Ask real estate professionals about prospects for European logistics and most will rave about the growth outlook in a market buoyed by the e-commerce boom.
However, some are sounding a note of caution. While investors continue to pile into logistics, with lenders eager to follow them, there are suggestions values look overinflated in pockets of the market.
At last week’s PERE Europe event, hosted by Real Estate Capital’s sister title in London, Michael Shields, who leads ING’s European lending operation, voiced concern about logistics. He recounted a recent approach to finance a logistics development at an eye-watering 90 percent loan-to-cost ratio. Voicing concern about the leverage, Shields was met with the argument that it would eventually translate to a 57 percent loan-to-value ratio. “I said: ‘explain this to me, because I am not really getting it’,” Shields remarked.
Such anecdotes suggest lenders need to scrutinise logistics financing deals, despite all the noise about staggering European investment volumes, which last year reached €41.3 billion, 80 percent up compared with 2016, according to JLL.
It is certainly unnerving to witness the prime yield compression in the sector, which was traditionally seen as the poor cousin to offices and retail. Prime European logistics yields registered a record low of 5.30 percent in Q1 2018, down from 7.91 percent in Q4 2009, according to CBRE. Although logistics yields remain at a premium over those of prime office and retail, at 3.80 percent and 3.38 percent respectively, the spread is narrowing.
However, the fundamentals suggest this is not a bubble market. Europe’s vacancy rate was below the 5 percent mark in Q4 2017, down from 6 percent in the previous year, according to JLL data. Speculative development accounted for only 24 percent of the 12.3 million square metres under construction last year – which is down by 1 percent compared with 2016. This year, new speculative supply delivered to the market is expected to slow down due, in part, to a scarcity of development land in many markets.
E-commerce represents a sea-change in the retail economy and logistics is the beneficiary. Facilities, as those who work in the sector stress, are no longer simply ‘sheds’. They are, in many cases, high-tech elements of complicated supply chains and are, as such, high-value properties.
At PERE Europe, panellists from the equity side of the logistics industry argued the case for sustainable growth. Mike Green, head of UK industrial and logistics at Aviva Investors, said he is not seeing a greater risk premium for industrial logistics in the UK, despite this market being in a late cycle. “Bubbles occur when there is not real foundation to demand,” he said, noting that one of the key factors benefiting logistics is the diversity of the occupier base.
The capital behind logistics has also changed in the past couple of years, bringing with it greater investment discipline, Nick Cook, president and CEO of Gazeley, GLP’s platform in Europe, pointed out, citing the “smarter, institutional global capital” backing developers.
Lenders are evidently keen to back logistics portfolios. So far this year, investment banks have launched a couple of logistics securitisations in Europe’s CMBS market, with the most recent deal, issued by Bank of America Merrill Lynch and Morgan Stanley, securitising a £315.3 million (€357 million) loan backed by a portfolio of UK logistics properties sponsored by Blackstone.
Fundamentals look strong for now, but lenders need to look beyond the hype. Logistics is benefiting from a structural shift in the way we shop, but debt providers should keep an eye on whether the rush of capital into the sector pushes values, in some cases, out of step with reality.
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