King Sturges new European Logistics and Industrial Markets research highlights the recovery underway across Europe's major logistics and industrial markets.
The report provides an assessment of relevant macro economic trends and logistics and supply chain management dynamics, and includes commentary and analysis of 13 country markets namely: Belgium, Bulgaria, Croatia, the Czech Republic, France, Germany, Hungary, Poland, Romania, Serbia, the Slovak Republic, Turkey and the UK.
Based on this, the report concludes that:- Improving macro economics and changes in logistics and supply chain management will support occupier demand for logistics facilities over the medium-term.
Occupier markets are recovering with demand levels increasing and availability falling.
Prime logistics assets offer investors good defensive attributes in the short-term and are underpinned by robust fundaments in the long-term. Industrial estates which are well located in strong industrial areas also offer good performance potential.
Occupier demand for logistics is being driven by positive macro economics and changes in supply chain management Across Europe, occupier demand for logistics and industrial premises started to recover last year after its collapse in 2009, following the sharp decline in manufacturing output and world trade in the wake of the credit crunch.
The upturn is demand is being driven by a revival in real economic activity. In particular, global GDP growth has picked up, world trade growth has gathered momentum and manufacturing output has turned around. In Europe, Germany, in particular, has experienced a strong rebound in economic activity, led by exports from its large manufacturing sector Whilst European domestic demand remains more subdued, the economic recovery has continued into 2011. Business confidence across Europe is also increasing, particularly in the export-orientated sectors and forecasts suggest a steady improvement in real economic activity across Europe.
In addition, changes in the way companies organise their logistics and supply chains will continue to be an important driver of property demand.
King Sturge Research Partner, Jon Sleeman said: "Companies are continually reassessing their supply chains to improve their performance and reduce costs, and the development of efficient warehouse networks is a key component of this."
"Key supply chain changes include the continuing centralisation of retail distribution, the reconfiguration of inbound supply chains, the growth of dedicated e-fulfilment operations and the growth of „reverse logistics, which requires facilities to handle returns, packaging and waste."
"In addition, mergers and acquisitions between companies typically lead to the re-alignment of supply chains and warehouse networks."
Occupier markets are recovering Whilst economies generally have been improving, occupier demand across Europe is recovering at different speeds
While take-up generally rose last year this was from a very low base in 2009. In addition, some of the demand last year was driven by opportunistic deals, with occupiers taking advantage of very competitive terms to acquire new facilities, or to renegotiate leases on existing ones.
On the supply side, the recession caused a near moratorium on speculative development as major developers focussed on de-leveraging and leasing their vacant portfolios. Where new facilities were developed this was almost exclusively on a build to suit basis.
As the availability of prime new logistics space has gradually diminished, due to the combination of take-up and very limited replenishment, overall levels of vacancy appear to have stabilised.
Whilst patterns vary between countries and markets, much of the second-hand warehouse availability in many countries is poor quality, and unsuited to efficient logistics operations and, therefore, not competitive with new supply.
Over the past two years, headline rents fell and tenants have additionally been able to secure significant inducements, such as extended rent free periods and capitals contributions.
Looking forward, King Sturge European Research Associate, Alexander Colpaert said that:
"We expect market demand and supply to become more balanced and shortages of new and good quality logistics stock will emerge in some locations this year."
"Developers will continue to focus on build to suit developments, although some may promote speculative developments in well established core logistics markets, especially on sites where they have already secured sizeable pre-lets."
"Rental levels on existing schemes should stabilise and inducements to tenants will reduce."A two-tier rental market will emerge with rents on build to suit facilities being typically higher than those prevailing on existing developments, reflecting build costs and development values."
Investor demand in the industrial sector picked up considerably in 2010. Some €10.7bn was transacted in the industrial market across Europe in 2010, 55% up on 2009, according to RCA.
Investor interest was strongest in the UK, France and Germany, which together accounted for just over 65% of the total 2010 volume.
Investor demand has remained focused on prime, long let assets with strong covenants.
However, there remains good investor demand for good secondary assets in sustainable locations, although the availability of debt remains a severe constraint on activity.
However, poorer quality secondary assets have attracted very little interest.
Reflecting investor demand, prime logistics industrial yields saw considerable compression over the year, particularly in the core Western European markets of the UK, France and Germany.
In Central Europe, prime yields saw some downward movement in the second half of 2010. For example, prime logistics yields in Warsaw, Prague and Bratislava fell by 25, 50 and 75 basis points respectively over the year to stand at 8.25% at the year-end. Over the year the gap between prime yields and poorer quality secondary yields increased significantly as demand for
secondary assets increased more slowly than for prime assets.
Looking forward, Alexander Colpaert expressed his view that:
"Prime industrial yields will remain fairly stable in the short-term in most Western European markets but certain Central and Eastern European markets could see further downward yield movement, given the strong levels of investor demand and lower perceptions of risk.