Despite slowdown towards the end of the year, logistics is proving remarkably resistant
By Sarah Seddon Kilbinger, Senior Reporter, REFIRE
Logistics continues to weather Germany’s economic downturn, ending 2022 on a record high. In total, more than €10 billion was invested in warehouses and distribution centres last year, an increase of 3% y-o-y, despite a slight slowdown towards the end of the year, according to BNP Paribas Real Estate.
Palmira Capital to launch 2 new logistics funds
One investor ramping up its exposure to logistics is Frankfurt-based logistics asset manager, Palmira Capital Partners, which will launch two new logistics funds in the second quarter of this year. ‘We’d like to invest as much as we can in logistics in Europe this year, likely around €400 million,’ Alexander Hoff, managing partner of Palmira Capital Partners told REFIRE. ‘We’re about to buy the first site for 3-4 projects which are due to be completed by the end of next year. We’re launching a follow-on Light Industrial fund with a target size of €300 million to €400 million. We’ve already got €500 of light industrial AUM across 3 vehicles. We’re also launching a new pan-European core logistics fund with a target cash-on-cash return of 5% and an IRR of 9% ish, which will have a target size of €500 million.’ The pan-European fund, which will have a lifespan of 8 to 10 years, will invest between 35% and 50% in Germany, with the rest spread across Austria, Poland, the Benelux countries and Spain, according to Hoff.
In December, Palmira Capital Partners acquired the fully leased Silesia East logistics park near Katowice in southern Poland in a further expansion of its portfolio there. The 32,000 square metre warehouse was purchased from a group of companies invested in Bluehouse Property Fund IV L.P. SIF-SICAV: ‘We are delighted to enlarge Palmira’s Polish portfolio with this acquisition, especially in such a challenging year. Further investments are on the way,’ said Aleksandra Bis, head of Palmira Asset Management Poland. The purchase price has not been disclosed.
Nevertheless, Hoff acknowledges that the market has shifted – and quickly: ‘Since we started with troubling inflation and the war in Ukraine, I’ve never seen the market correct itself at such speed,’ he said. ‘Yields went from 4% to around 5.5% in just 9 months. You can still find attractive investments, it’s the most adaptive asset class and demand is still high.’
Rainer Koepke, head of Industrial & Logistics at CBRE in Germany also remains bullish: ‘The fundamental dynamics of the German industrial and logistics property market continued to apply…strong demand for space is met with a barely existing vacancy rate and a limited supply of space.’
Logistics is second most popular asset class
Logistics take the number two spot in the asset class ranking for the second time in a row, ahead of retail (17%) but behind offices (41%), with a 19% share of turnover in the overall market, according to Christopher Raabe, managing director and head of Logistics & Industrial at BNP Paribas Real Estate.
Berlin is leading the pack, with €512 million of deals last year, followed by Frankfurt (€401 million), Munich (€301 million), Hamburg (€299 million) and Leipzig (€258 million), according to BNP Paribas Real Estate. With a combined share of just over 50% of the total, half of the investment volume is divided between two investor groups: spezialfonds, with a turnover share of almost 31%, are ahead of real estate corporations and REITs, with just under 20%. Investment and asset managers, real estate funds and project developers account for double-digit percentages (around 11% each).
‘Although demand can still be classified as high, the changed interest rate environment is also leaving its mark on logistics prime yields,’ Raabe said. As a result, the yield compression of the past years has been stopped and reversed into an increase in prime yields by 85 basis points year-on-year in each of the top markets.
Munich remains most expensive location for new buildings
According to the recently-issued and very useful REALOGIS rental price map, the region around the Bavarian capital Munich remained the most expensive logistics location for new buildings in Germany at the end of last year. Users had to pay a monthly top rent of €10.50 per sqm there for the first time, up from €8.50 per sqm at the beginning of 2022. The Munich metropolitan region was the first German market area to exceed the 10-euro mark for a square metre in this property segment.
Berlin follows with a gap of €2 per sqm in second place among the eight most important logistics locations (coming from €7.50 per sqm at the beginning of the year). Jointly ranked third are the regional market of Nuremberg as well as Stuttgart with €8.00 per sqm each (first quarter of 2022: €6.50 per sqm and €7.90 per sqm respectively).
"On average across the submarkets surveyed, prime rents rose by 14.9%, a clear upward trend," reports Christian Beran, REALOGIS managing director for northern and eastern Germany. He added: "In 23 markets, the increase was in the double-digit percentage range. In the eastern markets of Magdeburg, Halle, Leipzig, Zwickau, Erfurt and Dresden alone, the prime rent for new logistics buildings rose by an average of 22.2%. In a further seven markets it rose by single digits."
Institutional investors remain wary
However, the very real threat of a recession and the significant increase in financing costs are putting a dampener on the market: ‘Most institutional investors are risk-averse at the moment, they’re just sitting and waiting to see what happens,’ Hoff said. ‘Some pension funds already have quite a high allocation to real estate and aren’t able to invest more.’
Such uncertainty is also starting to have an impact on pricing. Fluctuations in the interest rate market are forcing investors to constantly adjust their calculations, which makes many of them nervous. It also makes it difficult for the contracting parties to reach an agreement and drags out the processes hugely.
Nonetheless, 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.
Prime rents in Top 5 rise by 10%
In 2022, the average prime rent in the Top 5 markets rose by 10% to €7.58 per square metre a month, according to CBRE. ‘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.’
Rents for new builds have also shot up, according to Kuno Neumeier, CEO of the Logivest Group, which is essentially a reflection of rising land and construction costs as well as higher interest rates. However, Koepke does not expect the burden on occupiers to be too severe, noting that rental costs are typically only 10% to 15% of their total cost.
There were around 6.68 million square metres 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 square metres and the five-year average by 25%. Demand from e-commerce companies was high in the first half of the year but dropped significantly in the second half. However, this decline was offset by demand from other retail companies.
In Berlin, Düsseldorf, Frankfurt, Hamburg and Munich, take-up in the first three quarters of 2022 was around 1.95 million square metres, 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 5 than in the same period last year, with around 930,000 square metres, but only 4% of this space was still available at the time of completion.
However, this year, momentum is likely to drop off, as evidenced by activity from the third quarter onwards last year, which saw 1.87 million square metres of take-up, compared to 2.39 million square metres in the first quarter and 2.42 million square metres 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.
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 square metres, Germany accounted for about one third of the take-up in Europe. ‘I expect the vacancy rate in Germany to stay the same this year,’ Palmira’s Hoff said. ‘The last 2% is so crappy, it’s almost 100% occupancy. The shift towards e-commerce is continuing, which means more need for logistics space. At the moment, high inflation isn’t having an impact but if it got a lot higher, we could see a massive impact.’
