Germany, the fifth-largest ecommerce market in the world, has the highest rate of returns on deliveries in Europe - by a long shot. A recent estimate by research group Bitkom put the rate of returns at nearly 12% - rising to nearly 20% by the under-30s - encouraged by strong consumer protection laws and a high rate of payment by invoice, in contrast to neighbouring countries where credit card penetration and some form of digital payment is more advanced.
This creates a headache for online retailers. But it is a boon for the providers of logistics capacity, who have to deal with the burgeoning volume of packages now being shipped to and from a growing number of online customers. While returns are a phenomenon everywhere, German consumer behaviour is particularly encouraged by conservative payment methods and a strong mail order tradition, where payment usually takes place after delivery. It's easier to return goods that haven't yet been paid for.
While many innovative strategies are being tested across Europe to handle the cost of these returns, one thing seems certain. Additional logistics space will be critical to the overall management of retailers' omnichannel strategies as they struggle to recover after the COVID pandemic.
Logistics is booming, for investors as well as users. Investment volume in German in German logistics assets in the first quarter was nearly €2bn, up 51% on its 10-year average. It would have been higher, if more assets had been available to buy. German buyers, particularly Spezialfonds, have been to the fore with more than half of purchases, pushing initial yields down to 3.35%. Foreign investors, though keen, are being squeezed out by the locals.
Rental turnover in the first quarter in Germany was 1.8m sqm, up 20% on last year, leading to a rise in top rents in the key logistics centres, with Cologne rents up 7%, followed by Frankfurt and Düsseldorf at 6%. But even average rents have risen by 2%, with logistics providers seeing no let-up in demand through the end of the year.
Nearly all logistics real estate companies have benefited from the surge in ecommerce from 15% to about 25% of overall retail sales since before the pandemic. Logistics giant Prologis recently said it expects ecommerce worldwide to grow by about 150 bps annually, creating additional warehouse demand of at least 11.6m sqm in the US and Europe each year till 2025. That's a lot of extra capacity.
Where's this all going to be built? The demand for brownfield sites, close to population centres and last-mile delivery options, is going through the roof. Finding suitable assets is the problem, it's certainly not financing. Banks are walking over each other to get their hands on logistics financing, and are prepared to slash their margins to get a piece of the action. Loan pricing of below 200 basis points for high-quality assets are no rarity, a far cry from traditional price levels for logistics assets.
In truth, banks are now seeing little difference between financing a Class-A office building in Frankfurt or other major business centres, and a brand-new logistics facility let to a blue-chip tenant 25km away, as these are now trading at similar investment yields.
As well they might. The future for office valuations is looking grim, despite what the optimists say about us returning to the office once we've all been vaccinated, and that the working-from-home phenomenon was nothing more than a passing fad. In REFIRE's view, the arguments about the increased need for chilling-out space and special rooms for brainstorming are pie-in-the-sky, at best. To paraphrase Buffett, when those 10-year office leases come up for renewal, we'll soon see who's been fantasising about the enhanced creativity of employees with too much space on their hands.
Prices haven't fallen yet, because there are simply too few transactions for buyers and sellers to draw meaningful conclusions. But the omens do not augur well. The IMF estimates that a 5% rise in vacancy in commercial property would cause a fall in valuations of 15% over five years. Rating agency Fitch sees a fall in values of over a half if workers don't commute at least three days a week. Fellow rating agency Moody's predicts a fifth of all offices will be empty by 2022. That doesn't sound to us to be too far-fetched, given our recent ramblings around the ghost cities that were Germany's bustling CBD's not so long ago.
There are plenty of good buildings - modern, airy and spacious - that will thrive in the coming years as the best firms vie for the best space and the best talent. But there are a lot of older, less ventilated, and altogether grottier office buildings whose future is tenuous, and where the cost of upgrading or improving them might be prohibitive. Many, particularly those 20 years or older, threaten to become stranded assets. The investors who've been piling into office property of any sort for years in this low-interest era are looking at a stream of write-downs on these unloved properties over the coming years. Sad, but true.
In some obvious cases, the move is on to convert ill-fated office space to other uses, such as apartments. It's not easy, given Germany's restrictive building laws, but it is happening. Inner-city department stores and car-parking centres are also dabbling in local logistics, given their ideal locations. Obviously the scope is limited, given the shape and size of office buildings, but in Japan many logistic properties are multi-storey, which Europeans aren't used to. Can we learn something from Japan?
Hamid Moghadam, Prologis' founder and CEO, likes to joke that his company hasn't had a new idea in more than twenty years. It hasn't had to, he says, it just had to position itself to support the emerging giants of ecommerce, such as Amazon and Home Depot.
That's arguably a more straighforward challenge than figuring out what do will all the empty office space that will be dribbling on to the market in the next few years.
