Market overview
In the fourth quarter of 2022, even the market for logistics real estate was influenced by ongoing geopolitical developments, high interest rates, rising prices and declining economic performance. The buyer restraint was clearly noticeable; a trend that will continue in 2023. The annual result on the investment market for logistics real estate is very good overall with more than EUR 9.0 billion. However, it is based predominantly on deals from 2021 with transfer of ownership in 2022 or transactions from the beginning of 2022.
Interest rate increases of over 3% in the last year, competition from alternative asset classes and exceeded real estate quotas have led to restraint and higher return expectations on the part of institutional investors. Nevertheless, investments in logistics real estate remain attractive for investors. High demand for space, e.g. from the restructuring of international supply chains, is being met by a further decline in the availability of land.
With a more assessable capital market situation, logistics properties with their inflation-protected leases as well as their rental growth and rental growth potential will prevail over bonds as alternative investment opportunities. Transactions will also pick up in the course of 2023. Gross initial yields are then expected to settle around 5%.
āThe leverage effect of low interest rates has led to high purchase prices in recent years. In some cases, investors were even willing to pay more than 30 times the annual rent. After the turnaround in interest rates, the financing and investment environment has completely turned. After our last market report in November 2022, interest rates increased again by 0.5 percent. The ECB has announced further rate hikes due to persistently high inflation rates, many market participants no longer consider a key interest rate of 4 percent out of the question. The pressure on the real estate markets will continue to intensify. The initial yields of 5 percent we were forecasting in November last year bearing with further increases in interest rates are already a reality. Logistics real estate continues to be an attractive asset class for institutional investors ā provided a corresponding higher yield can be achieved compared with risk-free bonds. Given the scarcity of available building land and increased construction costs, sellers and buyers will probably only come together on the basis of significantly higher rentsā, says Bodo Hollung, Managing Partner of LIP Invest.
Investment market
The reluctance of buyers and investors can be felt on the transaction market. A significantly low number of deals resulted in a transaction volume of only EUR 1.2 million in the fourth quarter. Nevertheless, a few, selected transactions were concluded in the asset class. For example, the project developer Panattoni sold its 67,0000 square meters logistics park Bremen South, which was completed in 2021. Overall, 2022 closes with a high transaction volume of EUR 9.2 billion, which is mainly attributable to the first quarter with almost half of the annual volume.
The gross initial yield for modern logistics properties has risen again and is at 4.85 to 5 percent in the fourth quarter. A well-founded statement on the current yields of existing properties is currently not possible due to the lack of transactions in this segment.
LIP constantly analyses the developments on the German logistics real estate market. This includes the regard of the supply situation. Properties with a volume of around 850 million euros were offered to LIP in the fourth quarter of 2022. Compared with previous quarters, this indicates a further decline in transaction activity.
In fourth quarter, logistics service providers and retailers were almost equally represented as users of the logistics properties available on the market, while industry accounted for a significantly lower share.
Take-up of space
With 1.8 million square meters of leased logistics space, take-up in the fourth quarter remained stable compared with the previous quarter. A total of 8.0 million square meters was leased or newly built in 2022, which represents only a minimal decline compared with the record figure achieved in the previous year. In fourth quarter, it also became apparent that major space take-ups are increasingly occurring in peripheral locations aside established logistics regions. For example, Alcaro Invest leased its 47,500 mĀ² new building in Frankfurt/Oder on a long-term basis to the EV Cargo group of companies for the storage of lithium-ion batteries for electric vehicles.
New construction activity slowed down at the end of the year. In the fourth quarter, 1.0 million square meter of new logistics space was built. In Elsdorf, between Bremen and Hanover, for example, the project developer bauwo started construction of a 70,000-square-meter logistics park. With new construction activity of 5.1 million square meters, the overall result for 2022 is high and only slightly below the previous year’s result of 5.3 million square meters. For 2023, a decline in speculatively constructed new buildings is expected due to more difficult financing conditions and uncertain exit factors.
Outlook
On January 1st, 2023, the Supply Chain Sourcing Obligations Act, also known as the Supply Chain Act, came into force. It obliges German companies with initially more than 3,000 employees to bring transparency to their supply chains. The law aims to counter human rights violations along global supply chains, for example through forced or child labor. By obliging companies to take responsibility for their procurement channels, the aim is ultimately to better protect the environment as well as human and children’s rights.
The Federal Office of Economics and Export Control (Bafa), which can carry out risk-based checks on companies, acts as a supervisory authority. Smaller companies in particular are reeling under the bureaucratic burden that the Supply Chain Act entails – especially since another supply chain law will follow at European level.
