International investors dominate the logistics market
- Transaction volume at €5.8 billion at the end of the third quarter
- Large-scale portfolio transactions determine investment activity
- Prime yields for core properties continue to slip – now at 4.50 percent
The interest of domestic and international investors in the German warehouse and logistics segment continues to run high. Investment in German logistics properties stood at €5.8 billion at the end of the first three quarters of 2017. This is the conclusion drawn in a current analysis prepared by the integrated commercial real estate services company CBRE.
In the first nine months, market activity in the logistics property market was determined by large-scale portfolio transactions and platform takeovers, which more than doubled the very good year-earlier result (growth of 103 percent). A good 15 percent of the overall investment volume, up six percentage points in a year-on-year comparison, was channeled into the warehouse/logistics asset class.
This is fresh proof of the growing importance of the German warehouse and logistics investment market as an alternative asset class, alongside the asset classes of office and retail. At the same time, it underscores the position of Germany as one of the world’s leading production and export nations. However, changes in consumer habits and the resulting realigned value chain in response to the steady expansion of online trading also require new logistics concepts and therefore also modern logistics properties.
Another reason for the strong demand at present for logistics real estate is the currently very low interest rate level which, even given conservative loan-to-value ratios, enables cash-on-cash returns in the high single-digit range, even with core properties.
International investors dominate market activity
The brisk investment activity was dominated by large-scale portfolio sales of foreign investors. Compared with the previous year, they stepped up their involvement in the German logistics investment market by around 22 percentage points to over 70 percent. All in all, international investors allocated €4.1 billion, reflecting an increase of €2.7 billion which is almost two thirds more than a year ago. Boosted especially by the takeover of the Logicor logistics platform by the sovereign wealth fund China Investment Corporation, Asian players committed funds of €2.5 billion and accounted for 43 percent of the entire logistics investment volume. International investors generally proved active in the context of large-scale portfolio transactions, which brought their portfolio share to 91 percent. On the seller side, US American and British market participants predominated, mainly through the sale of Blackstone’s European logistics platform. With sales of €2.6 billion and €1.6 billion respectively, they contributed 44 and 27 percent to the overall logistics investment volume.
Open-ended funds and special funds as the strongest net buyer group
Cash-rich asset and fund managers (€2.9 billion) as well as the group of open-ended funds and special funds allocated most of their capital to the German warehouse and logistics real estate segment. At the same time, the latter also constituted the strongest net buyer group in the first nine months. They acquired properties worth €1.5 billion and disposed of real estate worth €73 million. Open-ended funds and special funds were also the strongest buyer group of property developments. Around €370 million, which accounted for almost one quarter of their allocated investment volume, went into funding new building projects (up €264 million compared with the previous year’s figure). “Here open-ended funds and special funds are increasingly concentrating on contemporary investment properties with long-term rental agreements as a secure investment and prompted by the logistics segment’s good growth prospects,” Linsin says.
Persistently strong demand driving yield compression
Huge demand and the ongoing shortage of premium property caused net initial yields to fall by a further 25 basis points compared with the previous quarter. The yield for logistics properties with modern fit-outs and let long term now stands at 4.50 percent. “This is a trend which we are also seeing in the prosperous secondary market remote from the established top logistics markets of Berlin, Düsseldorf, Frankfurt, Hamburg and Munich. The lack of available core products in the top locations is progressively redirecting investor focus towards interesting investment opportunities outside the Top 5,” Oulds comments. Substantial yield declines due to high demand, accompanied by increasingly short supply, driven in particular by the growing importance of e-commerce, are also evident in the segment of cross-docks and inner-city logistics solutions. Prime yields of 4.50 percent are commanded for first-rate core investments in cross-docking-facilities. In respect of corporate real estate and light industrial properties, net initial yields are still running at 6.50 percent, thus unchanged compared with the year-earlier figure. “This segment is increasingly catching the attention of domestic and international investors, which leads us to believe that yields will decline in the coming quarters due to higher risk tolerance,” Oulds says.
Forecast: dynamic year-end rally anticipated
The strong demand for German warehouse and logistics property is expected to hold steady in the final quarter of the year. “The German market is moving increasingly into the focus of institutional investors who are setting up specialized investment vehicles for this purpose,” Linsin says. “As before, we are seeing the growing importance of online retail, which will generate sustained demand for both large-scale and also smaller distribution centers.”
“The unabated run on German logistics real estate may only be halted by a shortage in supply, which would then prevent even stronger investment momentum. We nevertheless anticipate an investment volume of up to seven billion euros through the realization of a number of projects which are at the selling stage,” Oulds says. The former record volume of almost €4.5 billion from the record year of 2016 had already been reached by the second quarter of the current year.
Industrial & logistics transaction volume in Germany
* only annual figures available
Source: CBRE Research, Q3 2017
Kai F. Oulds
Head of Logistics Investment
+49 (0)69 17 00 77 33
Dr. Jan Linsin
Head of Research Germany
+49 (0)69 17 00 77 663
+49 (0)69 17 00 77 165
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide.
CBRE offers a broad range of integrated services for the entire lifecycle of a property, from strategic and technical advice such as in sales and acquisitions or renting and letting, to managing and valuing properties to portfolio, transaction, project and facility management. CBRE offers individual advice for all asset classes from a single source.
Since 1973, CBRE Germany has been represented by its head office in Frankfurt am Main; there are further branch offices in Berlin, Düsseldorf, Essen, Hamburg, Cologne, Munich, Nuremberg and Stuttgart.