Eastern and western Europe are becoming a single, homogeneous industrial and logistics market as yields converge, leases become more flexible and distribution networks expand
Logistics and industrial property used to labour under the Cinderella soubriquet. Not any more. The kind of yield compression that occurred in European retail and office property may have taken a little longer to spread to logistics, but once it gathered momentum it happened in a much shorter time than in other property sectors.
Yields in the Ile de France area, for example, dropped from 8% to 6.5% over the past 18 to 24 months. And central European yields have been converging with western levels over the past six to nine months.
The sector also has all the characteristics of a pan-European investment natural, in terms of homogeneity of both product and tenant covenant. More portfolio deals are coming to the market, lessening investors’ purchasing costs when building up their asset base.
A whole range of investors are competing to buy logistics and industrial property. Most acquisitions are being made by specialist funds, but there is also a range of wealthy individuals looking for assets. Some of the braver players, such as Raven Russia, are trailblazing beyond eastern Europe and into countries such as Russia and Ukraine.
The main factor affecting European supply chains is the economic growth of central and eastern Europe as a strategic location bridging eastern and western markets. The expansion of the European market means many companies now have a larger distribution area to cover. But rather than moving distribution centres from west to east in anticipation of a demand shift eastwards, they are adding more regional centres in central and eastern Europe.
Meanwhile, ports are handling a lot more goods. According to EU statistics body Eurostat, the gross weight of goods handled in all European ports rose 17% between 2001 and 2004, with the highest growth rate in Romania at 47%, Slovenia (32%) and Greece (29%). Savills reports that property investors and developers are competing for warehouse opportunities near seaports and estimates that less than 20% of facilities around ports worldwide are modern and of high specification.
Flexible landlords have the edge
Occupiers are increasingly choosing to lease warehouse space, while lease contracts are tending to shorten. In future, landlords will have to offer more flexible leasing structures to gain a competitive edge in the market.
Logistics outsourcing is becoming more attractive to businesses because of consolidation among logistics service providers, which is leading to fiercer competition among global players.
Another effect of consolidation is a growing specialisation of logistics service providers, which are concentrating on niche areas such as food and beverages, high-tech industries, electronics and life sciences. Being able to provide the same standard of property and related services across Europe will make logistics service providers more valuable as long-term partners for specific industries.
Developers are going to have to provide high-quality space with a versatile layout, as well as more property that can accommodate an increased use of cross-docking distribution methods. The biggest facilities will mostly be bespoke developments tailored to specific end users.
For investors wishing to establish a presence in western Europe, control of land is crucial. Availability differs widely in the region, with land being most scarce in the UK, while in Germany, former military and industrial sites are coming to the market.
