By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Sector is finding favour as it proves to be crisis-resistant
It was a sluggish year for German real estate in 2022 but for some asset classes, such as logistics, it is full-steam ahead.
This month (December), LIP Invest, a logistics fund manager in Germany, acquired a new logistics building in Giengen an der Brenz for one of its funds, which was developed by Panattoni. Goldbeck International acted as general contractor. LIP was supported in the off-market deal by Ashurst LLP, tax-wise by Ebner Stolz and in the ESG due diligence by ES EnviroSustain.
‘With its direct location near the A7 motorway, Giengen offers good supra-regional connections,’ said Bodo Hollung, partner and managing director of LIP Invest. ‘This has already attracted well-known companies such as Amazon and Tesla, which have settled in the immediate vicinity of our purchased logistics property. Neighbouring cities such as Ulm, Stuttgart or Munich can be reached quickly from the location. In combination with the many transshipment possibilities, this makes Giengen an attractive starting point for various logistics services.’
Logistics continues to weather Germany’s economic downturn relatively unscathed. The growth from the first half of 2022 was continued in the third quarter, with the transaction volume rising to €7.6 billion, an increase of 16 % y-on-y and more than ever before in the first nine months of a year. However, a look at the third quarter shows that momentum is now slowing. At €2 billion, investment in the second quarter was exceeded (€1.7 billion), albeit behind the previous year's quarter (€2.7 billion), according to JLL.
Last November, a European logistics fund managed by Savills Investment Management acquired a fully-let logistics complex in Verden, Lower Saxony from Panattoni for an undisclosed amount for its European Logistics Fund 3 (ELF 3). The asset comprises 59,000 sqm of warehouse space, 3,700 sqm of offices and 4,000 sqm of mezzanine space.
Interest rates continue to put pressure on pricing
However, the very real threat of a recession and the significant increase in financing costs are causing prime yields for logistics and industrial properties to shoot up. Having already risen by 15 basis points in the second quarter, they climbed by a further 30 basis points in the third quarter. In Munich, Frankfurt and Hamburg, the prime yield at the end of the third quarter stood at 3.4%; in Berlin, Düsseldorf, Cologne and Stuttgart, it was 3.45%: ‘Analogous to rising interest rates, we are already seeing higher yields on current projects,’ said Diana Schumann, co-head of Industrial Investment JLL Germany. ‘With another rate hike, it could head towards 3.75% by the end of the year.’
Such uncertainty is also starting to have an impact on pricing, according to Dominic Thoma, co-head of Industrial Investment JLL Germany: ‘The interest rate is putting pressure on pricing,’ he warned. ‘Many investors are currently still cautious or conservative in their purchase price offers until a new price level has emerged. Nevertheless, there are currently still enough investors who are willing to buy. The problem here is rather the fluctuations in the interest rate market, which force investors to constantly adjust their calculations. This makes it difficult for the contracting parties to reach an agreement and drags out the processes immensely. On the other hand, there are investors with large shopping baskets to be filled with logistics properties. So the record mark from the previous year of around €10 billion could still be cracked.’
Logistics, along with student housing and city centre offices, is one of the most important sectors in which investors intend to invest over the next twelve months, according to a Savills survey last November, which asked selected real estate investors with total AUM of more than €500 billion in Europe and the Middle East about their current investment sentiment.
Germany and France are attractive investment targets, with 76% of respondents saying they plan to become active there within the next twelve months. The Netherlands, the UK and Spain were also mentioned as interesting investment locations. Berlin, Frankfurt, London, Madrid and Paris provide particular investment incentives for investors in the countries.
‘In view of the structural changes in other segments, many investors are focusing on logistics and residential,’ said Marcus Lemli, CEO of Savills Germany and head of Investment Europe. ‘However, we continue to see interest in high-quality office space, particularly in city centre locations - demand for space could receive a boost in the future due to user demands for more quality and sustainability. Some investors are anticipating this, especially as the shortage in the prime segment could become even more acute due to foreseeable subdued construction activity.’
Rents going through the roof
As demand rockets, top rents for logistics space are going through the roof, soaring by up to 34% in some locations last year: ‘Just a few years ago, the asset class was considered by many investors to be the one that would be hit hardest by an economic downturn,’ said Andreas Rehberg, spokesman for the commercial real estate network German Property Partners (GPP). ‘Now, however, with the economy going through several crises at the same time, market indicators in this segment are positive in key areas.’
The development of prime rents, property prices and prime yields in the top seven locations in Germany was analysed by GPP affiliates Anteon Immobilien, E&G Real Estate, Greif & Contzen Immobilien and Grossmann & Berger (G&B). The study reported that the driving factors are the steadily increasing importance of e-mobility and online retail, the return to warehousing due to disrupted supply chains, and further restructuring in the industry. Particularly around Stuttgart and Düsseldorf, demand for space is at a very high level. In Cologne it is rather moderate, but still exceeds supply.
By the end of the first half of 2022, top rents had shot up. Cologne recorded the most significant increase of more than a third (+34%) compared to the previous year to €8.00/sqm per month. In Hamburg (+15% to €7.50/sqm) and Düsseldorf (+14% to €7.30 /sqm), the increase was also in double figures. In all of the Top 7 core city areas, the top rent is now over €7 per sqm. The highest rents are paid by industrial and logistics companies in Munich, currently up to €8.60/sqm, according to CBRE.
‘In view of the emerging market environment in the coming year, further increases in prime rents can generally be expected,’ said Sarina Schekahn, head of Industrial Leasing JLL Germany.
Take-up hits new high
There were around 6.68 million sqm of logistics and warehouse take up in Germany in the first nine months of 2022, according to JLL, surpassing the previous high of 6.11 million sqm and the five-year average by 25%.
In Berlin, Düsseldorf, Frankfurt, Hamburg and Munich, take-up in the first three quarters was around 1.95 million sqm, also setting a new record. The corresponding figure for the previous year was exceeded by 8% and the five-year average by as much as 27%, according to JLL. Between January to September, more warehouse space was completed in the Big Five than in the same period last year, with around 930,000 sqm, but only 4% of this space was still available at the time of completion: ‘This shows the continuing demand for modern logistics space with a prospectively tighter supply, as construction space on the one hand and new developments on the other are decreasing,’ Schekahn said.
However, this year (2023), momentum is likely to drop off, as evidenced by activity from the third quarter onwards last year, which saw 1.87 million sqm of take-up, compared to 2.39 million sqm in the first quarter and 2.42 million sqm in the second quarter: ‘The decline is due on the one hand to the low availability of space in many regions, but on the other hand also to the fact that many project developers have to re-
evaluate their planned projects in view of the sharp rise in construction costs and the current economic development, which is difficult to assess and they are taking a wait-and-see approach for the time being,’ Schekahn said.
The region with the highest turnover in the first three quarters was once again Berlin with 939,000 sqm. Even without the Tesla deal, which was included in the statistics in the first quarter when planning permission was granted for 327,000 sqm, the region takes the top spot with 612,000 sqm. Hamburg (377,000 sqm) and Frankfurt (271,000 sqm) are significantly lower. The Munich region also fell short of the previous year's result (down 10%), while the Düsseldorf region recorded a plus of 22%, according to JLL.
Predictably, the average vacancy rate for logistics properties in Europe has reached a new historic low. According to CBRE, it was just under 2.3% at the end of the third quarter of 2022, which corresponds to a decline of 0.5% compared to the previous year. At 6.4 million sqm, Germany accounted for about one third of the take-up in Europe.
