Covid-19 lockdowns have hastened the trend towards Europe being a continent of online shoppers. As a result, logistics is attracting high level of investor interest.
According to CBRE, structural change and investor demand for logistics have led to compression in yields, which in turn has led to a convergence between office and logistics loan margins across European markets. In 10 of the 20 markets monitored by the consultancy, logistics margins were on a par with those for offices in Q1. In five of the markets, logistics margins were lower.
According to CBRE, the core ‘G7 markets’, including the UK, France, Germany and Italy, have seen the largest narrowing of the sector spread – from 22.5 basis points in 2018, to just 5bps in 2020, representing a relative margin shift of 17.5bps.
CBRE noted less convergence in the spread in the ‘Rest of West’ markets, with 13bps compression on aggregate. In the Nordics, there was 12bps compression in spreads, and in central and eastern Europe there was 11bps compression. The firm explained that this was because, in absolute terms, the average gap in those markets was zero or negative.
“Averages hide notable national market variation,” the consultancy said in its Q1 2021 Debt Map report. “While France, Italy and the UK have seen sizeable relative margin shifts, Germany’s margin has remained relatively stable over the two-year period.”
CBRE noted that, in contrast, Austria and Ireland have seen 35bps and 27.5bps shifts in margins respectively. “In Ireland, margins on logistics debt are now lower than on office debt,” CBRE wrote. “This is also true of Finland, Portugal, Romania, Slovakia and Spain.”
The data showed debt margins in some countries converged faster than could be explained by yield movements and investments volumes.
However, CBRE noted that relative margin spreads were well correlated with relative yield spreads, investment spreads and investment volumes: “One explanation for the convergence of margins would be that, as the logistics share of total investment increased, and as the logistics/office yield spread narrowed, so too would the logistics/office margin spread.”
“While France, Italy and the UK have seen sizeable relative margin shifts, Germany’s margin has remained relatively stable over the two-year period”
CBRE’s Q1 2021 Debt Map report
To explore the relationship, the consultancy plotted a scatter diagram. On the horizontal axis, it plotted a rank of the relative yield shift and the percentage-point increase in logistics’ share of total European investment between December 2018 and December 2020. On the vertical axis, it plotted relative margin shift over the period.
“In markets that had a relatively large margin spread in December 2018, and that have had large relative yield shifts and/or strong growth in logistics’ share of total investment, the relationship holds pretty well,” CBRE wrote.
For markets such as Denmark, the Netherlands and Belgium, where margins spreads were narrow to begin with – or Germany, which was already competitively priced in 2018 – the effect was less pronounced. In contrast, Poland, Portugal and Hungary were outliers, which CBRE said could not be explained in the same way.