How To Turn Yourself From A Retail Guru To A Leader In Logistics
Andrew Jones was the retail parks guy. He made British Land into one of the biggest players in the sector, and then launched his own REIT, Metric, to capitalise on his knowledge.
And yet today that company, now LondonMetric, is one of the biggest names in U.K. logistics, and has exploited the boom in e-commerce better than almost anyone else. How the company changed its focus from a retail specialist to a leader in logistics is a lesson for other real estate companies in how to break out of the habits of a lifetime and successfully attack a new sector.
LondonMetric is one of the few U.K. listed real estate companies trading at a premium to net asset value. It is boosted by e-commerce driving performance of logistics ever onward and global institutions like China Investment Corp. making huge investments in the sector.
The journey for Jones and LondonMetric has been incremental. Metric Property raised £190M in an initial public offering in 2010 and was purely retail-focused. Today LondonMetric has a £1.5B portfolio, of which 60% is logistics.
Metric Property bought its first distribution warehouse in early 2013, and later that year merged with London & Stamford, a mixed bag of a listed company run by industry sages Raymond Mould and Patrick Vaughan that owned assets in almost every sector. The newly formed LondonMetric sold the office and residential assets, kept the logistics and used it as a platform to grow in the sector, bolting on individual logistics assets and selling underperforming retail.
It sounds easy now, but in 2013, logistics was not outperforming other property asset classes in the U.K. like it is today. The decision to change tack was significant and not taken quickly — Jones did not just wake up one morning and decide to get into logistics.
“We made the decision to pivot our focus in 2013,” he said. “Every time I spoke to a retailer they were telling me they had too many shops. We did the London & Stamford merger and that gave us a platform, and allowed us to work across real estate sectors without blinkers.”
It bought its first warehouse in March 2013, let to Primark, at a 6.4% yield. It blew away Jones' expectations — he thought a Primark store would be 4.5% yield.
There was something in this.
It was not a complete leap into the unknown for LondonMetric; it utilised the knowledge and contacts it had of the retail world and the intersection with logistics. The assets it has bought have tended to be leased to retailers with a big presence in physical stores — often the retail parks it has owned — rather than focusing on third-party logistics providers or pure-play e-commerce firms.
“We understand how retailers work, how their cash flow works, the sustainability of their rents across their portfolios, the technology they are using, their margins, how they plan their logistics,” he said.
There is not a phone book of who to call at retailers to discuss their logistics needs, but Jones leveraged his long-standing retailer relationships to speak to the right people and inform his investment decisions in logistics.
Jones said the sector is being supported by the structural change in retail, and the competitive landscape made logistics more appealing than some other real estate asset classes.
“You have to look at the competition as well,” he said. “If I want to be in London offices I have to compete with some pretty talented people, I have to beat Gerald [Kaye, Helical Bar chief executive] and Toby [Courtauld, Great Portland Estates chief executive] and Rob [Noel, Landsec chief executive]. I might beat one of them sometimes, but I won’t beat all of them. In logistics for a long time the only people you had to get up earlier than was someone at an institution that wasn’t managing their asset.”
Talking to Jones, it is not entirely surprising he took the decision to make the leap out of his comfort zone — he thinks about the influences on his company from beyond real estate. He talks enthusiastically about the multiple business podcasts he listens to while jogging, and quotes from those he sees as the sages in the world of investment, like Oaktree founder Howard Marks and Berkshire Hathaway vice chairman Charlie Munger, Warren Buffett’s right-hand man.
With this in mind, he has changed not just the focus of LondonMetric, but the way it operates. Jones said he was leaving behind his past as an inveterate trader of assets in favour of benefitting from the forgotten magic of compound interest.
“People ignore the magic of compounding, they don’t understand it and underestimate it. The biggest mistake people make is interrupting the income by selling and/or building assets that take years to finish. You can collect and compound 8% rent and capital growth and make a very good return with borrowing costs where they are. Bankers are always coming in here and trying to get me to do something, brokers are trying to get me to trade, but I just don’t need to.”
He said that given the conditions for real estate at the moment, the best policy is perhaps to do very little at all.
“I have been in property for more than 20 years and there has never been a better time to invest in income compounding strategies. I’ve spent most of my time in property thinking I needed to be a hyperactive developer and trader. But today, consistent and reliable returns will mean you outperform.
“For example, history has shown that, over a 15 -year period, if you’re in between a range of 47th to 27th percentile performance every year, then your long-term performance is a fourth percentile return. Howard Marks, who I think is a genius, said avoid the losers and the winners will look after themselves.”
Jones said large logistics warehouses have gotten expensive — yields are now closer to 4.5% than 6.5%. He said LondonMetric, in line with the other big beasts of the logistics sector, has moved toward the urban logistics sector. He believes this part of the logistics world still has room for growth.
“People call it the last mile, but really its the last five miles,” he said. “Urban logistics markets are seeing supply taken out of the equation while demand goes up. Rents will go up because of that attractive supply and demand balance. Given what I’ve said about income collecting and compounding I’m a reluctant developer but we will do some short cycle spec development in the best geographies.”
That is more evolution than revolution, but Jones has not been afraid of either.