Commentary

Why undersupply means getting creative in logistics

Investment decisions are on the move

April 11, 2022
Contributors:
  • Lisa Graham

Capital continues to pour into industrial and logistics. What was once typically just a six percent allocation in 2006 has today become more than 20 percent of real estate holdings. Reaching a new record level of almost €65 billion, investment in Europe’s logistics sector has risen six-fold since 2012, according to JLL data.

Thanks to more than 20 years of strong performance and resistance during economic disruption, logistics is set to attract more capital throughout this year. The removal of borders between EU member states, alongside outsourcing of real estate and logistics, supply chain reconfigurations, and, of course, e-commerce, the sector proved its ability to weather the storm of the Global Financial Crisis, trade disruptions and the COVID-19 pandemic - coming out the other side even stronger.

But finding direct investment opportunities today is a challenge – particularly when M&A is largely off-the-cards for most investors bar the sector’s major players – and when so many investors right now want the same thing: core.

What’s behind the lack of core?

Construction completion as a percentage of the competitive stock that JLL tracks was as low as 1.7 percent at the end of 2021. Rising speculative development is not going to change market dynamics - and new construction is doing little to ease supply constraints.

In the UK, build-to-suit was last year exceeded by speculative development for the first time since 2010. Despite a pick-up in speculative construction, especially in the UK and Poland, it still accounts for just a limited proportion of space in most European markets. Construction remains largely build-to-suit.

At the same time, growing land constraints, coupled with rising land values and connected building and infrastructure costs, could have an impact on future development.

More space is of course welcome – but it’s still not enough to keep up with heightened occupier and investor demand.

Time to get creative

With all this in mind, many investors feel now is the time to take on risk.

Of course, considering moving away from core to peripheral European markets with the same supply and demand dynamics could possibly offer more attractive pricing. However, yields in many of these markets are already dropping below 4%, so to achieve an interesting return, another strategy is required.

It’s a move that will mean getting creative – from refurbishment to re-purposing opportunities.

It’s early days, but more investors are now turning to core+ and value-add strategies which can offer them the opportunity to take advantage of the strong rental growth that has spread to most markets across Europe.

Transforming properties through refurbishment, re-development or re-purposing requires them to be vacant. Once ready to be reintroduced to the market, assets can be leased at rental levels that are significantly above previous contract rents.

In such an undersupplied, resilient market as the one we are currently in – where even the word risk seems inappropriate – vacant buildings in strategic locations may soon prove to be the ideal opportunity to create value.