Although the European industrial sector has enjoyed stellar performance in terms of both rental growth and total returns, one asset manager says investors are now being more selective after a run of yield compression.
DWS Group, the Germany-headquartered asset manager, has voiced what many are expressing privately in their day-to-day jobs when working on logistics transactions.
In its latest research, DWS recounts how European logistics take-up reached its highest ever level over 2021, eroding vacancy rates to record lows and placing upward pressure on rental levels. Rental growth has been strongest in urban locations, averaging close to 4% per annum over the last decade, compared to 3.1% and 2.3% for residential and office, respectively.
Investor demand for European logistics has never been greater. Investment volumes reached a new high in 2021 and the sector accounted for circa 20% of total European real estate investment, a proportion typically closer to 12%.
However, while the company’s outlook for the sector is that logistics will remain solid in the short term, at current pricing parts of the logistics sector now look ‘fully valued’.
‘In addition, we see growing risks to future performance and are therefore increasingly cautious around certain parts of the sector.’
‘Logistics yields are now so low that at current pricing we find that some investors are having to underwrite exceptionally strong future rental growth to meet return targets. Whilst we expect continued elevated rates of rental growth over the next five years, it is unlikely very high level of growth can be sustained over the longer term, particularly in corridor logistics where we see short and long-term risks to supply.'
'However, urban logistics in supply-constrained markets will likely continue to outperform and we also see opportunities for outperformance in niche segments such as cold storage.’
DWS’ position chimes with caution being showed within the listed sector. The Financial Times reported on 3 May how the UK’s largest listed warehouse operators, Segro and Tritax Big Box, saw shares fall 7- 8 % and global leader, Prologis, plunged more than 10% in the wake of a profit warning from Amazon. ‘Fears that the Amazon-propelled boom in ecommerce is running out of steam have wiped billions off the value of the world’s biggest warehouse owners,’ reported the Financial Times.
In March, PropertyEU reported how Amazon’s global logistics costs had gone up 1307% to $151.8 bn (€136.3 bn) in the past 10 years, and that Amazon CFO, Brian Olsavky, said in a Q4 earnings update that the company would taper some of the capital investment earmarked to expand fulfilment capacity.
