Logistics has proved to be resilient, leading many in the market to consider its performance as a silver lining of the crisis, despite the unprecedented disruption across Europe’s commercial real estate sectors caused by the coronavirus pandemic.
Continued strong occupier and investor demand, coupled with logistics’ ability to offer greater certainty of future cashflow than other property types, means those lenders that are aiming to dial their financing activity back up will, according to debt market sources.
Paul Coates, head of debt and structured finance at consultancy CBRE Capital Advisors, told Real Estate Capital: “When you think about a post-covid world, it is easier to feel confident about logistics than retail. It is seen as a more resilient asset class than others, where it is more difficult to imagine when revenue or profits will come back. There is more clarity on the future of logistics.”
Demand for logistics space has only increased as a result of the pandemic, with lockdowns fuelling e-commerce activity while highlighting the importance of supply chains and logistics to people’s daily lives, said Jack Cox, head of EMEA industrial and logistics capital markets at CBRE: “There will be more competition and more supply of product because there is more fundamental demand from occupiers for this type of logistics space. ”
The growth of e-commerce across Europe was already the driving factor behind logistics’ growth, pre-covid-19. European logistics investment volumes reached €35.9 billion in 2019, the second-highest level in the past seven years, according to real estate services firm Savills.
Investor appetite for logistics is strong, but there is still a lot of price discovery ahead within the investment market, Marcus Minckwitz, director in the regional investment advisory EMEA team at Savills said. “Vendors are willing to be patient given the ever-increasing demand for the sector.”
There is strong evidence that real estate equity investors will increase their focus on European logistics. US real estate manager Hines told sister title PERE on 17 June that it is aiming to grow its European assets from €20.9 billion to €40 billion in the next five years, with urban logistics a major focus of its growth strategy. This month, industrial property specialist SEGRO raised £650 million (€711 million) through a share placing to invest in development projects and acquire land and logistics assets.
Investment deals are being done. On 18 June, property manager Nuveen Real Estate announced that its European logistics platform had acquired several Dutch logistics assets for a combined €215 million.
Financing deals – both for refinancing and funding new acquisitions – have also increased in the past few weeks, said Coates, although not to pre-virus levels. He said debt funds and other types of alternative lenders have been the most active in this resurgence, albeit lending at higher margins than six months ago.
“When you consider assets that might have been financed by a commercial bank before, you are possibly going to be seeing a more conservative lending structure at a higher price point, say 5 percent in terms of LTV and pricing maybe up 25 basis points on logistics,” said Coates.
There is also some evidence of banks writing new loans in the sector. In its results on 29 May, logistics owner Urban Logistics REIT announced it had agreed a £151 million credit facility from three banks – Barclays, Santander and Lloyds – for future asset purchases.
Dutch bank ING told Real Estate Capital that it is now selectively providing finance for its core clients in logistic sub-sectors, such as aviation and airport logistics.
Jules Kollmann, global lead on containers and logistics at ING, said limited availability of funding, coupled with a negative economic outlook, has led the bank to increase debt pricing. “The pricing increase depends, among other factors, on the credit quality of the client, but in general margins have increased from 20-40 percent.”
Speaking in private, one industrial specialist from a property consultancy said, at the prime end of the market in mainland Europe, loan pricing had increased by around 50bps since the covid-19 crisis began.
Coates noted that commercial banks are increasingly taking a fresh look at opportunities in the sector, potentially leading to reduced loan pricing going forward.
Another factor that might bring debt pricing down would be a comeback of the investment banks into the space, and a return of investor demand for commercial mortgage-backed securities, said Coates. “In the US, some CMBS deals are being done, which can be seen as a prelude to what might happen in Europe. If investment banks come back to finance the European logistics sector, liquidity could increase and pricing would potentially come down.”
Limited land supply
CBRE’s data indicate strong ongoing occupational demand for logistics, with vacancy rates at record low levels. Vacancy in Hamburg, for example, is below 1 percent, which suggests little occupational risk, according to Cox.
Pre-crisis, speculative development finance was available for experienced logistics developers, although one advisor said no more than around 30 percent of new development is done speculatively. As lending activity in the sector returns, speculative development finance might be reserved for key borrowers in core markets, the source said.
There is, however, a major obstacle facing both developer and investor aspirations in the sector, as well as scope for lending activity: limited land supply.
According to Cox, limits to the amount of land with permission for logistics development means a lot of capital is chasing few opportunities. “We need to see a broadening of the bottle neck before there is an equilibrium between equity and debt finding opportunities.
“The lending liquidity to the sector is available as well as the equity component, so the constraint is the lack of land permissions,” Cox added.