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Investing In Europe In War Time: How Big A Gamble Are You Taking?

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Is now a good time to invest in Europe, with the risk of global stagnation and an increasingly dangerous war on the doorstep? What risks do U.S. newcomers face?

There are good times, and bad times, to launch into new markets, and it is hard to believe that this is one of the good ones.

The early stages of an escalating war combined with a growing risk of supply chain-inspired stagflation make an unsettling background.

Yet this month CBRE-backed Trammell Crow acquired its first site in Germany, and entered into an exclusivity agreement on another, the latest 1M SF milestones in the global developer’s European logistics platform.

The risks (and rewards) for U.S. investors in Europe have never been clearer. Bisnow runs down issues.

1. European Dependence On Russian Oil And Gas

On Wednesday Ukraine closed one of the major Russian gas pipelines to the rest of Europe, instantly cutting supplies by 25%.

It is the latest hit to supply in an escalating energy crisis. Rosneft, Gazprom and the other major Russian energy suppliers have — or had — a stranglehold over many European economies. President Vladimir Putin’s insistence that bills are paid in roubles — and the European Union’s decision that such an act would breach its sanctions regime — leave major economies in peril.

Earlier this week it was revealed that German government officials are preparing for a sudden halt to Russian gas supplies, well ahead of a self-imposed 2024 deadline. Russian gas provides around 55% of German energy.

Meanwhile the Netherlands, Poland and Germany are all heavily dependent on Russian oil.

All three countries — particularly Germany — are targets for Trammell Crow’s European expansion.

“Even if supplies were switched off now, it would take until 2024 to find alternatives — and it could lead to recession — but it’s now a process,” Trammell Crow Head of Germany Logistics Mario Sander told Bisnow.

“If Russia decides to switch off the gas we have to face the impact; we need heating in winter, central European geography demands it. But fortunately warehouses are now being built without gas heating.”

The caution here is to look into alternatives, which will impact build costs but occupiers will understand that, Sander said. That’s the trick for the next two or three years, and in the meantime hope some agreement is reached where Germany gets less dependent on Russian oil and gas.

Trammell Crow is future-proofing its European warehouses by looking at electric heating and green energy solutions. Gas is definitely off its agenda.

2. Supply Chain Dangers

Ukraine was one of the world’s largest steel producers and a major supplier of structural steel to central and western Europe. Yet one-third of the country’s capacity was in Mariupol, one of the last holdouts of Ukrainian resistance in the east and now largely destroyed by Russian action. Only one out of six integrated Ukrainian steel plants is understood to be working, and that at just 80% capacity.

Russia was also a major supplier of iron and steel: combined, the Ukrainian and Russian contribution to some steel product sectors was around 60%. Take that away and an already pressured supply chain crisis turns really nasty.

If you’re building warehouses, or pretty much anything else, this represents an uncontrollable increase in costs, plus a serious brake on development.

“We have the risk of unpredictable build costs from contractors who can’t rely on their supply chains, certain supplies and materials cannot be supplied in a given time frame, particularly steel,” Sander said.

“In Western Europe the typical warehouse construction is steel roof and concrete pillars, unlike the UK where it is steel frame and roof. So we are looking at alternatives for the roof — concrete or wood perhaps. This is more costly, but more sustainable and certainly more reliable as an alternative to steel that is not coming from Ukraine into the West European market.

3. The War Gets Worse And Lasts Longer

The early days’ assumption was of a rapid Russian victory, a toppled Ukrainian government, and then an uneasy peace based on dividing Ukraine in two. Since then it has become clear nothing so easy is possible. According to Oslo’s Peace Research Institute, Putin now has no good options, a depleted and exhausted military, and no immediate escape ramp.

Reports in the last few days suggest that with his conventional forces outplayed he can choose between defeat or nuclear escalation. U.S. sources suggest the second option is now in play.

This is not a great background to a multimillion-dollar investment in central Europe, Sander said.

“This is an existential threat and if it goes wrong, the last thing to worry about is logistics development,” Sander said.

“Like everyone else we’re sitting on the sideline doing our best and hoping this won’t go to the worst-case scenario. For now, we are predicting possible scenarios that might worsen, so we hope we can make it work. Better to make a smart move now than later.”

4. But There Are Also Opportunities

Central Europe, especially around Berlin, is the kind of logistics hot spot that no developer or investor can ignore.

It could also be the case that the predicted surge in European defence spending — Germany will potentially double its contribution of 1.5% of GDP — will inevitably stimulate industry and the supply chain, with consequences for warehousing demand.

There is a growing body of evidence that increased military spending, far from crowding out good economic outcomes, can stimulate them.

The U.S. experience since the 1940s tends to prove the point, as a U.S. corporation like Trammell Crow seems to understand.

“Yes, increased military spending will create opportunities,” Sander said. “But that isn’t really the point, we’d like to see German politicians take a more controlled approach to allocating resources to the supply chain generally. So that would be dedicated zones for logistics. We need a higher strategic look at how logistics property is planned and controlled because we don’t want to see the country with warehouse developments every 2 kilometres. We can be smarter.” 

The wider strategic decision to invest in Europe is unchanged by recent events, Sander said. “Without Germany, a European logistics platform isn’t a player. So we’ve had a good start here, and in the UK, Spain and France, and we’re expanding in Austria and Poland and putting a team into Prague.”

Trammell Crow prefers what it calls “smart development,” which means avoiding paying top prices in open competition for sites by developing strong networks with landowners and local authorities.

Expansion will go beyond the core Big Five German cities — Hamburg, Dusseldorf, Berlin, Munich and Frankfort — into the wider hinterland of 15 to 20 cities.

“They have become prime because of the land supply problems,” Sander said. “An hour trucking from Frankfort is still called prime.”