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Interviewer: Welcome to the Aberdeen Standard Investment Trusts podcast series, where we get an update from our investment trust managers on their current positioning and the prospects for their sectors. Today we welcome Evert Castelein, Manager of the Aberdeen Standard European Logistics Income Trust, hi Evert. This has been a difficult time for commercial property generally, but in contrast it's also been a favourable time for some of the key long-term drivers on the Trust, such as online retail. Can you give me a top level perspective on the logistics sector across Europe in recent months?

Evert: Yes, of course. I think if you look at the logistics sector, in the last few years, it has been one of the strongest performing sectors in the real estate market and we expect that to remain the case going forward. If for example you look at our house view, we assume that logistics is going to outperform retail and offices, sectors that are being challenged by the working from home situation. And also the growing online consumption which is actually beneficial for logistics, as you said. So of course, logistics has not been immune to what has happened with the Covid virus as it’s an integral part of the economy. And now that there’s a recession across Europe, we clearly see that some companies are struggling, but as a sector logistics has proven to be very resilient. If we look at what’s happened this year, we noticed that the logistics supply chain was disrupted, especially in March and April when several countries went in lockdown in order to flatten the curve. And this has had a disruptive impact on supply chains that were very much focused on efficiency, ‘just in time’ deliveries, making it vulnerable. And if one of the steps is falling away in that supply chain, then goods will not be delivered on time. So that's what we saw initially. And especially companies focusing on international trade, or the automotive industry, or high street fashion and retail or restaurants - they have been, and maybe still are, struggling. But at the same time, we've also seen companies that have benefited from the situation such as groceries, the pharmaceutical industry, and ecommerce in particular. So it’s a mixed picture of how companies are experiencing the current situation. Some may struggle to survive, which could potentially lead to a small increase in vacancy levels. A good thing is that the starting point for the occupier market is really strong as there is an undersupplied situation across Europe with only 4% vacancy on aggregate. So that's extremely low. And there are a couple of structural trends supporting demand side for logistics space such as the rise of ecommerce, which I already mentioned, but also the reshoring of manufacturing activities and building up of inventory levels. If you start with the first one, ecommerce, we strongly believe that the growth of online sales is a structural trend. And yeah, more people are buying more online and in Europe, in 2019, online sales made up 10% of the total retail sales. And this is expected to increase to 15% this year, so that's quite a steep increase. And of course, as always, the best example to look at is Amazon. If you look at what they have done in the last few months, they have recruited 100,000 additional staff and they're expanding their logistics stock by 20%. So that's a big trend. But other big trends are the reshoring of manufacturing facilities - also called de-globalisation - which is a very strong trend. Many companies right now are moving their production activities from China back to Europe. And part of that maybe is related to an increase in wages or the trade war between the US and China. Another very important reason is that many companies wish to make supply chains more resilient to external shocks such as the virus outbreak and lockdown situation. So bringing production back home makes them less vulnerable, and for the same reason many companies are increasing their inventory levels. Something that was seen as weak management in the past because of extra cost, but now we realise that supply chains were maybe too efficient and focused on ‘just on time’ deliveries. And this is now changing, resulting in more demand for logistics space in Europe on aggregate. So this is what we see happening in the occupier market but if you look at the investment market, it's very clear that investors are recognising the opportunities making logistics as an asset class very hot. New fund launches are taking place, fund managers are reviewing existing strategies, for example moving away from hotels and retail and directing capital towards logistics with a strong focus on quality. So high demand will lead to competition and probably result in yield compression and higher property values. So we like to believe that ASELI (Aberdeen Standard European Logistics Income) is very well positioned to benefit from this flight to quality with the portfolio that we have.

Interviewer: Okay, that's great. Can you talk us through the portfolio is as it exists today, and in particular, your focus on the more liquid part of the market?

Evert: Yes, we have a very high quality portfolio with 14 warehouses in the portfolio across five different countries in Europe. Eight of the warehouses actually have been erected in the last few years so they are almost brand new. The majority of the capital has been invested in the Netherlands, where we have six assets right now. And this makes perfect sense to me as the Netherlands is seen as the gateway to the west European market thanks to its strategic geographical position and the largest port in Europe, which is the port of Rotterdam. And that's the starting point for large transport corridors leading towards Germany, Belgium and France to the south. So besides the Netherlands, we have also built up exposure in Germany with two warehouses in the Frankfurt Rhine-Main, two in France, two in Spain and two in Poland. It’s a very high quality portfolio. In sourcing deals, one of the key things to look at for us is liquidity. And with the Trust, we are investing in the most liquid part of the market where there's a lot of demand from both occupiers and investors. So within the segment of big boxes, we are focusing on mid-sized assets, as we think the ultra-big boxes with lot size above 1 million sq ft, for example, leased out to likes of Amazon has absolutely a role to play. But there's probably no alternative if a tenant leaves or gives you a hard time in renegotiating the terms or the maturity of the lease. So these buildings are so big and bespoke that we think it's better to invest in smaller sized assets that typically have a lot size of around 30, 40, maybe 50 thousand square metres.

So that's one. Another focus points for the fund is on urban logistics, a part of the market that we lack in particular. Urban logistics are the last mile delivery hubs. It’s the final step in the supply chain that is needed to deliver the goods that people have ordered online to the end consumer. And the way these operators are competing with each other is on delivery times so you need to get close and at the same the urbanization trend makes cities grow bigger. So there's a lot of competition for land and land prices are going up. And that ultimately will be reflected in higher rents. So we have very high growth expectations for urban logistics where we have built up quite a bit of exposure with the portfolio. The way I look at assets to get an idea of the liquidity is always by asking myself the question, if the warehouse has a second-life, in case the tenants would leave? Am I spending capital on a very large, bespoke, not flexible building with a long lease and a strong tenant on a secondary location, hoping the tenant won’t leave? Or am I investing in an established location with a lot of dynamics and with a building that, due to modern specification, can easily be leased out to another company? And I prefer the latter. I think that's a more liquid investment. And all our assets, I think are located on established locations and have these modern specifications that are needed in today's market. And, yeah, this is what you need, I think to build a durable income stream and pay stable dividends to investors.

Interviewer: Okay, so we can look at the income side in a bit more detail. I understand that rent collection has been reasonably robust, but where you have had tenants in some distress, what sort of conversations have you been having with them?

Evert: Well, I'm very happy with the rent collection so far. Our current estimate for the full year 2020 is that we will collect 97% of annual rent this year. And in today's market, I think that's really high. It's fair to say that the second quarter was challenging as companies started to feel the impact of the lockdown situation. We have collected 85% of rents due for the second quarter. And then the third quarter that number was 96%. Discussions evolve around rent deferrals or rent-frees in combination with material lease extensions. So these were the two options on the table. The majority of the discussions on rent-frees took place in our multi-tenant buildings, where we are dealing with shorter lease durations and where we normally would have had the same discussion on prolongations within the next few years or so. So on balance, there's hardly any difference, I think between the three year cash flow projection pre-Covid and now. And for me as the fund manager, I’m based in Amsterdam, it's really important to have support from our local resources within Aberdeen Standard Investments. ASI is the second largest real estate investor in Europe. And we have local boots on the ground, asset managers that are taking care of day to day business so they are liaising with our tenants, and making sure we make the right decisions together. And it really helps if your colleague based locally speaks the local language to get the best deal together. And, yeah, the property business is really a local and people's business. And that's why scale and local presence is really important. And it's something that sets us apart as a house.

Interviewer: And the Trust has recently maintained its quarterly dividend, which gives some stability for the shareholders. But how are you feeling about the rest of the year and looking into 2021? Are you kind of optimistic, pessimistic?

Evert: I'm not going to predict the future. But all I can say is, based on what we know today, that the logistics as a sector is really hot, and that we are in a really good position with ASELI. So overall, I'm very optimistic and the quality of the portfolio is really high, we have very liquid assets that are all fully leased out, and there's no vacancy, and we've managed the impact of Covid on our tenant portfolio with a satisfying result. And also the loan portfolio, it's very important to realise that there's sufficient headroom on the financial covenants that we have agreed with banks such as LTV and ICR ratios. So risks here are limited which ultimately resulted together with a strong rent collection to keep paying out the dividends, like we've done in Q1 and Q2.

If we look at the future of the logistics sector overall, I think it's really strong thanks to structural drivers such as the growth of e-commerce, which has really given a boost to the sector. And as a Trust, we have ambition to grow as well and to diversify risk with more assets in the portfolio and also focus on our existing portfolio by adding value to these assets with our local teams, for example, by extending our buildings, or by putting solar panels on the roofs and reduce the carbon footprint. So for me as a fund manager, the focus is very much on rent collection, keeping our tenants happy, adding value through active asset management, and growing the fund with new assets with the credit facility that we have put in place, which is a facility that allows us to buy an asset first before we go back to the market for a new capital raise. And at the moment, I'm looking at quite a few interesting deals with local transaction managers, both on an on- and off-market basis.

Interviewer: Great. Okay, thank you Evert for those insights today. And thank you to our listeners for tuning in. You can find out more about the trust at www.eurologisticsincome.co.uk and please do look out for future episodes.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets.. It is provided for information purposes only and should not be considered as an offer investment recommendation or solicitation to deal in any of the investments of products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up, and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.

Podcasts from Aberdeen Standard Investment Trusts, invest in good company.

Craig Wright: Hi, and welcome to this podcast hosted by Aberdeen Standard Investments. My name is Craig Wright, Head of European Real Estate Investment Research. Today we're going to be talking about logistics and looking into a sector that has significant implications from what's happened with Covid-19, but possibly is one of the only real estate sectors which stands to benefit in some respects from the disruption that we've seen. It's also incredibly important to us as a sector at Aberdeen Standard Investments as we manage roughly nine billion euros of logistics properties across Europe. So for us, it's really important that we cross reference what we think is going to happen in our logistics house view with what's actually happening on the ground.

So today, to do that we're going to split this into two parts. Initially, I'm going to give an overview of what we think is happening in the logistics market generally over the short term, and then over the long term, and touch on the key issues to consider that's driving the sector. And then the second part, I'm going to be posing questions to two of my colleagues based in Europe - Hennie Houtveen, who is the Head of Asset Management and Transactions for the Netherlands, and my colleague Lorenzo Penalver who's also responsible for Asset Management and Transaction Management in Spain. Thanks for joining us today.

To start then, just as a quick intro about the sector and how we see things panning out through Covid-19 and beyond, I want to just talk about the short term and the long term trends that we expect to see.

In the short term, I think we're expecting to see quite a lot of disruption for many tenants in the logistics space. I think that's undoubted, and we need to confront that. It's not going to be an easy ride for many operators. Typically logistics tenants can run on quite tight profit margins, and so shock to the system, the potential to lose some contracts could be quite painful for some. But on the other hand, we are starting to see some signs that there are demand drivers that have been exaggerated and accelerated significantly such as ecommerce. So those occupiers that are in that environment and exposed to that sector of the economy could benefit significantly from what we're seeing.

There are sort of, there’s a polarised situation in the short term where we see some disruption to tenants if they're in the wrong part of the economy, servicing contracts potentially with retailers who have had to close stores, and this can be quite a painful time. And if there is sourcing goods from global destinations then that can be also troubling and an issue with global supply chains under pressure. But over the longer term, we definitely see three key drivers that are entrenched in our view in terms of their importance to the outlook for logistics. We think that Covid-19 essentially accelerates and exaggerates at least two out of the three that were already in place. And the third one is potentially a new one coming from what we're seeing with Covid-19.

So clearly, e-commerce is the big topic on everyone's lips. We think that retail sales online have grown from, say, 5% to 20% of total retail sales in some economies, to say 30% to 40% in some cases. We think that's significant acceleration in the amount of sales online. And we're probably transporting ourselves five years into the future on a trajectory that was already in place. We've got new types of consumers starting to source products from online sales that perhaps would never have done it before. We're starting to see that become more entrenched as a key driver, and clearly to service online sales you need more logistics space than to service in-store sales. So that's a major acceleration. That's what everyone's excited about, and we'll touch on that and how we're seeing that pan out in local markets when we speak to my guests on the call today.

The second one, potentially, to discuss is reshoring. So again, it's something that's already been in train for some time now. We've seen companies moving operations, production and operations back from Asia to Europe, because you no longer have to rely so much on low cost labour, because you can produce things through automation through 3D printing, and it's much more cost effective to produce it closer to your consumers at the end of the day. So the European Commission has had a study into this since 2012, which they wrapped up in 2018. You can see on their website, a large number of companies that have moved operations back to the continent. Clearly there's a supply chain infrastructure that surrounds the production of goods and the movement to consumers in Europe. So that's the second component of the additional demand that we expect to accelerate post Covid-19, the supply chains set to be shortened to reduce risk and to reduce costs.

The third part, which is pretty much brand new as a result of Covid-19, and it's the increased risk that companies can't fulfil sales because they can't fully assemble products because they're waiting on certain components to come from locations further down the supply chain which have been disrupted. So we’re starting to see signs of inventory building, so basically companies holding more stock to protect against the eventuality that supply chains break down. We can see that starting to lead to an increase in net demand for logistics space. And actually, we saw a sort of window into that through Brexit whereby, because of the risk of goods coming across the channel into the UK, companies started to stockpile more in an eventuality that we didn't have a customs agreement and there could be a barrier in place. And that had a material impact on the need for warehousing space in the UK. Again, we think that this is definitely a trend that we could see in the long term. And certainly investors are looking through the short term disruption, and they're looking at these really strong long term drivers of demand for logistics space. And where we see long term strong tailwinds for demand, we tend to see really good real estate performance and a strong interest from investors, and we expect that to continue in logistics space.

So that's probably enough in terms of describing our short and long term view on the market. So now I'm going to pose some questions to my guests today. Firstly to Hennie, who’s based in Amsterdam in the Netherlands. And we're starting with the Netherlands because it is potentially the, probably the most important logistics market in Europe because of where it's strategically located in touching distance of Europe's wealthiest consumers within a couple of hours drive times, so that means it's in a strategic position. But it also has a really important port in Rotterdam, and obviously a huge airport in Schiphol. But also the logistics infrastructure and road network and barge network, and that means that it's a really, really good location for a lot of logistics operators who are working domestically or internationally through Europe. So it's a really important market and if anyone knows how to do logistics it’s the Dutch, so that's a great place to start.

So Hennie, to start with, obviously the Netherlands has been through an incredible run in terms of the logistics market from an occupier’s perspective and an investment perspective. Do you think that's going to continue through Covid-19, or do you think that Covid-19 is going to change that momentum and that trajectory and how do you see this play out?

Hennie Houtveen: Yeah, well, thanks Craig. Well, what I see is macro-conditions holding up reassuring well, and the government has a lot of room to increase fiscal spending to support the economy. So I think this is really helpful. Also important to mention is prime has definitely held up best in recent months, and prices remain high. This is what I see in the market. Some deals have collapsed, and we think it's good because there was a shortage of investment product, and this can increase more opportunities for our funds. Our local presence means we often have first look, if speed is a key factor. So yes, I think we have a good record in the Netherlands for now.

Craig Wright: Thanks Hennie, so essentially, you're saying that there's been an increased focus on good quality over secondary stock. Has that trend sort of been accelerated or accentuated so investors are becoming much more focused on quality given the risk that has emerged from Covid?

Hennie Houtveen: Yes, this is definitely what I see, because I think for us it needs to tick all the boxes when we look through a new proposition. We take a good look to location, total square meters, is the crossover enough, is it a big box or is it last mile? Also the specs are very important. Floor load capacity high, what type of contract is it? And also timing is very important so we want to be up running and in cycle. So all these things are very important and also important to say is we work very closely with our research team, asset management, property management, fund management - this is how we proceed on all our deals.

Craig Wright: Right, thank you. So moving over to Spain, Lorenzo over the last 12 months, Iberian logistics have attracted about two billion Euros total investment that I mentioned earlier, which is quite a significant shell. Can you see the same strong drivers in the Spanish market as Hennie mentioned in the Netherlands, and do you see those continuing to play out despite the disruption caused by Covid?

Lorenzo Peñalver: Yes, thank you very much, Craig. Yeah, we expect the Spain economy to be hit due to the severity of the impact of Covid-19, and also due to the high exposure our economy has to tourism and leisure and restaurants. But our economy is now starting to finally its feet again. Slowly, you see people going to bars and tourists again, and activity is picking up despite the restrictions and limitations. On the other hand, in lockdown and as you mentioned in the beginning, the e-commerce has increased drastically to the point where it was very difficult to receive groceries, pharmaceutical products, or sport goods related to in-home training, among many other things because demand was overwhelming, and surpassing the sellers’ capacity. Almost everybody has had some exposure to ecommerce during this period. I mean, even those most reluctant to it, have broken the barrier of buying online for the first time, and in the most part they're getting used to it. Considering that for any storage space needed to sell a product in a shop, you need approximately up to three times that space to sell the same product directly to a client due to returns, etc., the demand for logistics space is expected to have a positive trend despite any potential reduction in consumption due to the economic weakness from Covid.

As an anecdote, in Spain during the beginning of the sales period, the government forbid retailers to do sales in their shops to prevent people crowding in stores, so you could only buy sales online. On top of that Covid has hit harder all the real estate sectors like hotels, retail, and then it brought some uncertainty over the future of the office market. At the same time, it has got investors with a lot of cash spending to invest. So it is expected that many firms that did not invest in logistics before will now turn and start looking to diversify and minimise risk due to its marketed strong fundamentals. So it’s in this moment when we can benefit from our experience and long term presence locally, as we have created our network of contacts and relationships that will allow us, thanks to our successful track record, to continue sourcing the best deals, especially off market deals.

Craig Wright: Thanks, Lorenzo. That's really interesting. It backs up the key messages and the stories that we're seeing certainly in the UK, similarly in the Netherlands, and also in Spain. Just as a follow up to that, are you seeing these drivers of e-commerce start to have an impact in certain parts of the market? I know that we’ve discussed lots of transactions in and around Madrid, and it feels that with retailers having to restructure their supply chains to make last mile or e-commerce delivery more profitable, they will have to start looking at locations in and around the Madrid area. I just wonder if there's any trends that you have seen in the Spanish market that would sort of start to come to life because of what we've seen in the acceleration in the ecommerce story?

Lorenzo Peñalver: Yes, for sure. As you say last mile logistics is picking up very quickly. The truth is that it is very hard to find stock close to the cities due to limited availability. Many times logistics is competing with residential developments as the business is continuing to grow. In these cases, we have to be creative and join with developers to create product. For example, located south of Madrid was an old, semi abandoned industrial park, where people wouldn't want to work at night. But after a few new projects, to convert the old logistics, or old industrials to new last mile warehouses, now there is transforming and will most probably become an important last mile hub in the midterm.

Thanks to one of these creative projects, we are now in exclusivity for one of our funds for a logistic warehouse that would be literally located on top of a metro station. That means you will have direct access to the metro on the entrance of the warehouse, and that's something that is very attractive for finance and for investors.

And I think it's one we should look at, it’s very important what Hennie said, we really need to use our experience to be able to identify the good opportunities and don't get mixed up with products that is just not a good product or not well designed or well-located.

Craig Wright: That's really interesting, Lorenzo. Thanks for bringing up those points, and I think that's something that we definitely see in the market - that there is a sort of two speed or a two tier market between those locations and assets that are suited to the new demand drivers, and those that aren't. So I think it’d be easy for investors to make a mistake and be drawn into logistics because it's so popular without actually understanding the demand drivers and the reasons why a certain location should perform over another. And I think Madrid is a good example of that.

Moving on, at the start of this year, Aberdeen Standard Investments conducted a survey of European logistics operators. We managed to get responses from about 123 of the largest logistics operators on the continent, to see what their challenges were and how they were changing on the face of new technology, and the way that goods are being sourced and moved around Europe. Out of 70% of those, said that over the last year they've grown either substantially or modestly. So, certainly the lion's share were seeing their businesses grow quite considerably.

A large share of those also said that, roughly a third said that they were really struggling to source enough product to expand their businesses into – i.e. a shortage of planned logistics stock to take. Is this something that you’re both seeing in your markets? Do you see a continuous shortage of supply to fulfil the new sources of demand? I’m starting with you Hennie on the Netherlands.

Hennie Houtveen: Yes, well I can confirm, Craig, this is really what I see. It is very difficult to get good locations and to get to the transactions. What I see is only on the brown fields or really prime logistic locations in the Netherlands, for example, Rotterdam or Tilburg or Eindhoven the rents have been rising very fast. Let's say with 15 or 20% last year, so a good example is Eindhoven, we purchased a warehouse for one of our funds in 2016 at the level of 45 Euros per square meter. Now four years later, the market rent has increased up to 55 Euros per square meter, meaning over four years it's over 20%. But on the other hand, locations in greenfields, we also did some deals over there more in the North pf the Netherlands, I see less pressure on available square meters. So at these locations I expect the rents will only follow inflation over there. That's what I see in the market.

Craig Wright: Lorenzo do you see a sort of similar trend in Madrid or in the Spanish market?

Lorenzo Peñalver: Yes, definitely. It's very similar in the Spanish market. You see, for example, in Madrid, you have the northern east access and the southern access which are the strongest markets. It's true that anything close to a city, it's most likely - if it's well designed, well located with good accesses, it would work very well. The rent, regarding rental levels, we are at some point near or even slightly below of the maximum rental levels that we achieved per year to date right in the crisis of 2008. We really think that we still have room to still continue growing on these kind of very close to the city locations.

But if you go farther away from the cities or secondary markets, you really have to be careful because then the availability of land is much bigger. For these big boxes, you really have to be in a good quality logistics hub, which adds value for the potential tenants. There's the risk that you may decide to, or you analyze a project, standalone by itself or not well designed. Even if you think that it's not too far from the city, but if it's not in the right access, it doesn’t have the right connections, you may end up with a lot of troubles.

I just have seen some very good projects very well located, but with bad accesses. In one case, due to the fact that even if it was the last mile location, you had to go through a residential area to get into those warehouses. What initially shouldn't be a big problem, it ended up all the neighbours complaining for trucks going through various roads at late night, early in the mornings and having a lot of access problems, then you just don’t want to be there to avoid problems with the people living around. Having to create a new access, all those kinds of things have to be considered very deeply.

Another project with a very good tenant, but in a location quite off the main roads where you had the small road to get to the big transport access, and lots of traffic. Just make it efficient, even if you have a long lease already, you have to look always for the long term. You know that at the end that project, it’s going to give you a lot of trouble. The truth is that those projects don't get sold over time. It's very important to have experience and to know all this to identify which are the good projects that are coming to the market, and which ones are the old ones that everybody disregarded in the past that now come back again, because there is more interest and more money to invest. At the end, if you don’t have enough experience you may end up with one of those projects that looks very good, but finally it has some negative points, and it's not such a good investment.

Craig Wright: That’s interesting Lorenzo, because I think last time, because we discussed it last time I was with you in Madrid, we toured some of these assets. It was clear that there were some properties in the sort of, in the suburbs around Madrid that were a bit further out, but it seems to have some stubborn vacancies, despite the really strong stories that we hear about the demand drivers. We saw certainly some assets there even at quite low rents were struggling to find a tenant. I heard that story and that message that you really need to know about the best locations and what’s driving them is really key, if you're going to make sure that you find a tenant and it's suitable.

You touched on something else there, Lorenzo, that I think is really interesting and I think it's critical for investors to start to understand more about. That relates to issues around sustainability and social impact, and the relationship between how people live and how they receive their goods, and how logistic fits in between that environment. Again, in our survey it was surprisingly clear to me that the respondents were really focused on improving the sustainability features within their warehouses. They said that they were already implementing many schemes to try to mitigate or reduce their environmental impact and also their social impact as well. Both of those are clearly areas that tenants were very highly engaged in as is Aberdeen Standard Investments.

I just wanted to get a sense from Lorenzo and Hennie today as to if they're seeing this on the ground, are there any initiatives or any anecdotes that they can share with us with our own tenants in terms of how we're trying to improve or reduce social and environmental impact, given that the estates and residential are starting to blend into similar areas within city. Hennie, have you got any examples or any anecdotes from sustainable features that you are seeing with your tenants that’d be great.

Hennie Houtveen: I think it's very important -- but I see this it's very important for a tenant to have a green sustainable footprint, but sometimes they're not willing to pay a bit more, so we are all struggling with this when we do some negotiations. I also see that for funds it’s really important that you have a good rating, for them very important for their clients. Let me give you some example, Craig, which highlights a shortage you mentioned earlier and also improves sustainability. Well, we are now negotiating with a big supermarket retailer in the Netherlands who I can't mention the name. They have about six locations in the Netherlands for about 15,000, 20,000 square meters of good plot. They were already searching for a new logistics hub for their deliveries of online groceries in the middle of the Netherlands.

As you know, the market here is very tight. Due to the fact we have a pretty good relationship with the tenant, the plan was that we terminate the contract with the current logistics tenant. Well, the idea is we want to demolish the building and develop a new distribution center, and we increased the label from green good to green excellent specifications. We're in close contact with this new tenant and we hope to sign a letter of intent within a couple of weeks. This is just an example where we combine the search for new logistic hubs and improve sustainability in the Netherlands.

Craig Wright: Thanks, Hennie, and really interesting, and I think that’s something we’ve just seen more and more of, and that's a good example. I know that in the Netherlands we have a broader initiative to look at PV cells on the roofs and it can be really positive addition to the warehouse for both tenant and landlord. That is something we're proactively trying to do across our estate in industrial space. Lorenzo, are you seeing these kinds of trends in Spain? Yes, obviously, it’s a very sunny place so you'd expect PV cells to be pretty effective in terms of generating electricity. I'm just wondering if those sort of -- that dynamic is there and as strong as we've seen it in the Netherlands?

Lorenzo Peñalver: Yes, to be honest, quite surprisingly the tenants when they try to rent a warehouse they continue to be very focused on location, quality of the warehouse, and how it adjusts to their needs, and then price. They so far, as Hennie was saying, are struggling to pay more to get any of these certificates or better warehouse or more efficient etc, etc. In the first look they are not so focused into all this, but once you have them as a tenant it becomes one of their priorities, and they would give us a lot of support.

I would say that I feel very happy to say that at Aberdeen we are quite positive and quite pushing into all these strategies to improve the warehouse when we buy them. Especially solar panels is something that, despite as you say how much sunlight hours we have, is something we are not yet looking into much in the logistics market. I think that is a huge potential for add value and quality and efficiency to the properties and to the real estate market. But for example, to one of our biggest tenants, when we asked them about the possibility to increase the solar panels that we had in the warehouse, which were the minimum legal solar panels that you have to take into or to have in one warehouse was built for the first time. When we told them about the possibility to increase and that we were studying this, they were completely supportive. They know the difficulties that this could bring, having to install solar panels, potential problems with water leakages in the roof etc, but that's something that they were very, very interested in studying with us and even investing or supporting us because it's something that everybody wants to get into.

But, it is true that I think we still have a lot of way to go in that sense in Spain, because we are not taking the full advantage of the possibilities we have. Something that I think is very positive because that means that there is value to add with the correct asset management strategy. It will increase income and it will increase, as you say, reduce a consumption CO2 emissions etc. It’s a very win-win positive message that still has a long way to go here in Spain that we're just starting. But I'm pretty sure that everybody would continue to develop in the future.

Craig Wright: Thanks, Lorenzo, it is really interesting to get the two different perspectives and see quite different stages in that evolution towards being more sort of focused on ESG fundamentals. I know obviously as a house we are, and we're quite consistent across our portfolios with the application of ESG. But it's interesting to see that there's a difference in how some of the local markets embrace it at this point. I think it will become more apparent that there are benefits within the landlords but also I think the legislation will start to move more in that direction, I think.

Covid-19 has clearly elevated the way that we look after ourselves and our environment, and I think that will only move up the agenda. Being on the front foot seems like a really wise thing to do in this area. I think we'll only see more and more of that over time, which is obviously positive for an industry that's historically seen as quite a dirty and polluting sector, I think as you say, there’s a lot of opportunity there to make a big difference. We're definitely seeing it on the ground and the deals that I've worked on with both of you in the last few months, all of those have had a really strong ESG story. Particularly Lorenzo the development in Madrid that’s close to the metro station feels very convenient for people to be able to access to the site and the place of work.

So that was really helpful and really interesting, and I think so now we can summarize the key messages. Clearly, things have been disrupted from Covid-19 and there will be tenants that are really struggling as a result of the pandemic, because of the physical barriers to being able to operate. Many logistics operators run very tight margins, and this will be a very stressful time for them, especially for lease contracts with various different suppliers. It's a challenging time and we will see some difficulties in the short term. But it sounds like investors are looking through that into the positive long term drivers such as e-commerce and reshoring of industries back to the European continent, and also increased inventories as well. I think those three key long term drivers will set the sector in good stead over the long term.

Hopefully, as the pandemic is brought under control, we can return some sort of normality, we’ll start to see those long term fundamentals continue to drive the sector forward. But it was really interesting to speak to both of you today to hear the differences and how it's manifesting itself in the Netherlands and Spain, two important markets for us. I think some of the key takeaways for me is that e-commerce is having a really big impact on demand and the market generally. But you have to be very specific about where that's happening and to be focused on the right assets in the right location to avoid any bad mistakes where you might end up with a long term void, especially in some of the Spanish markets where you've got more abundant land supply. Also, in parts of the Netherlands, as Hennie as you mentioned, there are some Greenfield sites where new developments can take place. We have to be very selective and make sure that we're accessing the right market at the right place that are aligned to those demand drivers.

Probably lastly on ESG still perhaps a long way to go, even further than I thought in terms of the underlying interest in some markets. I think there's a lot of room for an improvement in how the industry can engage on that topic in a way that presents it as a benefit to all parties to everyone, benefits to the environment but also to tenants because they can source energy in a cost effective way. And to landlords because we can engage with our tenant and ensure that we have longer lead times or longer duration in tenancies and more robust and sustainable cash flows. I think there's a lot to be learned on that last piece and there are lot to be gained as well, and I think we'll see more of that in the future.

Just finally, I'd like to thank you both for joining the call today and sharing your insights on the local markets. I look forward to working with both of you in due course on many more transactions and on existing asset management initiatives that we have for our funds . Thank you both for joining us today.

Finally, we'd like to say a huge thank you to our listeners for tuning in. We hope you found this podcast interesting. To find out more about Aberdeen Standard European Logistics Income Trust, please visit www.eurologisticsincome.co.uk, thanks for listening.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets.. It is provided for information purposes only and should not be considered as an offer investment recommendation or solicitation to deal in any of the investments of products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up, and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.

Interviewer: Welcome to the Aberdeen Standard Investment Trusts podcast series where our investment trust managers discuss how the Covid-19 outbreak has impacted their portfolios to date and the outlook from here. Today we welcome Evert Castelein, Manager of the Aberdeen Standard European Logistics Income Trust. Hi, Evert.

Evert Castelein: Hello, hi.

Interviewer: I wonder if we can start with a look at kind of the bigger picture? So how have you seen the market change in the last few months and how do you think things will work out going forward?

Evert Castelein: Yes, I think to answer this question it's relevant to make a distinction between short term and mid or long term implications. The first reaction we have seen in Europe in March is that countries went in full or partial lockdown and companies shut in order to flatten the curve as we say. So the global supply chain was immediately disrupted and especially companies depending on international trade have felt this immediately but also discretionary spending, for example, in the automotive industry and high street fashion and restaurants and many others. At the same time, we've also seen companies that have benefited from the situation such as groceries and pharmaceutical companies and packaging and e-commerce related industries in particular. So the rise of e-commerce, or the growth in online sales, is a very strong trend and it's a structural one, not a cyclical trend. And it’s a driver behind the growth of the logistic market and the demand for logistics space. So this trend really has accelerated enormously in the last few months with people working from home and shops being closed. So as consumption has moved online, more people are just buying more online, and new groups of people have entered the online market. For example, older generations have started to buy more online as well, realising that delivery of food is maybe the safest way to get groceries at this point of time. And as always, I think Amazon is the best example in the market to see how e-commerce is evolving and they've recently announced that they're recruiting an additional 100,000 staff and needed six million square meters extra warehouse space within the next 18 months. So that's an additional 20% of their existing stock, so that’s a lot and we think that growth in online sales has a much larger impact on logistics than, for example, growth in traditional bricks and mortar shops. And that's been calculated by Prologis - that roughly two and a half times more logistics spaces required to support the central volume of e-commerce sales compared to store retail sales. So these are things that we are seeing happening right now, and for us therefore the focus is very much on managing the weaker tenants that we have, or that have mobility issues, but also the stronger performing tenants in our portfolio that need more space. So there's a wide variety and just depending on the sort of sector you’re in, what the impact will be on their business. If we look at the mid and long term implications of COVID-19, besides the continuous growth e-commerce, we see a restructuring of supply chains by making them shorter and more resilient to shocks by reshoring manufacturing activities and bringing it closer to home. If you take, for example, car manufacturers in Germany or Jaguar and Land Rover, have all mentioned that they couldn’t have completed production of cars because some parts come from Asia, but also a lot of medical equipment, such as medicines and face masks need to come from Asia. So all of a sudden, supply chains and logistics have become of national importance. I think supply chains were maybe too efficient, too much focus on ‘just in time’ deliveries and this is now changing. A final and third effect and impact is the increased inventory levels for the same reason to reduce risks in the supply chain and absorb delays in deliveries. Also cold storage, by the way, is in high demand now the supermarkets are doing good business. So these factors altogether have accelerated growth of e-commerce, the increasing inventory levels and also the reshoring of manufacturing activities from Asia to Europe will be beneficial I think for the demand for logistics. Although in the short run, we also will see some demand falling away with companies that are having liquidity issues or maybe even going bust as a result of the recession we are in. That's why I think it's really important to have scale and local offices across Europe like Aberdeen Standard Investments. That enables us to work really closely together with our tenants and help them where needed. This is really one of our main USPs I would say.

Interviewer: Okay, I mean with that in mind, can you talk us through how the portfolio looks today - the type of companies you've got exposure to and geographic regions and that kind of thing?

Evert Castelein: This is a core strategy and we're focusing on the most liquid part of the logistic market, which is the range of mid price, big box warehouses with asset sizes through portfolio around 30,000 square meters, and urban logistics as we think this part of the market has really strong growth prospects thanks to the growth in last mile deliveries. We’re fully invested right now with 14 buildings in the portfolio in five different European countries. These are France, Germany, Spain, Poland, and the Netherlands where half of the portfolio is located, which makes by the way perfect sense to me as the Netherlands is a small country, yes, but it's big in logistics as a team as the gateway to the West European markets thanks to its strategic location and the presence of the largest port in Europe, the Port of Rotterdam. So for an income driven strategy like ours, it has always been really important to create durable income streams from which we can pay a healthy dividend. We think the best way to achieve this is by buying warehouses that have a second life, meaning we have not spent the capital on very large bespoke assets in the middle of nowhere and then hope for the best. No, we have invested the capital with a long term view, meaning we've had a focus on established locations alongside main transport corridors and on high quality warehouses with modern specifications and good asset sizes, because these are the sort of assets that are highly sought after by companies and that would give the asset a second life. So the ultra big boxes which also have a role to play, we haven’t invested in these because we're more concerned about the second life. If we look at the most recent additions to the portfolio, I think they're all really good examples of this strategy. Since the second capital raise held almost a year ago, we've invested in three warehouses in Europe all with a very strong urban profile. Just to give you a couple of examples we’ve bought assets in Madrid and Warsaw, in Poland with DHL as main tenants. And we bought an asset in Den Hoorn, that's in the Netherlands between the cities of the Hague and Rotterdam which is by the way the most densely populated area in the Netherlands. Den Hoorn is the largest asset that we currently hold. It's a development that has been completed in January this year, that’s a size of 33,000 square meters and it’s a very liquid and flexible building which can easily be split into parts. That for us is really important. It has a long index lease and green credentials with LED lighting and solar panels that we hope to put in place this year showing our management capabilities.

Interviewer: Okay, I mean it's been a tough time for valuations in the wider commercial property market but obviously this area has some structural growth trends in its favour. What is the picture for valuations in the logistics market across Europe?

Evert Castelein: I think property values have held up quite well in the first quarter of the year. On the fund’s level we have experienced an increase in portfolio value of 0.7%. That's no surprise because that was until the end of March and since then the virus has spread of course. Going forward you would expect that theoretically that yields should go up due to this recession we're in, which should result in high risk premiums due to low liquidity and also the impact of high financing costs. But so far we have not seen this happening in deals that have recently transacted. And I think logistics and core logistics in particular will really be on top of many business lists going forward. I expect a wall of capital will be directed towards logistics for the obvious reasons. If you look at the alternatives, office and retail in particular are struggling, retailed because the sales, retail sales are moving online which is beneficial for logistics so it's not really difficult to explain why logistics is very much in vogue nowadays. And it will be a flight to quality and core strategies just like ASELI’s strategy have that quality and have that low risk profile with a lower gearing than for example, value added or more opportunistic strategies which will struggle a bit more I would say on the capital side. If we look at the rents of core logistics, we think rent levels will be quite resilient and hold up well as there was an undersupply situation across Europe with vacancy rates around 4% on average. So the starting point is really low although we expect vacancy is likely to rise just modestly, but from a low starting point, also with only limited new developments taking place right now.

Interviewer: Okay, and what feedback are you getting from your tenants on the rental side at the moment ? Do they feel they've got their kind of business under control and they can predict going forward?

Evert Castelein: Well, we get a wide range of sort of feedback from our tenants. Some tenants are working at full capacity and some tenants are having difficulties as they experience decreased turnovers. We've had a couple of discussions with tenants on deferrals, for example, with a distributor of bikes that had difficulties with imports of these bikes from Asia, and the fact that many bike shops in Europe were closed in Europe for a period of time. Since then bike sales have picked up very rapidly, so based on latest information we have received from that company I think I feel quite comfortable that they will be able to pay back the deferred rents in due course. But we have had similar discussions with a sports retailer, a retailer in home furnishing, but also a food caterer. However, there are several tenants in the portfolio that have told us that they have experienced much higher turnovers than before and that they are running at full capacity. So just to give you an idea none of the top five tenants representing almost half of the total annual rent have come to us. Companies like a transport company with direct links to the food sector, a leading supermarket chain, a distributor of fruit and vegetables, a leading drug store running a national ecommerce business and an industrial company specialised in the production of sprinkler parts which is working on their order book, so they are just doing great business. It's really a wide range of feedback that we have received so far.

Interviewer: So I see the Trust has maintained its quarterly dividend. Could you just talk me through that and also what you expect to happen going forward?

Evert Castelein: Yes, last week's announcement stated that the company is going to pay the full interim dividend of EUR1.41 cents per share in line with the dividend policy which makes perfect sense as we have collected all rents for Q1 which we're going to distribute. We are closely monitoring the quarterly rent collection together with the board. Actually we realise income is really important for our shareholders - it’s fair to say I think that we are at the moment in a very good position to deliver. We have invested in a high quality portfolio with very liquid investments that have a second life if, let's say, a tenant would fall over. And we have a cash positive position and sufficient headroom in our loan covenants with banks. So the fact that we have local feet on the ground as well makes a huge difference and this will, going forward, enable us to stay really close to our tenants and survive this period together.

Interviewer: Great, okay thank you Evert for those insights today and thank you to our listeners for tuning in. You can find out more about the Trust at www.eurologisticsincome.co.uk and please do look out for future episodes.

Important information:

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments or products mentioned here in and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.