Germany: Investment activity remains at a low level

by   CIJ News iDesk III
2023-05-24   08:15
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LIP Invest, a provider of special real estate funds in the asset class Logistics Real Estate Germany, published its latest developments in the logistics real estate asset class as part of its quarterly market report “LIP UP TO DATE – Logistikimmobilien Deutschland”. In addition to a review of the first quarter of 2023, the report also provides an outlook on the development of the investment market for the second quarter of 2023. The market report includes figures and information on the transaction volume, take-up of space and the volume of new buildings, the development of returns depending on the age of the building, location, property quality and lease term as well as on market developments and interest rates.

Market overview

Plannable rental income, inflation-protected leases and value stability make logistics an attractive investment. After falling prices due to interest rates, the opportunity for value appreciation in the logistics real estate asset class is currently higher than it has been for many years. Foreign investors are also reading the signs and are increasingly pushing into the German investment market again.

Nevertheless, the transaction volume fell to EUR 925 million in the first quarter of 2023, the lowest level in the past five years. However, this is not an omen for the rest of the year: The now more stable interest rate environment and the rapidly adjusted price landscape compared to other asset classes will ensure increasing interest from institutional investors over the course of the year.

Other factors – including stable user demand and the particular importance of logistics real estate throughout the entire value chain ­– will also revive the investment market, especially in the new construction sector. Project developers have already adjusted to the changed market conditions, whereas the market for existing properties is less flexible. This applies especially to properties with unfavourable provisions in the lease, such as a lack of index adjustments.

"Logistics properties are now considered systemically relevant, just like large banks. The high demand for space from users, a rapid market adjustment of purchase price factors and uncertainty in other asset classes, such as retail and office, are directing the focus of many investors to logistics properties. Nevertheless, the big run is missing since many institutional investors currently prefer bonds after years of building up their real estate quotas. As inflation rates are likely to remain high over the next few years, inflation-protected investments with appreciation potential are likely to gain favour with investors in the second half of the year," says Bodo Hollung, Partner and Managing Director of LIP Invest.

Investment market

Around EUR 925 million were invested in German logistics real estate at the beginning of the year. The transaction volume in the first quarter thus falls to its lowest level in the past five years, having only known the way up with the record levels of previous years. This is mainly due to the absence of large-volume portfolio deals. The larger individual deals, which nevertheless brought the transaction volume up to the billion mark, include the sale of the 80,000 square meter Panattoni Park in Hamburg.

At 4.85 to 5.10 percent, the gross initial yield for new buildings in top locations describes a sideways movement in the first quarter. At the same time, the gap to existing properties is shrinking, with gross initial yields ranging from 5.10 percent to over 6.00 percent, depending on the year of construction.

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 1 billion euros were offered to LIP in the first quarter of 2023. The potential investment volume is therefore almost 18 percent above the previous quarter. Accordingly, there is a property pipeline for the coming quarter available. Half of the logistics space on offer in the first quarter is attributable to the retail sector. These are exclusively logistics properties with a size of 30,000 square meters and more.

Year-to-date, an above-average number of new buildings – more than 80 percent – were offered on the market. This confirms the tendency that existing properties are currently more likely to be held by owners. Overall, new construction activity in the first quarter was below average at 660,000 square meters. Nevertheless, demand for space is predominantly being met by new buildings, as evidenced by the 60 percent share of new buildings in take-up and the many project developments announced. Deutsche Logistik Holding DLH, for example, has announced the revitalization of a 180,000-square-meter military airport site in Giebelstadt near Würzburg, which will provide around 90,000 square meters of logistics space.

Take-up of space

Following the exceptionally high result in the prior-year quarter, take-up in the first quarter of 2023 settled at 1.2 million square meters, slightly below the ten-year average of 1.3 million square meters. In the current market environment, tenants tend to use their options for existing space or negotiate lease extensions. Large-volume new leases in the first quarter include the rental agreement between VGP and Rhenus Warehousing Solutions for 70,000 square meters in Sülzetal near Magdeburg.

Trends from logistics – cold storage halls are in high demand

Logistics real estate play an important role in the supply chain for temperature-sensitive goods. To ensure that products can be cooled without interruption, cold storage halls often have different temperature zones. These range from deep-freeze areas of -18°, ambient temperature sections – also known as ambient areas – and +2° to +8° areas for storing fresh produce such as fruit and vegetables. In addition to food logistics, cold storage halls are also used by the pharmaceutical industry. As a direct result of the pandemic, security of supply and an increase in safety stock levels have come into focus. The increased stockholding requires correspondingly more storage space. Both the food trade and the pharmaceutical industry are markets with growth potential, which ensure an increasing demand for cold storage halls.

The German market report is available for all interested parties in German language only to download on the link below:

https://www.lip-invest.com/downloads/

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