Funds bullish on logistics

Real estate funds active across different parts of the logistics sector are bullish about logistics investment as e-commerce continues to redefine the retail landscape, according to Scope’s latest survey published this month in conjunction with consultancy Industrial Port.

‘The market is very much driven by strong e-commerce demand as well as Germany’s location within Europe,’ Sonja Knorr, head of alternative investment analysis at Scope, told REFIRE. ‘It’s a hot market and there’s no real yield difference between existing stock and new development, which is not the case for other asset classes. Many bigger funds are now trying to invest in product development due to strong logistics demand in metropolitan areas.’

Of the 19 funds surveyed, 90% of those active in project development rated their position regarding logistics as ‘good’ or ’very’ good. Closed Spezial AIF funds and debt funds were the most upbeat. Almost half of the respondents also offer investors exposure to logistics properties via debt vehicles. In addition, around 40% of those surveyed are active in project development.

‘Given the size of the market and the sheer amount of capital, it’s now an accepted asset class,’ Peter Salostowitz, managing partner at Industrial Port, told REFIRE. ‘You couldn’t say that three years ago.’

Germany takes the number one spot

Germany is the most attractive logistics location for investors in Europe, according to the survey, with 95% of respondents rating it an ‘attractive’ or ‘very attractive’ location. However, this is also reflected by the fact that the respondents are mainly active in Germany.

Logistics centres in urban areas remain very popular with providers. Almost 90% of the providers rated them as the most interesting, followed by inner-city logistics properties (53%) and international logistics hubs (47%).

However, rents can be as low as €3.50 per sqm outside the city centre, although that brings its own challenges, according to Salostowitz: ‘It’s the whole “Geiz ist geil” mentality,’ he said. ‘Sometimes a company can’t pay lorry drivers more or even pay more rent. If your space is outside the city centre, electricity is typically more expensive – and it costs you more to bring you product into town.’

One-hour delivery is also growing in Germany, according to Knorr: ‘It’s the question of competitiveness,’ she said. ‘One-hour delivery is becoming more popular and more prevalent because people have less time to shop. I think it will become more important as a service going forward.’

And tiny spaces are getting in on the act, with logistics spaces as small at 20 sqm emerging for one-hour delivery services, according to Salostowitz. ‘This means having to restock every day, but people are doing it,’ he said.

Going forward, Germany’s logistics sector is likely to develop in two opposing ways: ‘On the one hand, e-commerce and the outsourcing of industrial services will continue to gain in importance,’ he said. ‘This will increase the demand for logistics space. On the other hand, the global economy is showing the first signs of fatigue. Certainly, leading indicators such as the purchasing managers' index, the Ifo business climate index or the industrial production index show this. As economic momentum declines, so does demand for space. If the two trends are brought together, there is likely to be a sideways movement in demand for space overall.’

Rents for Industrieimmobilien, or industrial properties, soared by 8.7% last year, according to the IWIP Index, published earlier this year by IndustrialPort and the German Economic Institute (IW Köln), amid news that the sector now accounts for 10% of the overall commercial real estate market.

Economic risks pose greatest challenge

Interestingly, around 75% of those surveyed believe that economic factors pose the greatest risk for logistics investments. Location, for its part, is only considered a risk by around a third of respondents.

Just 58% of those surveyed expect rent increases in the next three years while 42% expect prices to stagnate, largely because rent increases will mainly occur in good locations in metropolitan areas. For other segments and locations - especially logistics centres in rural regions - the prospects for higher rents are not as good.

Open-ended mutual property funds plan more logistics properties

In addition to this survey, Scope asked managers of open-ended real estate funds this spring about the mix of types of usages in their portfolios. At present, the share of logistics properties in both the portfolios and the purchase volume is still comparatively low at just under 3%. However, almost two thirds of fund managers plan to increase their portfolio’s exposure to logistics, with around 13% planning a ‘significant’ expansion.

Development may be the only way to go for some of these investors, given the lack of available product. The deal volume in the first quarter was just €1.05bn, down 42% on the same period a year ago, according to Salostowitz.

And according to German Property Federation, the ZIA, there was a decline in the investment volume in Germany in 2018, compared to the record year of 2017. In total, more than €7bn was invested in logistics last year, including corporate and industrial real estate. However, the decline can largely be attributed to the lack of properties coming to market. In addition, there is a scarcity of available land for construction, according to the ZIA. As a result, prime yields have now fallen to below 4%.

The current transaction volume will be driven very strongly by the current and probably also future low interest rate levels, according to Salostowitz. ‘Low interest rates are prompting numerous investors to invest in alternative assets such as logistics properties,’ he said. ‘In addition, quite a few foreign investors from the US or Asia are active in the European investment market. It is precisely these investors who stand for shorter holding periods for the acquired properties. This is currently giving the investment market additional momentum. In the medium term, however, this is likely to decline significantly with a low economic volume.’

In the first quarter, industrial take-up totaled 1.7m sqm, down 14% on the first quarter last year, according to Savills. Take up in 2018 totalled 7.1m sqm, according to Industrial Port. Interestingly, industrial stock almost rivals office stock in Germany, according to Martin Czaja, speaker of the executive board at industrial property investor and developer, BEOS, with around €600bn of offices in Germany, compared to €562bn of industrial properties, although only a small percentage of industrial stock is currently investment grade.

Last year, there were €2.8bn of industrial property deals, excluding big-box logistics, according to Czaja, which rose to €6.8bn for all logistics deals, according to Colliers.