Although its fundamentals remain strong, with demand continuing to drive returns, the European logistics sector faces uncertainty both in the short and long term, writes Dominique Moerenhout, CEO of the European public real estate association (EPRA).
Many parts of the listed sector faced untold disruption and uncertainty during the pandemic, but one area which flourished was logistics.
No longer able to access the high street, shopping centres, or even supermarkets, populations across Europe resorted to online retail instead. This in turn led to a surge in investment in the assets underpinning distribution infrastructure. The result was record take-up numbers for logistics real estate in both the UK and Continental Europe.
Nearly a year on from the removal of restrictions in most countries, vacancy levels remain at an all-time low – but there are new headwinds bringing turbulence to retail as rising interest rates and the growing cost of living are putting pressure on consumer pockets.
Moving past the pandemic
The first pandemic for a century turned out to be an unexpected opportunity for logistics thanks to the boom in e-commerce while movement and socialising restrictions were in place. Data from Savills shows that in 2022, property investors in the UK spent an unprecedented £18.37 bn on warehouse assets and the take-up hit an all-time high of 55.1 million sq ft, with Amazon accounting for 24% of that space.
It was a similar story across Europe, with BNP Paribas numbers showing that take-up increased by 29% across six major European logistics markets (Germany, UK, France, Netherlands, and Spain) whilst investment in industrial and logistics real estate rose by 51% from 2020-2021 to an enormous €65 bn.
Positive conditions have remained so far in 2022 and the outlook for logistics remains healthy, largely due to consistently high demand for space – average vacancy rates across Europe are sitting at just under 2.3%.
The take-up rate is also robust, currently standing at 19.56 million m2 across Europe, which is only a 2.2% decrease from last year. Although Amazon’s profit warning earlier in 2022 prompted questions about whether the logistics sector had overreached, the answer for now appears to be no, as demand remains strong.
Obstacles ahead
The logistics sector is definitely in good health, but the way ahead isn’t completely clear. The biggest issue it faces is the economic turbulence affecting much of Europe. Inflation is touching every part of the economy and rising interest rates are having a significant impact on yields and the value of portfolios.
There is cause for optimism though as, like other sectors of the property market, logistics benefits from rental growth which goes some way to mitigate the impact of falling yields. Demand remains at record levels, driving rents up at an average of 14.2% y-o-y across Europe in Q2. If supply constraints mean they continue to grow, inflated rents will protect the value of logistics investments.
Inflation is having a more negative impact on consumers and this could lead to a drop-off in retail spending. E-commerce experienced a boom during the pandemic, but a slowdown is likely on the way. Amazon has predicted a slowdown in sales over Christmas. Some of the consequences are already being seen with some small valuation drops feeding higher yields.
Going green
Logistics relies very heavily on transport, playing a role in large supply chains across the continent. As such, it faces huge pressure to decarbonise operations and reduce emissions. This is coming from investors, among others, who are becoming increasingly conscious of the impact their investments have on the planet.
There is also increasing pressure from governments as states, including the EU, commit to net zero targets and introduce sustainability standards, and some companies have already made effective progress. For example, real estate investment trust WDP has long been investing in fitting its warehouses across Europe with solar panels, whilst Segro is using low-carbon materials and renewable energy sources in its new developments to reduce its carbon footprint by 42% by 2030.
However, although ‘going green’ is the right approach in the long term, it’s an expensive change to make and one which smaller companies may struggle with. Planning is another factor, with warehouse developments coming under increasing scrutiny, and while pre-approved developments mean it’s not an immediate issue, it may become a problem in future if demand continues to rise at its current rate.
Overall, while the logistics sector is in a strong position with demand powering returns, there is a degree of uncertainty in the short term. Rental growth will help, but it is not a silver bullet, and we will need to wait and see exactly how changes in consumer activity impact returns. Longer term, the environmental impact of the sector, and efforts to reduce it, will undoubtedly become the central issue occupying businesses’ planning and strategic efforts.
