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Group Saturday 14th June 2014

AN ENGLISHMAN ABROAD

AN ENGLISHMAN ABROAD

Verdion is a leading force in the continental European logistics development market, but its boss, Mike Hughes, is English through and through. We asked him for his views on the market at home and abroad.

Mike Hughes, CEO of Verdion discusses trends in Logistics market UK and abroad.

On the day of the interview with Mike Hughes, a report from the respected think tank, the National Institute of Economic and Social Research, announced that ‘robust’ growth in the first part of the year meant that Britain’s economy might already be larger than it was before the financial crisis. On that basis, the report reasoned, the recession might be deemed to be officially over.

While many people might be celebrating this, Verdion’s CEO is more ambiguous in his response: “I like recessions. I like periods of business activity before the dumb money arrives. Recessions have always been good for me. They are great times to build a business.

“I started my original company, Helios, back in 1996, just as we were coming out of a recessionary period. It’s always a good time for making money and creating value for investors.”

Verdion was born pretty much at the midpoint of the recession in 2010. With backing from Mansford Real Estate and Tristan Capital, Hughes’s aim was to create a specialist pan-European logistics development company.

He started by assembling a team that had worked in different market sectors within continental Europe and in particular within Germany.

“I wanted to build a European business as opposed to a British business trying to do business in Europe. We are a multi-lingual, multi-national team. We don’t all come from the same background and that’s very invigorating for the business.”

The ‘milestone moment’ for the new company was the purchase in 2011 of three major German development sites in Leipzig, Ingolstadt and Schoenefeld. All in prime locations next to airports, the sites brought with them the scope for more than 3m sq ft of development.

Verdion was up and running and shortly afterwards it made its UK debut by buying out SEGRO’s interest in the 337-acre Inland Port (‘iPort’) development project at Doncaster. The site has the potential to deliver more than 6m sq ft of Grade A logistics warehousing.

In the intervening years, Verdion has added to its German development roster on the Continent and also has projects in Denmark and Sweden. Having been a veteran of the UK logistics scene, Hughes now finds himself with an increasingly Continental perspective on the idiosyncrasies of his home market.

“There are certain fixations in the UK and one of those is the phrase ‘institutional standard’. It’s a mantra that gets drummed into surveyors from a very early age!

“But today the UK is a bit peculiar in the sense that we have certain UK institutional ‘standards’ that don’t fit with the norms that institutions would expect anywhere else in Europe or indeed that occupiers want or need. And yet you see the same funds investing in both continental Europe and the UK but they don’t say, as an example, ‘My goodness, the development density for this German warehouse is 60% so we must downgrade this particular product’.

“In the UK, we tend to be fixated in templating certain criteria : the type of building frame, densities, yard depths etc. Some of it is unquestioning to the point of being lazy.

“There is no reason of course why you cannot achieve a product that fully satisfies the requirements of both the long term investor and occupier”.

Hughes believes that part of this contrast in approach is borne out by structural differences between the development scene in the UK and continental Europe.

“They are two very different markets. The UK has been, and remains, a land market. In the UK, it’s all about controlling the land. That is not generally the case in, for example, Germany

where the municipalities play an active part in providing land.

“In Germany, it’s all about the relationship with the client. It’s about the ability to deliver a great building on the right commercial terms and less about whether you control the land. In the UK, you can be a pretty average developer but if you control the land you’re halfway there.

“In Germany, you have to be very able technically, and be able to communicate with your occupiers at the very highest level. Occupiers there are very technically minded, and they will often know as much about the building specification as you do, or more.

“We are going to complete in September a facility for Siemens in Germany. It’s a light manufacturing warehouse and office facility, and a very important part of the company’s infrastructure. We got the project because we were able to display technical understanding and competence to the Siemens team. Forget pricing for a moment, it was all about being on the same wavelength as the occupier so they trusted us to be their partner.

“That’s what we’re good at: technical relationships with clients.”

So how does that impact what Verdion will create at iPort in Doncaster?

“We will absolutely deliver buildings that UK and International institutions would love to buy. But we’ll introduce certain

additional quality standards that we would expect to find in continental Europe and that we think are right in the UK and should be in the UK as market standard.”

Purchase of the Doncaster project completed at the beginning of the year and by the summer it will be a fully accessible development site with a dual carriageway road directly linking to junctions on the M18 motorway at Doncaster. In addition to the logistics park, the ‘intermodal’ project will also encompass a 35-acre strategic rail freight terminal.

Hughes sees the impact of new rail line upgrades and also the increasing movement of freight by rail as a huge factor in the development market.

“The demand for rail is immense and it’s just going to grow and grow. And it’s going to require massive investment in infrastructure which in turn will boost demand for the type of industrial and logistics space we’re building.

“It’s not just projects like HS2; there are planned upgrades all over the UK and this will increase capacity on the network, create opportunities for the businesses directly involved in this expansion and also increase the demand for space close to rail hubs.”

Schemes such as Doncaster require substantial investment. In October of last year, Verdion entered into a €1bn agreement with the Healthcare of Ontario Pension Plan (HOOPP) for the funding and development of logistics parks across Europe.

HOOPP is one of the largest pension funds in Canada, with $47.4bn in assets, and through the new partnership will own and develop iPort plus a stake in Verdion’s €250m Link Project in Germany.

The alliance came as a result of Hughes speculatively going to Toronto to see the fund.

“I went over in May 2012 to do a pitch. We showed them what we had, our ideas, where we would invest, how we would invest, and which opportunities existed in this sector.

“Their objective is to generate the kind of returns that they won’t get just buying stock at market value. They already invest in the industrial and logistics sector in Canada and North America and they love it for its resilience and lease longevity. So the challenge for them was: how do we acquire interests in industrial and logistics in Europe in a way that achieves the kind of returns we want?

“They didn’t want to deal with 20, 30, 50 different developers to get there. They wanted to find a partner that would look after them; be their representative in Europe. Do everything that needs to be done; protect their interests. They were trying to find that right partner, and happily we found each other.”

Looking ahead, even though the recession may be technically over, Hughes believes the UK market will still provide opportunities for the near future.

“The fundamentals are right; we’re a small country with a very high population, and we’ve got the fastest growing economy in Europe. There are a substantial number of requirements from third-party logistics companies, e-commerce and retailing related companies who are looking to build their supply chains.

“So what we’re going to do over the next year or two is to continue to focus on the things that the ‘dumb money’ is less likely to focus on – and not take our eye off the ball.”

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