Logistics yield compression 'bottoming out", says Realogis report

The Munich-base logistics investor and fund manager Realogis Real Estate GmbH says the yield compression in the market for German logistics properties since the beginning of 2014 has now bottomed out, with gross yields of 6% still widely achievable.

Heavy demand from investors, but also sharper competition among project developers for potential tenants, with many developers undercutting competitors to lock in tenants. This has lead to the unusual situation that tenants are partly able to get better deals in new properties than in existing buildings, a situation only tenable as long as sales price offering 6% yields can be achieved.

This can make it difficult for investors, banks and valuers to get a handle on what should be market rents, or indeed to assess the likelihood of pushing through future rent increases.

According to Bodo Hollung, Realogis' CEO, "We think things could go in different directions from here. Large-volume portfolio deals north of €100m as well as investments in the Big 5 cities are still so attractive for international investors that contested deals can end up offering less than 6%. Individual assets with blue-chip tenants and lease durations of 10-15 years offer an interesting alternative for investors whol would normally only invest in liquie and safe assets. Depending on location, this could yield 5.0-5.5%.

"For most of the logistics property market we see a slowing-down or an actual end to yield compression. Compared to the 4.0-4.5% prime yields available from retail or office investments, institutional investors still expect a yield spread of between 160 and 200 basis points", said Hollung.

There are still many attractive investment opportunities in Germany's about 20 established logistical centres, both in new-built and existing properties. In many micro-locations with attractive centrality, yields of 6.75% up to 8.50% are still possible.

According to Iryna Pylypchuk, director of global research at CBRE in London, the new hottest sector in Europe today is the industrial and logistics segment. She expects the sector to rally open up from later this year, as actual investments are currently running at less than half of stated investor intentions.

Major investors such as Blackstone's Logicor platform have been prolific logistics buyers already this year across Europe, spending more than €1bn in the first half before partnering with Norway's Obligo Investment Management to buy a €3bn European portfolio in an off-market deal, of which a third was logistics.

New arrivals from Asia are also stirring up the market. Singapore's GIC wealth fund set up a €300m joint venture with Exeter Property Group to invest in logistics assets throughout Europe. GIC and its UK partner believe that demand for logistics space at key distribution hubs will increase in the long term due to the growing trend of e-commerce, supply chain reorganisation and the increased use of third-party logistics providers.

Malaysian sovereign wealth fund Employees Provident Fund (EPF) plans to invest a further €1bn in German logistics assets through its European division Kwas over the next three years in partnership with German firm Dietz. This comes on top of last year's €500m partnership with Goodman, called Kwasa Goodman Germany (KGG), which has already bought €215m in German assets.