European logistics sector ‘has not reached its peak yet’
You ain’t seen nothing yet: the European logistics sector grew strongly last year, with huge platform transactions and massive interest from overseas investors, but it has not reached its peak. There is a lot more positive news to come, experts agreed at the PropertyEU European Logistics Investment Outlook 2020 briefing, which was held at MIPIM this month.
‘We are beyond being a hot sector, that was last year’s headline,’ said Logan Smith, head of Logistics – International Investment Group, BNP Paribas Real Estate. ‘After so much movement in the sector, the question this year is what comes next.’
The answer is development and rental growth, which for once are not mutually exclusive because demand is so high. ‘The consequence of all this movement is that pricing is above replacement cost, which is leading to good development,’ said Smith. ‘But this year there is a lot of tenant demand and 80% of spec projects are leased before completion. Show me another sector there this is anywhere close to the case.’
Room for growth and development
Europe still has only one-third of the logistics space per capita that North America has, so there is room for growth, and conditions are perfect for development. ‘There is a lot of healthy competition in the sector now and many developers that are well-funded because they have access to inexpensive money,’ said Ian Worboys, CEO, P3 Logistic Parks.
This is positive for tenants, said Worboys: ‘Although we see rents rising, they are rising less quickly than they would have done if this wave of money had not been there to support all the developers and investors out there.’
Despite all the development that is going on, demand is increasing at a faster rate than supply, which is leading to rental growth for the first time since Logistics became an asset class.
‘After 15 years of flatlining, in the last 12 months we have seen rental growth because of the demand/supply imbalance,’ said Rémy Vertupier, fund manager Logistis, AEW. ‘I believe yield compression will slow down, land values are increasing everywhere and construction costs are up 15% on last year, so all these factors create rental growth.’
Global investors assessing the European market see the strong fundamentals and are keen to have an exposure to the sector, which means that there is no problem with liquidity.
‘On top of capital appreciation coming from yield compression we have capital appreciation coming from rental growth,’ said Vertupier. ‘You get fully let buildings with no capex. No wonder investors are interested in logistics.’
Not just e-commerce
E-commerce is a big driver of investment, as it represents around 8-9% of purchases in Europe but that percentage is expected to double, increasing demand for warehouses. But it is by no means the whole story, said Pierre-David Baylac, head of logistics, CBRE Global Investors: ‘E-commerce is still a small part of what is happening in warehouses, because a big chunk is still traditional retail, which is re-organising its supply chain.’
Looking ahead, there are two reasons why logistics will outperform, said Smith: ‘One is that there is still demand, and the other is that there is still a lot of money coming out of other asset classes and looking to get into this space.’
The market has expanded, changed and become more competitive but there is more growth to come. ‘There are still opportunities out there, it is still a booming market.’ said Worboys. ‘My bet is that this time next year we will be sitting here with big smiles on our faces.’