Logistics is top dog as other asset classes falter
By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Logistics shines as residential assets in B and C locations fall short
Logistics is the asset class leading the charge, with 38% of asset managers citing it as their favourite asset class, according to the latest research from JLL.
Residential and office properties in A-locations were the second choice, with 36% each. Compared to the previous year's survey, residential buildings in B- and C-locations have become significantly less attractive, with only 23% of investors picking them, down from 45% last year. At the bottom of the ranking are inner-city commercial properties with 11% and shopping centres with a measly 6%.
JLL conducted the investor survey in the period from mid-January to mid-February 2023. A total of 550 companies were contacted. The majority of the 145 respondents are German asset managers, many of whom manage real estate assets of more than €1 billion in Germany.
One reason for logistics’ popularity is that is offers opportunities for both sustainable new construction and conversion, including the use of solar panels on the roofs. There has been an uptick in building multi-storey spaces, as developers Four Parx and Garbe have been doing. Munich’s Atmira Group is currently building a four-storey distribution centre for Amazon in Erfurt, which will be one the largest of its kind in Europe. It is due to be completed in late summer, totaling 265,000 square metres of floor space. The roof of the building will be equipped with a photovoltaic system as well as greenery and heat pumps will be used for heating. In addition, a green area of around 12,000 square metres will be made available to all, with the idea of creating a nature trail designed to appeal to wild bees.
Modern robots will be used in the warehouse and Amazon will be able to handle up to 550,000 parcels per day at the site, according to media reports. The property complements an Amazon distribution centre that has already been operating there since 2019. Atmira Group is investing around €450 million in the development, which will later be sold to investors.
LIP Invest launches fifth logistics fund
Other investors are also pushing ahead with logistics acquisitions. Last week (20 April), logistics real estate fund manager LIP Invest announced the launch of its fifth logistics fund. Like its four predecessors, the open-ended real estate special AIF "LIP Real Estate Investment Fund – Logistics Germany V" will invest exclusively in core logistics properties in Germany. The fund, which is managed by the capital management company IntReal, will increasingly focus on climate protection in its property selection. An approval according to Article 8 of the EU Disclosure Agreement has already been submitted to BaFin.
The fund, which has a minimum target size of €350 million, aims to generate an attractive distribution yield and, in addition to an inflation-protected investment, offers the opportunity of value increases following recent interest-related price declines. The fund is open for subscription to institutional investors with immediate effect and has an investment pipeline of around €300 million.
‘Following the price corrections of the past 15 months and the reluctance of many investors due to the uncertain macroeconomic forecasts, logistics properties are once again at the top of many investors' shopping lists,’ said Bodo Hollung, partner and managing director of LIP Invest. ‘Plannable rental income, inflation-protected leases and value stability make logistics an attractive investment. The opportunity for value increases is currently higher than it has been for many years. With our large network, our proximity to the market, and our reliability and speed, we are repeatedly able to secure suitable properties for our funds despite the fierce competition and thus regularly fulfill our investors' desire for a quick capital call.’
The new fund will focus on new logistics buildings suitable for third party use, primarily modern properties in locations with long-term sustained demand for space, enabling continuous rental growth and value creation potential. The fund management plans to acquire 10 to 15 properties for the fund. Due to the recent sharp rise in interest rates, leverage to improve fund performance is hardly feasible. Therefore, the leverage ratio will not exceed 30%.
The fourth LIP logistics fund "LIP Real Estate Investment Fund – Logistics Germany IV", which was launched in the second half of 2021, completed its final closing at the end of 2022 with equity capital of €190 million, acquiring 11 properties with an investment volume of over €300 million. With one property already in the acquisition process and a further acquisition with a volume of around €50 million, the fund will be fully invested to the tune of €350 million. With an investment volume of €1.7 billion, the LIP logistics portfolio now consists of 59 properties with a total rental area of over 1.2 million square meters.
LBBW finances €100 million logistics portfolio for DLE Logistik Fonds
Also this month, LBBW financed a €100 million logistics portfolio for the DLE Logistik Fonds. The portfolio has an occupancy rate of almost 100%. The term of the loan is five years.
‘These types of properties are very good investment properties because the property yields are attractive at around 6% and allow for a positive leverage effect,’ said Dr. Kilian Mahler, managing partner of DLE Logistics. ‘The indexation of many leases provides good inflation protection.’
The transaction was advised by GSK Stockmann, Mittler IFM, (each acting for DLE) and Bryan Cave Leighton Paisner as well as Elvinger and Hoss & Prussen (each acting for LBBW).
Despite the stagnating economy and the uncertainties surrounding the development of interest rates and inflation, there is no lack of willingness to buy on the part of investors. According to a JLL survey of 145 asset managers, 42% of them said they wanted to invest more this year than in 2022. Only one in five is planning fewer purchases. On the other hand, 16% of the survey participants are prepared to sell more properties in the current year than in the previous year, while almost half of the asset managers want to reduce sales.
‘There is not a shortage of investors who want to buy, but of those who want to sell - and in many cases the price expectations are still too far apart,’ said Jan Eckert, head of Capital Markets, JLL DACH.
Two-thirds of those surveyed expect price reductions of more than 5% compared to the price level last year. Just 8% of companies surveyed plan to reduce their real estate quota. The majority - 60% - want to leave their current real estate quota unchanged.
According to the survey, almost all investors expect interest rates to remain high this year. Only 6% of them foresee an interest rate cut. And just 40% expect lower interest rates by 2025. ‘However, only 13% still believe that interest rates will continue to rise beyond 2023,’ Eckert said. ‘For real estate markets, the most important thing will be that financing conditions stabilise at a level that makes reliable purchase calculations possible.’
Value-add buyers dominate market
According to Colliers, around €848 million was invested in the German industrial and logistics property market in the first three months of 2023. Predictably, the change in financing conditions and the recent financial market turmoil have resulted in both the transaction volume and the number of transactions falling well short of long-term averages.
There has also been a decline in portfolio sales, with them accounting for just 18% of the total transaction volume this year. Overall, significantly fewer properties were traded, regardless of whether they were single or portfolio transactions. In a comparison of the last five years, around 52% fewer properties changed hands, according to Colliers.
‘SWAP rates remain stable despite rising base rates, as interest rate increases are already priced in and rate cuts are expected in the medium to long term,’ said Nicolas Roy, head of Industrial & Logistics at Colliers. ‘However, banks' margins are increasing and the availability of senior credit may decrease further. This will continue to be challenging for many investors. It remains to be noted that price adjustment in the logistics sector has been very rapid and sellers have increasingly realistic expectations of the market, so increased activity can be expected again during the year.’
Transaction activity in the first quarter was mainly dominated by national buyers, who were responsible for more than half (55%) of the transaction volume. Value-add buyers were particularly resilient and adaptable, accounting for €205 million of the overall deal volume. National buyers, for their part, focused on small-volume core products making up €249 million of the total.
‘In the last few quarters, we have registered that core buyers have become significantly more selective and are increasingly focusing their attention on the location and ESG criteria of the property,’ Roy said. ‘The difficult market situation is leading many investors to take a closer look at emerging opportunities. This is particularly beneficial for value-add buyers, who are increasingly acquiring products in locations that are temporarily avoided by core buyers, but still have very good fundamentals for the future.’
And despite the market conditions, logistics should continue to be robust this year, according to Roy: ‘Going into the end of the year, we remain realistic but not pessimistic,’ he emphasized. ‘On the leasing side, the industrial and logistics property market recorded high rental growth rates of 13% on average for the top 8 locations. Logistics real estate has proven to be an ideal inflation hedge, as rental growth has outpaced inflation for many years. For many investors, this makes logistics real estate a very attractive asset class. The now common 100% consumer price index clauses and dynamic market rents act as a stabilising factor for total returns and, unlike bonds, offer upside potential. Weakening tenant demand is offset by a reduced pipeline and low vacancy, so demand will continue to outstrip supply.’