Property portfolio: massive reallocation of capital to logistics properties anticipated

For decades, 30% – and rising – of institutional capital in the USA has been invested in the “industrial sector”. The majority of this is attributable to logistics. In Germany, the share of capital allocated to logistics properties is currently at just under 15%, compared to 7% more than 10 years ago.

As a result of the coronavirus crisis, many institutional investors will increase their logistics share. Our discussions with almost 100 institutional, indirect investors, family offices, sovereign wealth funds and direct investors confirm this development. Many are thinking about reducing or completing exiting from their investments in the sectors of office space including business centres, large-scale specialist retail space, shopping centres and hotels.

After offices, logistics is currently the second-biggest established asset class with the greatest growth potential for the future, driven by online retail with growth of 11% to date and even more in the future. And we expect logistics to experience an unprecedented run over the next 12 to 18 months in terms of reallocation of capital. Among institutional investors, we expect to see shares of around 30% to 50% in the high-end logistics sector in Germany over the next ten years. In the case of private investors, the share of the property portfolio attributable to logistics is lower than among institutional investors. But here, too, we will see a shift away from the asset classes of offices, large-scale specialist retail space, shopping centres and hotels.

Growing demand for modern logistics space

There are three reasons for this. Firstly, we already had a shortage of functional warehouse space before the coronavirus. Demand is now rising as a result of the coronavirus, and not just around the main urban centres. The coronavirus will make logistics even more attractive than it already was. It is no paradox that warehouse space is needed just as much during crises as during booms.

Secondly, politicians will be forced to maintain significant permanent stocks of urgently needed products and basic commodities in Germany in sufficient quantities for boom and crisis times like these. We are recording a fivefold increase in requests for space, but this demand cannot be met. For 15 years, we have been working to encourage communities and municipalities to be more open to the establishment of logistics properties. Now we are being heard. After all, the goods ordered will not transport themselves.

Thirdly, many companies have already started thinking about returning to local research and production sites and pan-European supply chain locations. Europe is and will remain the biggest economic area in the world. We will not keep exporting to the USA and China at the same high levels as before the coronavirus crisis. Research, production and sales will all become more European. Globalisation has experienced a setback and will not come back again to the same degree.

Paradigm shift in other commercial asset classes

At the same time, bricks-and-mortar retail is scaling back enormously as a result of the coronavirus crisis, except in the segments of food and basic commodities. Open-plan office designs may undergo a paradigm shift in the future, especially since the whole of Germany can work from home and offices can at least temporarily be “relocated” to residential properties. By contrast, storage and logistics space cannot be “relocated” to other asset classes.

What does this mean for us as project developers and portfolio holders? The coronavirus crisis emphatically confirms the three Ls: Location, Location, Location. Especially now that even blue-chip tenants are trying to suspend payments, lessors in better locations are in a more secure position, as some tenants are willing to take on space immediately when it is re-let due to an urgent need for space. In extraordinary times, logistics has a unique selling point among all the established commercial property asset classes.

Logistics yields beat office yields

The current developments will also have an impact on yields. Logistics yields, particularly in city-centre locations, will soon exceed office yields on the outskirts of cities. As we can see, Germany is also able to work from home. Goods, by contrast, can be stored in homes only to a limited extent. The pricing difference between a modern logistics property and a very high-quality business park in the same location comes to around two annual net rents – in good times.

Over the next few months, however, there will be far fewer industrial property transactions, i.e. with buildings that are used for industrial production processes such as manufacturing, assembly and storage of raw materials, intermediate products and finished goods. This is despite the fact that now would actually be a good time to sell. After all, a sale-and-leaseback transaction with properties that are owned by industrial companies and could accordingly be leased back represents the best possible source of urgently needed liquidity.

Lessons learned from the financial and economic crisis

Compared to the situation in 2007/2008, there are now very few speculative developments without forward purchase or forward funding structures. Things were different back in 2008, when some developers had purchased large plots of land without tenants or end users, for example in the case of the Westfalenhütte site. This was risky. Today, by contrast, the pricing for vacant top logistics properties is attractive for developers and end investors alike, partly due to the yield spread.

Only a small number of speculatively constructed new builds are completed with a 100% vacancy rate. For years, at least 50% has already been let before completion, and often 100% in top locations. End investors can thus secure top logistics properties – at somewhat more favourable conditions – as soon as they are completed.

At the same time, the letting risk is currently very low – despite and in some cases even because of the coronavirus – in the top regions of Munich, Stuttgart, Cologne, Düsseldorf, Hamburg city, the Frankfurt extended city region and the Berlin city region as a result of the bullwhip effect.

Today, the logistics property market benefits from its transparency. In 2008 and 2009, the market was extremely fragmented. Now there are far more comparables, independent studies and market-leading specialist companies, which are much more efficient than generalists. Logistics is the fastest-growing commercial property asset class worldwide.

About Umut Ertan

Umut Ertan is the founder and a partner in the Realogis-RLI Group and has 25 years of experience in the industrial and logistics property segment. During this time, he has brought two companies to a market-leading position on the logistics property market. In 2005, he founded Realogis, which is now the number 1 in consulting business for industrial and logistics properties in Germany, with more than 70 experts at the six top logistics locations and two overarching divisions for Germany. In 2014, he founded the investment and asset manager RLI Investors, which currently has more than EUR 1 billion in assets under management and is considered the number 2 among German logistics investors (source: bulwiengesa study 2019). He has also been strongly committed to reducing CO₂ emissions with his own capital as an impact investor since 2018 and established the first through-and-through impact investor in the German-speaking region, Schweizer Kapital Global Impact Fund. He manages his activities as a family office with the Schweizer Kapital Group that he founded.