Following significant repricing in the last 18 months, logistics property markets across Europe are close to turning the corner with a recovery in take-up, rental growth and higher returns on the cards, says investment manager AEW.
In its latest report on the sector, AEW examines key metrics such as take-up, vacancy, capital values, rents, yields and returns.
The firm notes that the overall slowdown in retail sales volumes and weak economic sentiment have negatively impacted occupier demand in the short term, with many firms maintaining their current footprints for now. However, take-up is expected to strengthen as the economy improves in 2024 and supply chains start to normalise.
AEW says 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.
Ken Baccam, director of research & strategy Europe at AEW, said: ‘In 2022, logistics was the quickest sector to re-price, losing an average of 14% of value across all European markets. The 55% 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.’
Although average vacancy rates are expected to increase a little due to weaker take-up in the long term, they remain well below 4% and are expected to come down after 2024 as new construction slows down.
Despite the rising vacancy rate, growth in prime rents has remained robust, leading AEW to raise its forecasts for 2023-2027 from 2.5% per annum in its previous base case projections to 3.0% per annum.
Hans Vrensen, 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% 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.’
He added: ‘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.’
AEW identifies the Nordics and Benelux regions as having 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.
