Rationale broadens for increased logistics investment

Investment in European logistics property is more than a defensive play in a slow-growth environment, according to Richard Holberton, director research EMEA at CBRE.

‘That in itself is a commendation…But there is a broader rationale for looking quite hard at investment in this sector for a broad set of investor types and investment motives,’ he told attendees at the PropertyEU Logistics Investment Briefing held at CBRE’s London office this week.

Citing a study by Mercers actuarial consultants, Holberton noted that the investment credentials of the sector were very strong based on four key factors: income profile, inflation hedging, liability matching and efficiency of returns.

Over the past decade, industrial and logistics assets have provided an income return that has been 120-130 basis points higher than the other main two commercial sectors - offices and retail - on a reasonably consistent basis, he pointed out. ‘If you look at pricing relative to (government ed.) bonds at the moment, the income profile looks even more attractive. There’s a differential of over 600 bps between average prime industrial yields and 10-year German bonds. That’s a pretty attractive spread.’

Holberton added that industrial and logistics assets also perform ‘very respectably’ with regard to the other three factors examined in the study: ‘Industrial and logistics have a strong bill of health on those factors as well, compared to both other commercial property types as well as non-property asset types.’

CBRE’s own research indicates that industrial and logistics as an asset class is rising significantly on investors’ wish lists, but so far investors have not migrated to the sector in huge numbers, Holberton said. In the past few years, the share of industrial & logistics has hovered around 8-10% of overall market investment, he added. ‘The figures have been reasonably consistent these last few years. Strong investor intentions have not yet become manifest in transaction activity.’

According to a CBRE survey held at the beginning of last year on investors’ preferred sectors, the industrial and logistics sector was on a par with shopping centres in 2012. Effectively, however, provisional figures point to a total investment volume of €8.5 bn in 2012 across Europe, which marks a slight increases on 2011. However, this figure is in the same sort of range of investment volumes for the sector in the post-Lehman era, Holberton noted. ‘Industrial and logistics are doing OK and investment volumes are broadly in keeping with commercial property transactions generally.’ Total investment volume in Europe came to €120 bn in 2012, which is almost identical to 2011 and 2010, he added. ‘These are well established patterns in terms of the liquidity in the market.’

At the same time, the rise of e-tailing and multi-channel retailers will have an impact on occupier demand that is not yet well understood in capital markets, Holberton said. ‘Understanding the fast-moving occupier dynamics is vital,’ he argued. ‘From an investor’s point of view, it is important to understand that e-tailing will mean a structural shift in the industrial and logistics market, not more of the same. Demand will grow for different types of assets in different locations. The key questions facing the sector is how will it evolve and how will capital markets develop?’