Industrial and logistics transactions have grown to represent the bulk of investment activity in Central and Eastern Europe so far this year, according to research by PropertyEU.
Already a hot investor favourite in Northern and Western Europe, industrial and logistics properties have now also become the asset class of choice in Central and Eastern Europe (CEE), capturing over half of the capital invested in the region in the past few months.
According to PropertyEU’s list of the 20 largest transactions in the region in the first three quarters of the year, logistics surpassed all other sectors both in terms of number of deals as well as volumes. It was also the only major property type to register higher deal activity so far this year than in 2019, experts say.
The largest logistics property transaction in CEE so far this year is GLP’s acquisition of Goodman Group’s logistics real estate portfolio in the region for just over €1 bn. This significant deal, which was first announced in March, covers around 1.3 million m2 of space across Poland, the Czech Republic, Slovakia and Hungary spread over 40 distribution centres, plus a landbank of 1.1 million m2.
‘We believe attractive macroeconomics, urbanisation, e-commerce growth and proximity to major distribution hubs across Europe are helping to drive Central and Eastern Europe’s logistics real estate market,’ said Nick Cook, president of GLP Europe, commenting on the acquisition.
Another major transaction this year was the purchase of a logistics facility leased to Leroy Merlin. Savills Investment Management bought the 123,000 m2 asset in Piatek, near Lodz in Poland, from Invesco Real Estate. The property - the largest single-storey, build-to-suit logistics facility ever developed in Poland - was acquired on behalf of Korean institutional investors managed by Vestas Investment Management, with the deal structured as a forward commitment to purchase upon completion.
This type of transaction underlines the strength of the market from both an investor and an occupier perspective, says John Palmer, head of Savills’ industrial investment business in Poland. ‘We are seeing several players resorting to forward-funding transactions as well as teaming up with developers on new projects, also on a speculative basis,’ he said, commenting on the market’s latest developments. This is partly being driven by the lack of available investment product but also by the search for higher returns, he added. ‘Forward funding is getting popular because of the ongoing yield compression for prime assets, which makes it difficult for investors to get the returns they wanted.’
Beneficiary of the crisis
Amid the myriad of uncertainties caused by the pandemic, the logistics sector continues to attract plenty of capital as it is perceived as the only property type to be benefiting from Covid-19 disruption. The crisis is in fact accelerating the shift away from physical stores to digital shopping, hence driving growth in the transport and logistics sectors, Palmer said. ‘Investors follow occupiers and that is why they are so interested in Poland. If we look at take-up in the country this year, a quarter of the total is represented by new leases to fresh tenants. This really points to an attractive occupational market, driven by the growth of the manufacturing sector but also by e-commerce.’
The sector is likely to break all records in 2020, also thanks to another major logistics property portfolio which is expected to trade before year-end. As PropertyEU revealed, P3 Logistic Parks is seeking a buyer for a 375,000 m2 package of industrial and logistics assets across Europe. Four of the 16 assets, with a total of 88,000 m2, are located in the Czech Republic, while one (26,000 m2) is in Poland.
The sale – Europe’s largest live logistics portfolio transaction at the moment – is being managed by broker JLL which is now collecting second-round offers, according to well-informed market sources. Known as the Apex portfolio, the package is expected to fetch between €400 mln and €500 mln.
Yields for prime assets in particular have reached record lows over the past few months, falling below retail yields for the first time in recorded history. Earlier this year Chinese investment firm CGL Investment set a new record when it paid a 4.2% yield for two Amazon distribution centres in Poland from Invesco Real Estate.
Also, big box distribution centres have seen yields fall dramatically from 6.8% some 18 months ago to 5.5% at present. ‘I believe these assets will get an even stronger yield as they become available, and could even go below 5%,’ Palmer said. ‘The current sentiment is that industrial yields will compress further and capital values increase in the industrial and logistics market to the detriment of other sectors. Funds which are into industrial want heavier weighting in the sector and those which are not invested want to get in. The reasoning for this trend is largely occupier-driven.
‘The warehousing market is viewed as sustainable and something of a safe haven from the demand perspective, as funds move out of hospitality and from bricks-and-mortar retail. European near-shoring and reduced dependence on Asian supply chains will also undoubtedly be trends going forward into 2021.’
Revetas starts fundraising for CEE-focused Fund IV
CEE-focused investment manager and hospitality specialist Revetas is gearing up to start fundraising for its Fund IV which it expects to raise over the next year, according to founding partner Eric Assimakopoulos. The vehicle will look to tap into the continued growth in outsourcing and in the manufacturing sector across the CEE region, Assimakopoulos said.
‘In a post Covid-19 environment, corporates will be looking to cut costs and increase the resilience of their logistics chains, and one of the smart ways to do that is by continuing outsourcing and reshoring operations in university cities in CEE where highly educated and multi-lingual university graduates are available within a much more cost-efficient labour and higher productivity economic environment. We believe this will continue to grow as a result of this crisis and that the region will continue to evolve as the largest outsourcing destination in the world,’ he explained.
Fund IV will focus on university cities educating highly specialised college graduates in Poland, Czechia, Slovakia, Hungary and Romania. Given that CEE is on the major transport corridors into Europe, the company expects the region will see increased demand from the manufacturing sector as well as continued growth in the logistics sector. As such, the vehicle will focus on large size, complex transactions, with a value-add strategy targeting hospitality, office, residential and logistics real estate, where there is value to be added through redevelopment, re-positioning and asset management initiatives. Like its predecessors, the fund will target a gross IRR in the range of 17-20%% and a 1.7-2x multiple.
Revetas was set up nine years ago as a discretionary fund business with the backing of a number of institutional investors and has since launched several investment strategies focused on university cities in Central and Eastern Europe.
Assimakopoulos: ‘Central Europe was an emerging market economy pre-GFC and investors invested speculatively. Post-GFC, large corporates began to focus more on “smarter” cost-saving measures, outsourcing different business lines and services into the region, which rapidly evolved into a business cluster of innovation and “knowledge-based development”. This has been the primary driver of growth in the CEE region for the past few years.’
