EUROPEAN LOGISTICS VIEW

Transcription

1 EUROPE EUROPEAN LOGISTICS VIEW AUTUMN 2010 Key highlights European Logistics markets The outlook for European logistics markets remains cautiously positive as prime transaction yields compress faster than expected and conditions in the occupier market show signs of stabilisation. Uncertainty about the recovery has been rising and a slowdown in growth is widely expected. Nonetheless, economic indicators still point to positive but modest growth in the coming years. Prime transaction yields benefit from continued demand for prime property and a scarcity of prime investment deals on offer. This has led to sharper yields in the forecast but only for assets with considerable lease length. Another positive factor for logistics investments is the attractive spread between logistics transaction yields and the cost of debt. Logistics occupier markets have been negatively impacted by high vacancy and conditions are challenging. Still, for most markets vacancy is stabilising, enabling some very modest rental growth, in line with the previous forecast. Demand continues to exist for modern state-of-the-art logistics properties, both in the occupier and investment markets. Assets of secondary quality are expected to underperform. Despite tentative signs of a modest pick-up, the development pipeline remains limited, which bodes well for rents and yields. The three Continental European logistics markets with the best three-year expected performance are Hamburg, Paris and Frankfurt (see page 5). CONTACT Max de Groot Managing Director Institutional Clients E: max.de.groot@ingrealestate.com T: Eugene Philips Managing Director Research & Investment Strategies E: eugene.philips@ingrealestate.com T: AUTHOR Gerben Koops Senior Investment Analyst Risk adjusted ranking is based on output from the ING REIM Risk Analysis Framework. This tool incorporates local knowledge available within ING REIM Europe s pan-european network, along with quantitative variables to assess forward looking investment risks in over 75 Continental European property markets. Thumbs indicate current conditions, arrows reflect our outlook for REAL ESTATE INVESTMENT MANAGEMENT

2 2 BIRDS EYE VIEW ON LOGISTICS RENTS One of the defensive characteristics of logistics real estate stems from the relatively flat rental cycle. For most logistics markets except Spain, this was confirmed in the crisis. On average, European prime headline rents for logistics assets declined less than offices and only slightly more than retail. Generally speaking, logistics prime headline rents are set by new developments. Because demand for logistics space declined sharply during the crisis, higher incentives were needed to lease out logistics space as supply rose and occupiers needed to cut costs. This trend appears to be continuing. Keeping headline rents on a relatively high level while granting incentives may be beneficial for capital values. However, effective rents and portfolio income will be impacted for some time as incentives weigh on cash flows. Logistics demand drivers Logistics demand drivers in positive territory as world trade surges. The outlook for logistics demand drivers remains positive as Europe continues to profit from the surge in world trade. The WTO raised its 2010 world trade forecast in September to a staggering 13.5%, up from the 10% forecast as per the first quarter. Although slowing next year, the level of activity is now significantly higher than expected previously. Trade orientated countries like Germany and Sweden mostly enjoy the benefits as opposed to slower growth rates for most of the southern economies. As depicted below, the Benelux enjoys a position in the middle of the pack. The continuing increase in trade volumes should have a positive impact on logistic players also as more contracts are being awarded to them. Next to transhipments, demand for warehousing space is for a large part related to import growth. A key factor for this will be domestic demand, for which a recovery is less pronounced. Figure 1: Trade outlook across Europe Source: EIU, size of bubble indicates trade dependency...but uncertainties about the economic outlook remain as growth rates slow down. The positive outlook is coloured by uncertainty. After a stronger than expected rebound, a slowdown in growth is widely expected due to implementation of austerity packages. The strength of the prolonged recovery is still questionable. An important question for Europe is whether China can maintain its growth momentum. The recent appreciation of the euro against the dollar may also start to drag on trade volumes for euro zone countries as the euro-dollar exchange rate rose back to 1.36 at the end of the third quarter. Nevertheless, consumer sentiment in the euro zone has improved in the third quarter despite increasing uncertainty. The Purchasing Managers Index remained in growth territory although slowing from peak levels, while the new order component maintained its peak in September. Another positive factor is the forecast growth for business investments, which is expected to start contributing to GDP growth from 2011 onward. However, global imbalances pose a threat to international trade and cause tensions, most notably on currency markets. Figure 2: Outlook for euro-zone logistics drivers (index; 2008=100) Source: Economist Intelligence Unit August 2010 Outlook logistics occupier market Occupier markets appear to stabilize as prime rents stopped falling... As expected in the beginning of this year, the logistics occupier market remained under pressure during 2010, but there are signs of stabilisation and improvement. Subdued take-up and rising supply pushed up vacancy rates to over 10% on average across Europe. However, vacancy rates have stopped rising since the beginning of this year. Relativities remained largely unchanged with low vacancy reported in the top five German markets, while the highest vacancy was reported in markets of Spain and the UK, Lyon in France, and in the south of the Netherlands. Hidden vacancy is problematic, although rising activity levels are expected going forward, which

3 3 should lead to higher take-up volumes in the current recovery scenario. In that respect, the divide between modern state of the art logistics assets and older secondary premises is high with B-grade assets facing tougher reletting conditions. After two years of downward corrections, prime headline rents appear to have stabilised in the majority of the main logistics markets throughout Europe. As depicted in figure 3, the strongest corrections were seen in Spain followed at a distance by the Nordics. Limited decreases were reported in Paris and most German markets, with the exception of Hamburg. However, incentives and rent free periods are still sizeable, supporting prime headline rental levels, but at the expense of portfolio cashflows. capital to logistics developments in Europe. Still, financing conditions will need to improve before the level of development can pick up. Especially for local players financing is essential to be able to capitalise on existing land positions. Figure 4: European logistics developments (1,000 m²) Figure 3: Prime logistics rental levels (index;2007=100) Source: PMA Autumn 2010, Continental Europe excluding CEE Outlook investment market Source: JLL, forecasts ING REIM Europe Research (Autumn 2010)...while limited rental growth is forecasted. As shown in figure 3, rental growth is forecast to remain limited, contrary to expectations last year when rental levels where forecast to show a steeper decline. However, since the beginning of the year, rental growth expectations have remained largely stable at subdued growth levels. Consequently, this reduces upside potential in a recovery. Markets that have experienced larger corrections include North-Brabant, Hamburg, Antwerp, Milan, Barcelona and Madrid. These markets may also benefit from stronger rebounds depending on economic outlooks and vacancy levels. For example, vacancy in Antwerp, Milan and Hamburg is low compared to North-Brabant, Barcelona and Madrid, while the economic outlook for North-West Europe exceeds the outlook for Southern European markets. supported by a modest development pipeline. If yields continue to decline and rents show modest growth, a pick-up in development activity can be expected as development margins become more attractive. However, the share of speculative developments is expected to remain limited. A number of players have been expressing interest in deploying Logistics investment volumes are rising... Despite a weak first quarter, transaction activity picked up in the first half of 2010, boosted by a number of sizeable portfolio deals in the second quarter. France, Germany, Sweden, the UK and Poland saw a number of notable transactions, while activity in the Benelux and Southern Europe was low. Figure 5: European industrial investments ( billions) Source: JLL Since the crisis started, risk conscious investors have shown a preference for secure prime logistics investments with long lease length remaining at established locations. These types of investments remain scarce also due to the limited development pipeline for logistics properties. In the past, the investment market in some cases anticipated an upturn in the occupier market.

4 4 However, in the current market, a strong rise in investment volumes may have to wait until the occupier market recovers, leading to a higher development pipeline and supply of new product for logistics investors. In the meantime, the low supply of solid logistics investments and high demand is expected to cause further yield compression. Again, secondary assets face tougher conditions also reflected in the hesitance of banks to provide loan financing for non-prime assets. The yield spread between prime and secondary assets varies roughly between 175 and 300 basis points. For some good secondary assets, the higher yield level may start to look attractive, but for the lower end of the market the outlook remains weak. Prime transaction yields in Germany, France, the Benelux and Sweden now range between 7% and 7.5% but only for the best product with long leases. Figure 7: European logistics prime net transaction yields Figure 6: European prime logistics net yield outlook in a historical perspective Source: JLL, forecasts ING REIM Europe Research (Autumn 2010) Source: JLL, forecasts ING REIM Europe Research (Autumn 2010)...and yields compressed faster than expected... Scarcity of good assets on the market and the relatively attractive margin to financing costs caused yields to fall faster than forecast at the beginning of this year. In response, forecasts have been adjusted and show sharper compression for the period, as shown on an aggregate country level in figure 7. On one hand, there is upside risk that yields will again fall sharply in a low interest rate environment and the current forecast will prove to be conservative. On the other hand, uncertainties and risks remain real and a yield level around 7% seems realistic in a historical perspective. Further yield compression to a range between 6.5% and 7% may not be unlikely but also increases the likelihood that yields will bounce back. This scenario would be similar to the forecast for the UK market, which shows a rise in yields from its current low levels. ING PROPERTY RETURN CYCLE Figure 8 Prime Continental European logistics markets, Source: ING REIM Europe Research (Autumn 2010) Real estate returns are cyclical. Figure 8 shows the ING Logistics Property Return Cycle which reflects a simplified version of this cyclicality. Due to the high income return of logistics properties and prime yield compression the forecasted total return is expected to be positive again for 2010, based on our calculation methodology. In 2011 and 2012 total returns are forecast to benefit further from some yield compression and muted but positive rental growth across Europe is forecast to be the peak year before logistics returns head back to their main performance driver: the income return.

5 5 ING S TOP 3 LOGISTICS MARKETS IN CONTINENTAL EUROPE The three logistics markets that are forecast to outperform within the sector for the years are Hamburg, Paris and Frankfurt although only slightly better than a few other Western European markets, notably Stockholm, Rotterdam and Dusseldorf. In general, established logistics markets in France, Germany, Sweden and the Benelux are expected to be more in demand despite overbuilding in some areas. Source: ING REIM Europe Research 1) Hamburg The port of Hamburg suffered in 2009 as container handling was 28% lower compared to This put pressure on rents, which were reportedly 7% lower during 2009 (JLL). Still, availability of prime space is tight in Hamburg particularly within the inner harbour region and for rental units above 5,000 m². The absence of speculative development and the strong increase in trade flows in Germany make it likely that Hamburg will benefit as a global hub. Indeed, cargo handling was up 8% over the first half of 2010 compared to last year, while logistics take up increased by 6%. Therefore, a rebound to 2008 rent levels is forecast for the upcoming years, which together with modest yield compression will drive returns. 2) Paris While 2010 is still expected to see some limited downward pressure on headline rents, double-digit total returns for 2011 and 2012 in Paris will be driven by a combination of positive rental growth expectations and solid yield compression. Prime yield levels moved out significantly during the last two years. Even after three quarters of yield compression, scarcity of prime investments on offer is expected to continue to force prime yields down. Paris remains attractively priced at a 7.3% net transaction yield reported as of the second quarter of 2010 (JLL), which compares to a 7.1% average yield for Demand for logistics properties as an investment product continues to be strong at present given the relatively modest impact of the downturn on the French economy and the relatively strong outlook compared to other European countries. 3) Frankfurt The demand for logistics space in Frankfurt suffered only moderately during crisis. In line with current German economic recovery, air cargo growth rates of Airport Frankfurt continue to improve and have been expanding by 27% over the first three quarters of 2010 (YoY). Occupier demand seems to benefit from improving market conditions showing positive trends in increasing letting volumes in Frankfurt as from mid The availability of prime space is still very tight in Frankfurt. Almost no speculative building activity can be reported, which kept prime logistics rents stable during crisis. Given the current positive economic outlook of Germany global hubs like Frankfurt will likely continue to benefit, which may support moderate future rent growth. Prime logistics yields in Frankfurt are forecasted to continue to decline somewhat as has been seen in the first half of This is attributable to a lack of core assets and the expected ongoing strong demand of national and international core investors. In figure 9 on the next page, the three-year return outlook for the European logistics markets is presented. Figure 10 ranks the markets relative to each other. The map shows the regional logistics markets compared to the European average.

6 6 Figure 9 Logistics sector - indicative total returns (new calculation methodology; see below) Source: ING REIM Europe Research (Autumn 2010) Figure 10 Logistics relative return outlook for (above, at or below average) Source: ING REIM Europe Research (Autumn 2010) The table indicates whether the unlevered return outlook is above, close to or below the weighted average total return for logistics markets that are covered in Continental Europe, for respectively 2010, 2011 and Returns are not risk-adjusted. The return forecasts are shown in Figure 9, which are only indicative and do not reflect actual portfolios. Logistics markets in Central and Eastern Europe are currently not covered. The UK is not included in this analysis as ING REIM forecasts IPD benchmark returns in this country, which are not comparable to the return forecasts in Continental Europe. This publication has been prepared on behalf of ING Real Estate ( ING ) solely for informational purposes. It is not investment advice or an offer or solicitation for the purchase or sale of any financial instrument. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, ING makes no representation that it is accurate or complete. The assumptions used in making forecasts rely on a number of economic and financial variables. These variables are subject to change and may affect the likely outcome of the forecasts. The information contained herein is subject to change without notice. ING and any of its officers or employees may, to the extent permitted by law, have a position or otherwise be interested in any transactions, in any investments (including derivatives) referred to in this publication. ING may provide banking or other services (including acting as adviser, manager, lender or liquidity provider) for, or solicit banking or other business from, any company referred to in this publication. Neither ING nor any of its officers or employees accepts any liability for any direct or consequential loss arising from any use of this publication or its contents. Copyright and database rights protection exists in this publication and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved. Any investments referred to herein may involve significant risk, are not necessarily available in all jurisdictions, may be illiquid and may not be suitable for all investors. The value of, or income from, any investments referred to herein may fluctuate and/or be affected by changes in exchange rates. Past performance is not indicative of future results. Investors should make their own investment decisions without relying on this publication. Only investors with sufficient knowledge and experience in financial matters to evaluate the merits and risks should consider an investment in any issuer or market discussed herein and other persons should not take any action on the basis of this publication. Additional information is available on request. At the date hereof, the author, and/or the ING Group may be buying, selling, or holding significant long or short positions; acting as investment and/or commercial bankers; be represented on the board of the issuer; and/or engaging in market making in securities mentioned herein.