There are a lot of nervous people here at MIPIM thanks to the geopolitical uncertainties and potential tariff war.
I think if we should take a couple of steps back and ignore all the noise. Trump is fantastic at creating noise. But what’s happening now is a continuation of what has been going on for a long time. Deglobalization, nearshoring, friend- shoring has been going on for the last 10 years-plus. The Brexit vote was 2016, Trump won in 2016, so the process began a while ago now.
Over the first nine months of last year, so before the US elections, 20% of all of our new leasing was with Asian clients. This is about nearshoring – manufacturing in Europe for Europe. The manufacturers were telling us already before the US election, this trend is going on. What Trump brings is a continuation of the trend along with a huge amount of volatility and uncertainty around that.
At the end of the day, Europe needs to stand on its own two feet. We need energy independence, precious goods independence, military independence – that’s what’s going to allow us to be economically independent. The EU is still the largest market in the world combined.
This has been something of a wake up call. Trump 1.0 was already a wake up call, but people weren’t listening properly. Now we know we have to act. The uncertainty has a positive for Europe – it creates clarity.
Aren’t there potential benefits for your sector if Europe really starts investing more in its own defence?
More demand. Every increase in manufacturing will increase demand for logistics space. 50% of our tenant base is manufacturing, so it will be positive for us. Central Europe will benefit as the best cost location, but Germans are also going to invest in their own economy, so it’ll be good for our German business as well.
For all the noise, CTP’s share price has rebounded just fine
All that investment assumes quite a bit of borrowing. It doesn’t look like rates are going to be coming down too much further than they already are.
We have thought for ages now that interest rates are going to stay higher for longer. We develop at a 10% plus yield on cost, so we are able to cope with the higher cost of borrowing. If inflation is reasonably well-anchored around 2%, then 10-year interest rates of 2.5% are not wild. They’re going to be 2.5% or 3.5%. You need to have a business model that makes sense with those financing costs. Everyone got fat, lazy with 0% interest rates.
But this uncertainty has a real impact on the business environment, including people’s ability or willingness to invest in property. It can’t be great for business for you right now.
I think it’s different. Manufacturers look beyond the noise and volatility. They have to, because they’re investing for 10, 15, 20 years. Asia manufacturers are investing in Europe to build for consumption in Europe, and Europe is not going away. Europe will remain an economic powerhouse. Sometimes you have to hold your nerve.
Especially if you’re publicly traded…
If you’re publicly traded, you’re protecting yourself for the future. We raised a billion euros last week on the bond market. That puts us in a position to look at interest rates with calm. We fixed a bunch of our funding for a long period of time.
Tell me about the terms and what you want to do with it?
We did a six-year bond and a 10-year bond — two lots of €500 million. The average cost of funding was 4%. You look surprised! Do we think everything will be perfect going forward? No. But we have a business model, tenant base, land bank, and a team that allows us to take opportunities. We’ve grown our market share from 24.5% to 28.8% in our four core markets.
Where do you expect to build your next million or 2 million sqm of industrial space?
The majority will be in Central Europe. We’re active in seven Central European markets – Czech, Slovakia, Hungary, Romania, plus a strong growing business in Poland, and we’re number one in Serbia and Bulgaria. That’s the bulk of where our land bank is. But we also have a fantastic business in Germany.
Isn’t vacancy up in the Czech market?
The Czech market has a vacancy rate more than double what it used to be, but that’s because it used to be less than 1%, and now it’s around 2.5%. If you add all the vacant space under construction, you’d take vacancy to around 5% – still very healthy in any market.
What about space that’s basically the shell and core, but the developer is waiting for tenants before finishing it. Should it be counted as vacant space or not?
Well, in most cases it’s not finished, so it’s not vacant. They still need to do something with it. So depends what you define as shell and core. Most of it is not actually finished space, so nothing really to worry about there. Some agents would like to create some headlines…well, good for them.
Can you continue to grow organically, or are you looking for acquisitions?
Our primary source of growth has always been developing on land we secured – over 60% in existing parks, 30% for new parks. We have 26 million sqm of land secured. But if we see something interesting to buy, we’ll try. We don’t depend on acquisitions to grow.
Is brownfield development a road you’re going down?
It differs market by market. Central Europe is still materially undersupplied compared to Western Europe. Western Europe has an average of 1.2 sqm per capita. Central Europe has 0.6 sqm per capita. Czech Republic’s around 1.1, so you’ll see more brownfields there. In Romania, it’s going to be more greenfield. At the end of last year, we bought a large 830,000 sqm plot in Düsseldorf, a brownfield site from an old steel pipe manufacturer. As economies evolve, the more advanced they are, the more you’ll be in brownfield.
Richard Wilkinson is CFO at CTP
