30min and 60min drive times, drive time weighted distance to cargo handling locations, access and density of transport distribution routes
- overlay with macroeconomic and demographic data and/or user specific data
- ML algorithms to identify clusters and tail risks across portfolios
- ability to benchmark an assets' competitive position compared to institutional quality logistics assets across markets
About Kania Advisors
Kania Advisors is an independent research and advisory firm focused exclusively on institutional real assets allocations and investment programmes. We provide advice and solutions to improve outcomes in real assets investment programmes. We conduct detailed industry research and custom studies typically focused on quantitative analysis and provide insights which form a critical part of a client's decision process.