The European logistics sector is seeing strong investment activity and capital is pouring in, but there are marked differences between regions and geopolitical risks to take into consideration.

The European logistics sector is seeing strong investment activity and capital is pouring in, but there are marked differences between regions and geopolitical risks to take into consideration.

That was one of the key messages to come out of the European Logistics Investment Briefing organised by PropertyEU at CBRE's City of London offices on Thursday.

The panel of experts agreed that the sector provides attractive returns, given the low interest rate environment.

‘There is a big increase in appetite for the logistics sector,’ said Richard Holberton, director of EMEA research at CBRE. ‘After two years of decline, there was a 50% rebound in activity in 2014 which is set to continue this year. Its market share is a significant 11%.’

Market activity is being driven by national and international retailers, parcel services, food manufacturing and third-party logistics and reflects a ‘genuine expansion’, Holberton said. Commercial property investment in the last quarter of 2014 was close to record levels and the €23 bn in industrial logistics turnover eclipsed even the figure for 2007, before the financial crisis hit.

The market is at a favourable point in the cycle, Holberton noted: the positives are that prime commercial yields are comfortably above long-term interest rates, that investment is financed primarily by equity rather than debt, and that economies and markets are mostly improving.

‘Investors are very keen to get into logistics,' said Tony Smedley, head of pan-European property funds at Schroders. ‘Quantitative Easing, low oil prices and low interest rates are all positives for the sector and that is why there is a lot of capital looking at it. It is a great time to invest because people are concerned about the economic environment. Whatever your strategy, there is a bigger allocation to real estate and a real appetite for yield.’

Tidal wave of cash
According to Michael Hughes, CEO of Verdion Properties, ‘there is a tidal wave of cash coming into the market and a degree of desperation to spend which is creating interesting scenarios'. Investments have so far come from Europe, the US and Canada but Far Eastern money will increasingly become part of the equation, the experts agreed.

The main risk is of upward yield corrections if occupier market expectations are dented by financial or political events like an exit by Greece from the Eurozone or a worsening of the conflict in Ukraine, which could lead to a sharp fall in prices. Another problematic issue is exchange rates, but currency risks can also have a silver lining, said Joseph Ghazal, managing director of Prologis: ‘The fall in the value of the euro has brought demand from American and Asian investors.’

On the issue of rental growth, which has been muted in Europe with the exception of the UK, the shared belief is it will come through, but not evenly across the continent. Holberton predicted that the market should expect ‘some growth in the UK and in the Nordic countries but that it is likely to stay low in the core parts of the Eurozone’, while Ghazal said that ‘rental growth will surely come as the supply shrinks.’