LIP Invest, leading provider of special real estate funds in the asset class Logistics Real Estate Germany, publishes the latest developments in the popular 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 third quarter of 2022, the report also provides an outlook on the development of the investment market for the fourth quarter of 2022. 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.
The German market report is available for all interested parties to download free of charge.
The investment market for German logistics properties was surprisingly stable in the third quarter. Regardless of significant interest rate increases and high volatility with interest rate jumps of 0.5 per cent within a few days, increased inflation and more difficult purchase price determination, the transaction volume in the first nine months exceeded the long-term average. Although transaction activity remained high in the third quarter, the result is largely based on deals already initiated at the beginning of the year. Currently, buyers and sellers are having increasing difficulties to come to an understanding. The situation is reminiscent of the global economic crisis in 2008, with the wide gap between the price expectations of potential buyers and the value expectations of property owners.
Despite the difficult economic challenges with rising energy prices, supply bottlenecks and interrupted supply chains, the user demand for space remains very high. The market for new buildings continues to develop dynamically, even with the increased construction costs in the meantime. On the other hand, the supply side is having an increasingly dampening effect. Hardly any existing space is becoming available and the increasingly difficult availability of suitable land is preventing significantly higher space turnover.
Natalie Weber, Authorised Signatory and Head of Fund Management at LIP Invest, forecasts a significant decline in transaction activity at the end of the year with a further increase in yields. "With financing rates of around 4 per cent or above, we will probably soon see yields of over 5 per cent for new buildings again. Properties acquired at lower yields in recent years are likely to hold their capital values due to rent adjustments."
Instead of the expected decline in transaction activity, the transaction volume in the third quarter remained at the level of the previous quarter at EUR 1.9 billion. The surprisingly strong result is largely based on previously initiated deals that were concluded in the third quarter. Some large-volume individual deals, such as the purchase of a 60,000 m² new logistics building in Kerpen for EUR 115 million, benefited the quarterly result. In total, the transaction volume of the first nine months amounts to EUR 8.0 billion, which is mainly due to the strong first quarter.
The changed interest rate conditions have now reached the logistics property market with some delay. The gross initial yield for modern logistics properties amounted to 4.35% in the third quarter. The prime yield is expected to increase further by the end of the year.
LIP constantly analyses developments on the German logistics real estate market. This includes monitoring the supply situation. In the third quarter, LIP was offered properties with a volume of EUR 1.2 billion euros for sale. However, not all of the logistics properties offered on the market are actually being transacted at present.
At just under 60%, logistics service providers were the dominant user group of the logistics properties available on the market in the third quarter, while the industry is represented with a much smaller share.
Due to the limited supply of logistics properties, the letting market stalled slightly in the third quarter. At 1.8 million square metres, less logistics space was taken up than in the previous quarters. Nevertheless, the result for the first nine months, at 6.2 million sqm, exceeds the previous year's result due to the strong second quarter of 2022. The biggest deal of the third quarter was the letting of 70,000 sqm of logistics space to Moeller Maersk in Bremerhaven. Overall, user demand remains at a high level, which is also reflected in new construction activity.
In the third quarter, 1.4 million square metres of new logistics space were built. New construction activity in the first nine months thus amounts to 4.1 million square metres. In September, the project developer Lang & Cie. Industrial announced the start of construction of a 67,000 square metres multi-user centre in Koblenz. The rental space is already fully let before completion in 2024.
Considering the current geopolitical upheavals, an insecure energy supply and rising prices worldwide, it is difficult to predict the development of the next few months. Not only the logistics industry – keywords labour availability, driver shortage, land availability and infrastructure – but the entire German industry needs stronger support from the political side. Germany is one of the best logistics locations in the world. Both the user demand for space and the interest in logistics real estate will remain high. Compared to fixed-interest bonds, the asset class has the advantage of inflation hedging. Therefore, sellers and buyers will settle again after the difficult price-finding phase. However, this will not be possible without significantly higher rents.
Electromobility is becoming increasingly present in the logistics real estate sector. More and more companies – especially from the automotive industry – are asking for space to store batteries. Not every logistics property is suitable for this, especially since there are still no consistent public-law requirements for proper storage.
The issue of fire protection is particularly important when storing and handling e-batteries. Lithium-ion batteries are highly flammable hazardous material. They can catch fire unintentionally if handled incorrectly, exposed to high temperatures or mechanical impact.
Logistics properties must therefore be equipped with a fire system – including an early-triggering fire alarm system – that reacts quickly, specifically and with the right extinguishing agent. Since extinguishing agents based on powder or foam are less effective, experts advise sprinkler systems with a high-water charge. In addition to fire protection gates including extinguishing water retention, logistics properties should have water hazard class sealing to prevent contaminated extinguishing water from entering the groundwater.
Finally, it is indispensable to include the special features of battery storage in the building insurance right from the start and to involve the responsible authorities and fire protection experts.