AEW, a leading real estate investment and asset manager, has published its latest research report on the logistics property market.
Commenting on the report, Ken Baccam, Director, Research & Strategy Europe at AEW, said: “In 2022, logistics was the quickest sector to re-price, losing an average of 14 percent of value across all European markets. The 55 percent appreciation in value the four preceding years, the highest of any sector, offset this loss in 2022 for most investors, and we forecast that logistics values have nearly bottomed out, with a small further decline expected for this year.”
“Whilst European logistics leasing activity has continued at a slightly slower pace, prime rents have remained robust and we expect to take up to strengthen as the economy improves, supply chains start to normalise, and e-commerce penetration rebounds, having decreased slightly in the UK.”
Hans Vrensen, Managing Director, Head of Research & Strategy Europe at AEW, added: “Based on our latest base case forecasts, we project total returns for logistics markets across Europe will be at 8.2 percent p.a. for the next five years. This is a significant improvement of 290 bps from our previous September 2022 base case. In turn, that is driven by faster-than-expected re-pricing, our improved rental growth outlook and projected yield tightening as inflation and bond yields are expected to normalise.
“In our relative value classification, logistics is the best-positioned sector in European real estate, with the highest proportion of attractive and neutral markets of any sector. The Nordics and Benelux regions have the highest proportion of attractive logistics markets. On a city level, the UK regional logistics and light industrial markets are well represented in the attractive category, followed by Paris light industrial as well as Oslo and Amsterdam logistics.”
While the macroeconomic outlook is expected to improve by 2024, the overall slowdown in retail sales volumes and weak economic sentiment have negatively impacted the logistics occupier demand in the short term.
Separately, government bond yields are projected to peak at 3.5% in Q3-Q4 2023 before gradually declining to 2.5% by 2027, in our base case. This is expected to push prime logistics yields back down by 2027, normalizing the excess spread between bond and property yields.
European logistics leasing activity continues albeit at a slower pace as costs take centre stage and Q1 2023 take-up declined by 44% y-o-y. Many occupiers are maintaining their current footprints for now. Take-up is expected to recover as the economy improves and manufacturing and shipping revert to long-term growth and e-commerce penetration rebounds.
With weaker take-up in the short term and existing pipeline projects coming online, the average vacancy rate is expected to increase a little bit but remain well below 4% and come down after 2024 as new construction slows down.
Despite the rising vacancy rate, growth in prime rents has remained robust. Our logistics rental growth forecasts (2023-2027) remained the best across sectors and have stepped up from 2.5% p.a. in our previous Sep-22 base case projections to 3.0% p.a.
In 2022, logistics was the quickest sector to re-price, losing an average of 14% of value across all of the European logistics markets. Most investors offset this 2022 loss by a 55% appreciation in the four preceding years, the highest of any sector.
Logistics values have nearly bottomed out with only a 3% further value decline projected in 2023. After this significant 2022-2023 repricing, logistics prime property yields are expected to peak at 5.1% in 2024 and gradually narrow to 4.7% by 2027.
The 2022-2023 repricing triggered a reduced excess yield spread between logistics and government bonds. We expect this excess spread to return to positive levels and stabilize by 2027 at 2.3%, still below the 4% average 2017-21 spread.
As rents improve and yields are projected to tighten, total returns for logistics markets across Europe are estimated to improve to 8.2% p.a. for the next five years according to our Mar-23 base case. This is up 290 bps from our Sep-22 base case.
Hence, in our relative value classification, logistics has the highest proportion of attractive and neutral markets of any sector in Europe. 33% of logistics markets are classified as attractive, 64% as neutral and 3% as less attractive in our base case scenario.
The Nordics and Benelux regions have the highest proportion of attractive logistics markets. Half of the Southern European markets are classified as attractive. In the UK, France and the rest of Europe, most of the markets are classified as neutral, with the remainder as attractive. CEE is the only region with a single market (Budapest) that is classified as less attractive.
On a city level, UK regional logistics and light industrial markets are well represented in the attractive category, followed by Paris light industrial as well as Oslo and Amsterdam logistics.
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