Global investors showed great enthusiasm for German warehouse and logistics properties in 2014, and there is every reason to expect this lively dynamic to persist in the year ahead, fueled by favorable macroeconomic trends and the rising significance of e-commerce.
Investment in German warehouse and logistics real estate reached €3.3bn in 2014. A particularly strong fourth quarter contributed €1bn to this extraordinary result, representing a quarter-on-quarter volume increase of approximately 74%, with the first three quarters having been already very good. After Q1 2014’s €1.3bn, the Q4 result was the second best quarterly result of the past four years.
The attractiveness of warehouse and logistics properties as investment products is particularly striking when compared with other commercial asset classes. After office and retail properties, logistics properties are the third most sought-after asset class, accounting for 8.4% of the overall investment volume. Compared to 2013, logistics properties’ share of the total volume increased by 1.3 percentage points. The trend is boosted in particular by the success of e-commerce and by increasing competition among institutional investors meaning to expand their real estate ratio by raising their allocation to German logistics assets. Moreover, Germany is a strongly export driven country and its logistics sector promises more attractive rates of return than office or retail real estate.
Foreign Investors Dominating the Market
Foreign real estate investors accounted for 54% of the total transactions in the logistics sector during Q4. Their market share for the year was even higher, at 59%, reflecting commitments of nearly two billion euros. Compared to the previous year, this represents an increase of more than 10 percentage points. Their share was above average even when measured against their rate in the entire market, which stood at 47%. Nine of 2014’s ten largest deals were transacted by foreign investors. More than other overseas investors, players from the United Kingdom, the United States and Australia dominated the German logistics investment market in 2014, with a combined investment total of more than €1.5bn.
Exports Hit Record High in 2014
The popularity of the German logistics market among cross-border investors is explained, for one thing, by the country’s central location in Europe and by the highly export-driven nature of its economy. Despite the Ukraine crisis and the Ebola outbreak in Western Africa, German export sales registered record results in 2014. In total, Germany exported goods worth €1,133.6bn—3.7% more than the 2013 figure. Imports increased by 2%, to €916.5bn, surpassing the all-time record set in 2012. In particular, exports to European countries outside the eurozone, such as the UK and Poland, increased by more than 10% year-on-year. German exports to eurozone countries picked up as well (+2.7%), though their share of total exports has dropped by 8 percentage points, to 36.5%, over the past ten years. Meanwhile, American demand for German goods has strengthened. For 2015, exports are expected to increase by 4%, hitting a new record volume of around €1,172bn. Overall, Germany’s trade balance—the difference between exports and imports—developed positively, reaching €217bn in 2014 for an improvement of €21.7bn over 2007’s previous high.
Above-Average Result for the Letting Market
Another factor is that Germany is one of the world’s most industrialised countries, with a wide range of global market leaders. It has robust economic perspectives and a world-class infrastructure. In due consideration of the overall economic recovery and a positive outlook for the Eurozone, as well as ongoing geopolitical uncertainties, the German logistics sector ended the year with a much improved view on its business situation, compared to the autumn of 2014. In particular, commercial and industrial companies have revised their assessments upwards considerably. In agreement with this assessment, the letting markets for warehouse and logistics space in Germany’s 20 most important logistics centres have shown themselves to be robust. Take-up (including owneroccupations) of around 5.2 million square meters exceeded the 2013 result by 12% and the five-year average by 17%. Take-up volume in the five most important logistics markets (Berlin, Dusseldorf, Frankfurt/Rhine-Main, Hamburg and Munich) totalled 1.85 million square meters, the second best result of the past ten years. Year on year, the volume increased by around 10%.
Logistics Sector Investments Driven by e-Commerce
Over the past year, the various types of logistics properties have been subject to differentiated dynamics. The majority of the transaction volume of the fourth quarter involved distribution warehouses, matching the trend of the previous nine months. Over the year as a whole, distribution warehouses attracted the largest share of investment (71%), with a total of €2.4bn. Investors continued to show serious interest in the sub-category of distribution property—the so-called XXL logistics properties. Warehouses of this type, with a floor area of 50,000 square metres or more, attracted investment of nearly €857m. Moreover, light industrial properties’ share of investment experienced quarter-on-quarter growth of 5.7%, to 13.2% of 2014’s total transaction volume. There are indications of a somewhat heightened risk tolerance among investors, though in terms of site selection their investment focus remains on investment-grade property in good to excellent locations.
Asset and Fund Managers are Strongest Purchaser Group
The types of investors going for logistics properties remained as diverse as ever in Q4 2014. Each of the groupsactive in this market segment committed amounts in the hundreds of millions or more, impressively underpinning the trust investors place in logistics properties as an attractive asset class for diversifying risk. The strongest purchaser group in this sense included asset managers and fund managers, led by Blackstone’s portfolio acquisitions, which accounted for more than 50% of this group’s investments. Year on year, the amount invested by asset managers and fund managers tripled. The second-largest group of purchaser included institutional investors like insurance companies and open-ended property funds specialising in logistics properties, their growing prominence being reflected in a combined transaction volume of more than €745m. Compared to 2013, this equals an increase of 27%. Particularly noteworthy are the providers of closed-end funds—most of them backed by German institutional money—which invested more than €250m in logistics assets in 2014, ten times the volume of 2013.
Growing Risk Tolerance from Investors
The shortage of investment-grade property is exacerbated by the recent tendency among project developers to place the assets they develop in their own fund vehicles, rather than putting them on the market. Since the logistics industry offers a great outlook, given the signs for an economic recovery, and since logistics properties show a relatively high yield level compared to office and retail real estate, for instance, property investors are encouraged by a generally growing risk tolerance to step up their investments in more management-intensive, value-add products. They are even prepared to accept shorter lease terms on the tenant side.
Rising Share of Portfolio Deals
The share of portfolio deals rose to 50% over the course of 2014, up from a mere 32% in 2013. The large logistics portfolios were bought almost exclusively by foreign investors, who accounted for the overwhelming majority (85%) of the portfolio transaction total, demonstrating the popularity of warehouse and logistics property as a high-yield asset class for foreign players. One of the biggest portfolio deals of the year, with a nine-digit price tag, was the acquisition by Blackstone of a portfolio consisting of several central warehouses of food retailer Tengelmann.
Keen Demand Puts Pressure on Yields
Given the mismatch of enormous demand and short supply, especially in the core segment, the net prime yield declined by 25 basis points, to 6%. The same development was observed in secondary markets. However, compared to other countries, but also in comparison to traditional asset classes in Germany, the yield rate remains highly attractive and ensures a continued influx of investor capital into Germany’s logistics property market. Net prime yields for logistics assets marked by modern fit-out quality, located in established sites, and let on long-term leases continue to exceed the yield rates for prime assets in the office and retail property segments in Munich or Frankfurt, for example, by around 150 to 190 basis points. Due to the huge demand for logistics properties, further yield compression is expected, also beyond the core segment.
Dynamic Investment Market 2015
There is every reason to expect the lively dynamic of the German logistics investment market to persist in the year ahead, fueled by favorable macroeconomic trends and the rising significance of the online market. With this in mind, we expect transaction volumes to keep developing briskly in 2015, not least because we have noted an increased risk tolerance among investors, manifesting itself in a greater willingness to compromise, especially in regard to the length of lease terms. Due to the increasing importance of online retailing, the resulting depletion of greenfield plots, the restructuring of the supply chain, and the constraint recently imposed by the German government limiting the use of undeveloped land to 30 hectares per day until 2020, it can be expected that the quest for suitable logistics sites will intensify. Therefore, a rapid increase in the significance of brownfield and conversion areas can be anticipated throughout the year ahead. Indeed, an accelerating activity among project developers and increasing investments in industrial brownfield areas was noted in 2014.
By Dr. Jan Linsin, Senior Director, Head of Research Germany, CBRE.