How has the last year impacted logistics real estate?
Joseph Chan: The decade of cap rate compression has come into abrupt reversal in most Asian logistics markets. Going forward, logistics real estate’s capital value increase will need to come from value-add/rental growth that can offset cap rate expansion.
Christian Jamison: Together with the rest of the real estate sector, logistics has been significantly impacted by repricing caused by the aggressive hikes in interest rates to combat inflation. In the same way a rising tide lifts all boats, so the same is true of a falling tide.
Alistair Calvert: The rise in interest rates has increased the cost of debt financing by circa 300 basis points in Western Europe. With prime yields in the low-mid 3 percents, values have had to adjust. The market remains in price discovery mode, but with this correction being interest rates-led, it is easier to pinpoint an entry point for any given level of target return.
Has this changed the outlook for your investments in the sector?
CJ: Despite values being impacted in the short term, our appetite for the sector remains undiminished. The sector fundamentals remain very attractive and so far the occupational market has continued to be robust, underpinned by the growth of e-commerce, particularly in continental Europe, where online penetration has been lower than the UK.
AC: We think that the current repricing will present attractive buying opportunities over the coming months. Otherwise, the occupier market outlook has not fundamentally changed. Economic headwinds have intensified but market fundamentals are robust. We still very much believe in the rental growth story and in the secular drivers that have been driving demand for logistics real estate in Europe over the last years.
JC: The opportunity set has become much narrower. Focus on the projects with sufficient buffer that can offset higher financing cost, higher construction cost and higher cap rate.
How is institutional appetite for logistics evolving?
AC: There continues to be tremendous investor appetite for European logistics real estate. In 2021, €60 billion transacted, triple the pre-GFC peak of €20 billion. Year-to-Q3 volumes for 2022 stand at €46 billion. Logistics’ market share has grown from 7-8 percent historically to more than 20 percent as of Q3 2022 and sentiment surveys indicate that the sector remains very much in demand among investors.
JC: Institutional appetite for logistics is still strong. Institutions are becoming more targeted in where they like to deploy. Some have expressed preference for cold storage.
CJ: Institutional appetite for logistics continues to grow and, on a relative basis, the sector is well positioned. The fundamental supply/demand imbalance remains and will become more pronounced as recent price weakness will deter further new development. This should drive rental growth over the medium/long term.
Which markets offer the best opportunities for logistics investing and why?
JC: Tokyo for the rental growth and positive yield spread (rental yield over cost of financing). India and Southeast Asia for scale and growth with a long-term horizon. For China, selected markets such as the Greater Bay Area, Shanghai and cold storage.
CJ: We continue to favor urban, infill markets around the biggest cities in Western Europe, as this is where we consider the supply/demand imbalance to be most acute, and therefore the prospects for rental growth to be the greatest. We have aggregated scale in prime submarkets of London and Paris, and alongside this are now increasing our footprint in Germany, particularly around Berlin.
AC: We continue to favor supply-constrained markets in Western Europe with the best rental growth prospects. We think that stabilized assets offer a better risk-adjusted return relative to development at this point of the cycle due to reduced development margins. We are also seeing growing evidence of portfolio ‘discounts’ relative to single-asset deals, and we think there could be opportunities there.
Which trends or sub-segments are you most excited about for 2023 and beyond?
AC: Rental growth remains one of the overarching themes of European logistics real estate, and one of our core convictions in the sector. It will be also interesting to see how some macro trends, such as reshoring/nearshoring, will play out across the sector. Last but not least, ESG remains at the forefront of investors’ minds, with a growing body of evidence pointing to the emergence of a ‘green premium/brown discount’.
JC: Brownfield logistics projects with value-add angles.
CJ: I am interested in the shift towards net zero, in particular via electric vehicles and how that impacts the urban real estate footprint. I am also interested to see how ‘quick commerce’ business models continue to evolve and which of the various platforms generates the most economies of scale.