Logistics rents in German cities set for further rises in 2016 - report

A new report by London-based Capital Economics sees German industrial occupier demand set to moderate in 2016 after this record-breaking year of 2015. However, supply constraints that are more aligned to distribution than production lead the researchers to nonetheless expect industrial and logistical rents to rise in Germany's main cities next year.

This year saw logistics takeup over the first nine months being the strongest on record, ahead of the previous best year of 2011 by 20%. Rents, however, remained largely flat.

The researchers assess the likely impact of the fallout from the Volkswagen scandal in Germany, given that car production makes up 17% of Germany's industrial output. Figures released this week show that VW's European market share has indeed declined by 2.3% in the year to November, although its November market share is only 1% lower than its January-August share, a fall that has largely ben made up by other German companies. Also, point out the researchers, focussing on market shares ignores the fact that EU car registrations were up by 12.7% year on year in November. This will largely compensate for localised difficulties at VW, they say.

However there is compelling evidence of a general slowdown in German GDP growth over the coming quarters, based on recent weakening of macroeconomic data, with Capital Economics forecasting a slowing of German growth from 1.5% this year to 1.2% in 2016.

On the supply side for logistics properties, the current rent levels have not inhibited development, with completions of 3.2m sqm in 2014 marking the strongest year since the crisis. The figure for 2015 will fall just short of this, with the two strong years giving a healthy boost to supply.

Interestingly, the researchers comment that this has not had a fully corresponding effect on the level of existing stock, which has only risen by 0.7% to 1% per annum. This is because, in the top city markets, there is greater demand from distribution firms than from production firms, leading to space constraints in these cities. They give the example of Munich, where despite the buoyant local economy, only one new logistics project was completed there over the first nine months of this year.

Hence, the researchers conclude, there is scope for rental growth in the top cities despite the coming moderation in national occupier demand. In the short term, Munich has the tightest supply constraints and the strongest potential for rental growth. As such, over 2016-17 the Capital Economics team expects cumulative rental growth of 4% in Munich to surpass gains of around 3% in Berlin, Frankfurt and Hamburg.