Logistics rents rise strongly, yields fall again on supply shortages

The transaction volume in German logistics investment has fallen by a quarter in the first six months of the year, compared to last year, with €3.3bn being transacted for logistics properties (76.3%), production facilities and business parks, according to figures released by consulting group IndustrialPort, along with property advisers Savills.

Nonetheless, according to Peter Salostowitz, managing director at IndustrialPort, this year is shaping up to be the third-strongest year in the sector’s history. In his view, with prime yields hitting a new record low of 4.1%, the decline in volume is solely attributable to the lack of adequate supply.

Savills expects yields to fall further this year, to 3.9%. According to Bertrand Ehm, director for industrial development at Savills, “Particularly in the Top-7 logistic clusters investors can find scarcely any properties that meet their return expectations. Only in the area of Rhine-Main, around Frankfurt and Wiesbaden, did volumes not fall.”

The shortage is particularly noticeable in the high-volume segment and in portfolio acquisitions. This year, portfolios have accounted for only €1.4bn to date, compared with last year’s €2.2bn and €4.4bn in 2017. “Still, despite the shortage of supply, we don’t detect any weakening of investor demand. The majority of investors are focused on the main conurbations, and prefer to take the risk of not fulfilling their investment objectives, and going elsewhere,” said Ehm.

On the tenant side, the increasing demands of e-commerce fulfillment means a steady rise in demand for suitable logistic properties, with a subsequent rise in rents. Jan Stemshorn of Savills in Cologne forecasts further rises. “Last year the rents rose more strongly than their long-term average based on the IWIP-Index. Given the low level of supply in the favoured locations, this trend looks sure to continue”, he said. In fact, rent rises have been moderate, given the huge rise in land and building costs, he suggested. “Development land is thin on the ground – and the market among developers is very competitive. In competition for space and reputable tenants, however, not all the extremely high costs are being passed on to the tenants in the form of higher rents.”

In its latest European survey “DNA of Real Estate” for Q2, property adviser Cushman & Wakefield confirms the strong performance of logistics across Europe, with strongly rising rents, increased investor demand and falling yields.

Peak rents in European logistics rose in Q2 by 0.6% and by 2.8% year-on-year – the highest rise since March 2008. The biggest growth was still in the CEE markets, with rents in Budapest rising 4.4% and in Warsaw by 2.7%. Among the German markets, Hamburg was the strongest with a rise in the quarter of 3.4% due to a shortage of supply and higher demand as a result of the rationalization of several distribution networks.

The biggest fall compared to last year was experienced on the German logistics market, the biggest European market by volume. Peak rents for first-class logistics assets dropped by 51 basis points to its current 4.12%. A third of the markets are expecting further falls by year-end, fueled by ongoing low financing costs and favourable user markets.

Alexander Kropf, head of capital markets at Cushman & Wakefield in Germany, said he saw peak yields in Germany falling under the 4%-mark, given growing demand particularly from international institutional investors, and the bottleneck in supply.

On the deal front, Apollo Global Management and its property advisor Cushman & Wakefield started discussions in August for the sale of a major logistics portfolio comprising 28 assets in Germany, Benelux and Poland. Apollo is hoping to attract more than €1bn for the portfolio, which would put it on a yield of 4.5%.

The portfolio is described as “a true cross-section of logistics properties from smaller cross-docking buildings to big boxes, covering the whole delivery chain.”

Apollo has been investing heavily in European logistics for the past two years with its European Principal Finance III Fund (EPF III) establishing a joint venture with Frankfurt-based Palmira Capital Partners to invest more than €1bn. Last year Apollo tied up a financing deal with Aareal Bank, which gave them a five year loan of up to €800m to finance acquisitions.

Some of this year’s bigger deals have already confirmed the 4.5% yield benchmark, such as the Prologis acquisitions of the Nordic “Ostium” portfolio and the Spanish “Magna” portfolio from Colonial. GreenOak is also thought to be close to achieving 4.5% for its whole European logistics portfolio, heavily Spanish-weighted, valuing the 46 assets at about €1.5bn. Eastdil Secured is advising GreenOak on the transaction.