New opportunities in the European industrial and logistics sector

• Market fundamentals continue to support ‘Big Box’ logistics assets but investor demand has driven prime net initial yields to historically low levels
• Investors must diversify to mitigate risks of overpricing and in order to lever the full depth of the industrial and logistics market landscape
• We see strong rationale for thematic investing in urban and last mile logistics, light industrial estates and cold storage that offer diversification opportunities and attractive risk-return profiles
• ESG compliant assets are paramount to investors and occupiers alike

‘Big Box’ mainstream logistics assets continue to display strong fundamentals but with pricing pressures driving down yields and new themes emerging, other industrial subs-sectors now offer alternative opportunities to investors.

Our new report, entitled Thinking outside big boxes, identifies opportunities in mainstream ‘big box’ logistics and warehousing. It says long term demand fundamentals, such as economic growth, trade volume, manufacturing output and retail sales, all continue to provide strong support for such assets, while their availability remains limited in major markets across Europe as vacancy rates near record lows. Online sales, a key demand driver for ecommerce-related ‘big boxes’, are expected to grow strongly and be a key driver for occupier demand.

We estimate that demand for additional logistics space totalled more than 10 million sq m in Europe in 2020 alone and another 21 million sq m could be added by 2025.

But we urge caution because surging demand has forced yields down for ‘Big Box’ assets - prime net initial yields are currently at historically low levels of 3.5% to 4.0% and sometimes even lower in core European markets.

Our report says urban and last mile logistics, light industrial estates and cold storage subsectors now offer investors diversification opportunities because they are benefiting from the long-term trend towards the faster movement of goods and supply constraints on urban land.

Secular economic, technological, consumer and demographic trends are bolstering the strong fundamentals that already exist in European industrial and logistics markets. The dynamic growth of e-commerce has been accelerated dramatically by the Covid-19 pandemic, boosting the success of the logistics market even further.

For this reason, we continue to see value in buying and creating modern, flexible logistics and industrial facilities in the key hubs, though in a more selective manner. With yields at historically low levels, stock selection, rental growth and sustainability of income are now the most important factors for investors to consider.

Industrial and logistics is considered among the most exposed real estate sectors for environmental, social and governance credentials. We argue that, by prioritising ESG, institutional investors also have the potential to improve the underlying asset fundamentals and leap on significant commercial benefits.

Aside from the ‘big box’ sector, emerging sub-sectors offer higher yielding alternatives and provide yield-enhancing and risk diversification for investors willing to take higher risks and engaging earlier in the product-cycle.

Find out more at https://www.savillsim.com/research/