Prologis idea was a fabulous winner in real estate

While brick and mortar property in Dubai is in a vicious bear market spiral, the COVID pandemic has been a dramatic money making opportunity in the shares of industrial property landlords. I had recommended the shares of Prologis (PLD), the NY listed logistics REIT at $60 on April 15th, 2018 and had it published in my media columns in the GCC and Britain. Prologis closed on Friday in New York at $102, a 70% profit in the past 28 months during a period when Dubai real estate prices have fallen 20%. Prologis is now the world’s largest owner of logistics and industrial assets, the most attractive segment of the global property markets.

Prologis is thus a classic beneficiary of the dramatic rise in demand for warehouse space since online sales have risen from 6% of retail sales a decade ago to 30% at the height of the global pandemic lockdowns. Is this trend overdone? Absolutely not. Amazon, Prologis’s largest tenant, intends to lease 35 million square feet of new warehousing space in the US alone in 2020. Property economists estimate that every $1 billion in online/E-commerce sales translates into demand for 1.2 million square feet of logistics space. With rents expected to rise by 6% in 2021 as Amazon and its peers opt for high tech, colossal fulfillment centers on the outskirts of the world’s major cities, there is no doubt that Prologis’s competitive advantage as the planet’s pre-eminent industrial landlord will only increase. This is the safe haven sector for sovereign wealth funds, pension funds and life insurance companies who need to invest for decades and crave value long term, stellar tenant credit risk and recurrent rising rental yields.

Given that shopping malls, and hotels and even office buildings are all victims of the pandemic, I see no reason why logistic and data center assets become the most profitable niches in global real estate. This is an investment theme I have recommended ad infinitum since at least 2012 but the tragedy of the pandemic has only underscored the urgency with which investors in the UAE must grasp its nuances in order to make money in real estate.

The investment thesis on Prologis is as compelling as it is simple. Prologis owns more than 700 million square feet of state of the art warehouses, logistics, distribution centers and industrial parks in the US, Europe and Asia. Amazon rents 60 million square feet of industrial property from Prologis, making this company a proxy for the exponential secular growth of E-commerce. As retailers and shopping malls die all over the world, the writing on the wall has been crystal clear to me since early 2013. E-commerce will destroy traditional retailing and shopping malls. This is the reason Prologis has soared from 25 to 102 in the last seven years. The COVID-19 pandemic will only accelerate the death of the shopping malls, once viewed as a preferred commercial real estate asset due to its high barriers to entry and defined catchment area. Game, set, match and tournament to the new king of retailing – E-commerce.

E-commerce requires three times the warehouse space of traditional retailing. So as online sales become a higher proportion of total sales, the chronic supply deficit in warehouse space will only get worse. I was stunned to hear that the US Air Force is leasing one million square feet land in its ultra-secret Cold War era air base in the Nevada desert (Area 51? UFO’s?) for Amazon to build giant warehouses. Amazon also intends to build a mega 2.3 million square feet fulfillment center near London, Britain’s biggest logistics asset. Who benefits from this existential reality and sector trend? Prologis.

Prologis’s tenant list is the world’s top retailers, led by Amazon.com. As any investor who has rented out apartments in International City on twelve monthly cheques will agree, the credit risk of tenants is absolutely critical to success in property investing. Prologis’s corporate tenant constellation is a landlord’s dream come true.

The greater the barrier to entry in a given property niche, the greater the pricing power (rental increases over time) and capital growth a landlord enjoys. This is the reason I refuse to invest in brick and mortar commodity segments in real estate like residential or office, where any Tom, Dick and Azizi can add supply even to a glutted market. This is obviously impossible in a technologically advanced, industrial property space like the one Prologis dominates. After all, Prologis owns five times more warehouse space than its nearest publicly traded competitor. The economics and mathematics of oligopolistic markets can be super yummy, as Prologis’s more than 140% total return since I first recommended its shares proves with a vengeance.

Prologis has the world’s most attractive assets in global port complexes like Los Angeles/Long Beach, Seattle, Shanghai, Canton (Ok, Guangxu), New York/New Jersey and San Francisco, where it has built high tech, multi-storey warehouses with 100% occupancy. Its land banks, tenant lists, development pipeline, intellectual capital and management are all world class. The biggest risk for UAE investors with Prologis is not owning its shares.