COMMENT The logistics sector – long unloved, much underappreciated – seemed to have been having the last laugh over recent years. Once synonymous with “prime redevelopment opportunity”, industrial and logistics land had become the hottest ticket in town.
Little wonder, with JLL noting that European logistics take-up reached a record high of over 360.5m sq ft in 2021, up 35% on the previous year. Demand was robust across the board, with lettings above the five-year average in all key European countries. Vacancy had declined to less than 3%, with levels even tighter in key markets such as the UK, Germany and Belgium.
Capital flows were also at record levels, according to Real Capital Analytics, which tracked more than €120bn (£101.6bn) of European industrial transactions over the year to the first quarter of 2022. That is around 20% of total deal flow, double what it was a decade ago. That pushed the yield on industrial property below the other major property sectors, upsetting the perceived “natural order of things” and pricing the sector for near perfection, in the eyes of many.
Despite skittishness about pricing, it still seemed like the good times would keep on rolling as surely as the wheels of an Eddie Stobart HGV. But back in late April, the brakes came thundering on with an Amazon’s profit warning. That jack-knifed the industrial REIT sector, with billions wiped off the valuations of specialist listed industrial property companies like Tritax Big Box, Prologis and SEGRO in a matter of days.
Froth blown off
Yet, if you look at the share prices of those companies over the longer term, you get a far less dramatic impression – perhaps the froth being blown off a hot market while it reverts to a still highly favourable long-term trend?
The logistics sector’s long-term attractions remain numerous. Distilling the case to invest in logistics, the sector is underpinned by just three near-immutable long-term tailwinds.
Firstly, a lagging European but rapidly growing online retail penetration rate over the next decade and probably beyond.
Secondly, an intense and chronic low supply of modern logistics floor space – Europe has a fraction of the US stock levels.
Finally, the need for supply chain fortification and on-shoring in an increasingly less stable global geopolitical context of the war in Ukraine, China, Brexit and more.
Near-term pressure
Prime European logistics rents increased by nearly 5% per annum in 2021, but rising land prices and development costs have limited the ability of the development pipeline to respond. While the impeding economic slowdown means a softer near term for occupier markets, persistent reduced new development simply points to rising rents over the mid-term.
Yields for grade-A logistics assets in prime hubs might also potentially be subject to a little near-term upward pressure. Yet that is true for all investment assets classes, with central bankers keen to wrestle inflation under control via interest rate hikes – seemingly irrespective of the impact on growth in the wider economy.
The prospect of a release of some value in the sector only heightens Barings’ desire to continue to seek out suitable logistics investments and development opportunities with our partners across Europe.
Paul Stewart is managing director and head of Europe and Asia Pacific real estate research and strategy at Barings
