European logistics begins to see shortage: Knight Frank

European logistics property markets are beginning to experience shortages of new supply, according to Knight Frank.

The property adviser's annual European Logistics & Industrial Market Report indicates a general improvement in both occupier and investment market conditions compared to 2010.

Increased manufacturing and export activity over the last twelve months - even though Europe's economic recovery remains fragile - has helped to strengthen the demand for logistics and industrial property. Prime rental levels have been supported by limited levels of new supply coming to the market, the report says.

After widespread falls during the economic downturn, prime logistics rents have remained essentially flat in many European markets since the start of 2010. Knight Frank's European weighted average prime logistics rent, calculated from rental levels in 17 key markets, fell by -14.8% during 2008-09 but has subsequently shown only moderate change. In the 18 months to June 2011, the weighted average moved by only -1%.

Pockets of rental growth have been seen in countries including Russia, where there has been a sharp contraction in available supply. Occupier demand has been boosted in Germany and Sweden by increased industrial activity.

Many European markets have witnessed a squeeze in the availability of modern logistics space, with speculative development activity coming virtually to a halt in the last two years. Knight Frank says that there is some evidence that developers are now beginning to build new speculative schemes of modest sizes in a small number of undersupplied locations, but this is likely to remain at a low level over the rest of 2011 due to developer caution and shortage of bank finance.

Investment activity in the sector has improved, albeit transaction volumes remain well below pre-downturn levels.. Investment volumes in H1 2011 were broadly in line with 2010, with just under EUR 5 bn invested in the sector, though there was a slowing of activity in Q2 as renewed economic uncertainty affected investor confidence. Investor interest is focused principally on prime, well-let logistics assets offering secure long-term income.

Around EUR 10.2 bn was invested in industrial and logistics property during 2010, a 46% increase on 2009

Prime logistics yields have hardened in most western European markets over the last two years, though the pace of yield compression has generally slowed in the first half of 2011.