Strong activity from occupiers across Europe has led to the lowest vacancy rates since 2007. But, says Liza Helps, it’s not all bad news for occupiers.
According to property consultant JLL, take up in 2015 is set to surpass previous years. “In the first three quarters of the year alone,” says Alexandra Tornow of JLL, “take up was 24 per cent up across the 11 main markets. By the end of the year that will increase further – a new record.”
She adds: “Much of the growth in take-up is being attributed to on-line sales and the pressure is on the retailer’s side to pay attention to logistics and to align the supply chain making it more visible and agile. This trend will continue to keep occupier demand strong over the next 12 months.”
Dr Neil Blake, head of EMEA research at CBRE, explains: “A growing proportion of the recent boom in consumer demand has been satisfied by the internet, which pushed down demand for bricks and mortar retail while transforming the industrial and logistics sector. In the future consumer spending online has more scope to grow within mainland Europe than it does in the UK, which already accounts for one in three of all European purchases made by consumers over the internet. Analysts believe that countries like France must begin to catch up and this is why we see these markets becoming far more active.”
The downside of on-going demand is that vacancy rates are plummeting especially for the larger units. Dirk Sosef, director of research & strategy at Prologis, says; “The vacancy rate has come down significantly on a pan-European basis – it is only just above six per cent the lowest level ever seen, even lower than 2007.”
Andrew Gulliford of SEGRO notes: “Despite being one of the slower economies to revive the occupier market, in France it has been lively over 2015 and vacancy rates have fallen significantly. Whereas Lyon used to have an oversupply, now it is a very tight market.”
In some areas vacancy rates of just three per cent have been recorded. This has led to a higher than normal level of development starts on a pre-let or build-to-suit basis.
Logan Smith of BNP Paribas Real Estate says: “Demand for new high-grade warehouses remained stronger than availability in most markets in 2015 with the result that design and build [build-to-suit] solutions continued to be a strong alternative, particularly for large units.”
Prologis recorded five new build-to-suit starts in Europe between July and October 2015 totalling some 127,092 sqm. These included a facility for electronic e-commerce retailer AO in Cologne, Germany; and a facility for BMW in Bratislava, Slovakia.
According to research by JLL there has been a 10 per cent year-on-year increase on construction figures and while this may sound promising for occupiers seeking space, Mo Barzegar, president and CEO of LOGICOR is quick to point out: “Development activity in 2015 and that forecast for 2016 is roughly 30 per cent below levels delivered in 2007. The type of delivery is also radically different; whereas in 2007 it was 80 per cent speculative, now the vast majority of delivery is built-to-suit.”
That is not to say that there is no speculative development at all, just that it is focused in areas where vacancy rates are at a historic low, and where demand is at its greatest. Thus there has been a plethora of speculative development start-ups in the UK with a few in The Netherlands and Spain. But now, at the beginning 2016, this is being seen much more strongly in countries such as Germany.
Gulliford says: “Germany is a very active market for us and has supply shortages so it is not surprising that we have embarked on speculative development in specific areas.”
The company has already been successful with the letting of a 15,000 sq m speculative unit at its Krefeld-Sud scheme near Dusseldorf and is embarking on yet another one totalling 20,000 sq m at Bishopheim.
Logistics developer and investor Verdion has also opted for speculative development in Germany. It is developing 15,000 sq m of Grade A warehouse space at its 92,000 sq m Verdion Airpark scheme, Berlin. The new project is being developed in partnership with funding partners, Rockspring Property Investment Managers on behalf of a discretionary fund, and completion is scheduled for the end of June 2016.
Three new units, each totalling 5,000 sq m will be available either individually or in combination, flexibly designed to suit the strong market demand from 3PLs, retailers and e-tailers seeking urban logistics space, accessible to both Berlin’s Airport and Berlin City Centre.
Verdion Airpark Berlin is located within two km of the new Berlin Brandenburg Airport and adjacent to key road and rail infrastructure. The scheme will be delivered in phases, with both speculative and build-to-suit opportunities for warehousing units ranging from 5,000 sqm to 40,000 sqm. The development has an expected end investment value exceeding €90 million.
Verdion CEO Michael Hughes says: “Verdion Airpark occupies an exceptional location for urban logistics, being close to Berlin City Centre and adjacent to what will become one of Europe’s most important airport hubs. The strength of tenant interest in Verdion Airpark Berlin underpins this new investment.”
Other areas where speculative development is becoming more prominent is at strategic transport nodes. Goodman speculatively developed a 13,800 sqm facility at its Pomeranian Logistics Centre located near the Gdansk Deepwater Container Terminal. Which was quickly snapped up by a local 3PL.
“The dynamic growth of the DCT Gdansk is having a positive impact on the attractiveness of the logistics market in the Tri-City area. More and more companies are deciding to locate their operations in Gdansk and the expansion of the Pomeranian Logistics Centre shows that Goodman’s investment is the right choice for them,” says Tomasz Mika, head of industrial department Poland at JLL.
Many speculative schemes are being piggy-backed off a pre-let or build-to-suit deal. Gulliford says: “In general, customers [in Continental Europe] are happy to share the same site with others. For example in the Czech Republic we pre-let a unit at SEGRO Logistics Park Prague to Ikea and speculatively developed the rest of the scheme, which eventually was leased to Promed; it is what we call a pragmatic speculative development.”
Goodman is providing speculative space at its latest scheme in Germany in just such a way. It has acquired a 7.2ha site at Bayernhafen Nuremberg, the largest multi-modal freight village in southern Germany, where it will develop a 42,000 sqm logistics centre. It has secured two pre-lease agreements with logistics service providers STUTE and DB Schenker, with the remaining space to be developed on a speculative basis.
“The commercial success of the Nuremburg project confirms our disciplined approach to land banking. Our purchasing decisions are based on consultations with our customers and our analysis of the market to secure the most attractive sites,” said Jordan Corynen, Goodman regional director for Germany, Austria and Switzerland. “We have secured additional prime locations throughout Germany, on which a further 457,000 sqm of logistics space can be developed.”
The new facility has 12m eaves and will include LED lighting throughout, as well as insulated dark-tube radiators to reduce consumption costs. Once the property is completed, it will receive a silver certificate from the German Sustainable Building Council (DGNB).
In addition to Nuremburg, another port-based project, Goodman Interlink Hamburg, will shortly be completed and will have 8,500 sqm of remaining space for lease.
Not all markets are strong enough to encourage speculative development.
Despite a growing demand for space in France, SEGRO is not planning any speculative development as yet, instead it is pushing ahead with bringing sites up to ‘oven ready’ levels with planning, infrastructure works and individual plot preparation for pre-let deals.
It has sites in Lyons where it could build 20,000 – 30,000 sq m. In Paris it has two sites that it is promoting; one on the A1 at Mitry Mory, where it could bring forward 55,000 sq m, which is already prepped and consented as well as a further site known as Garonor Aulnay on the former Peugeot/Citroen works which could provide up to 100,000 sq m.
Goodman is also prepping sites ready for development in the country. At its Saint-Mard Logistics Centre near Paris it has plots for two stand alone units of 12,000 sqm and 24,000 sqm that could be delivered within eight months after agreement. The developer also has a plot ready for a 62,000 sqm facility at its successful 220,000 sqm Lille Douai Logistics Centre, south of Lille.
It might be assumed that with such strong occupier demand would be the catalyst for significant rental growth but luckily for occupiers at present that is not
Machiel Wolters, head of EMEA industrial and logistics research points out: “The capital markets environment we are in makes it possible for new developments to be placed in the market at very competitive rental levels, because with yields falling, developers are able to lower their asking rent and still generate the same purchase price for their warehousing.”
The appetite shown by investors for logistics facilities has been strong. In the first half of 2015 the UK, Germany, Sweden, and France, accounted for 75 per cent of all European logistics and industrial investment totalling around €10.1 billion, rough estimates of the final half of the year are thought to be similar.
However, says Logan Smith of BNP Paribas Real Estate product, it has been getting scarce which could be good for occupiers.
With occupiers increasingly forced to go down the build-to-suit route, and many of them as owner occupiers, there is an opportunity to cash in on demand and enter sale and leaseback agreements at very competitive terms.
“This trend has accelerated especially among the larger users in particular who are more sophisticated. They have no intention of leaving facilities having just acquired it and spent large amounts on fitting it out and are happy to accept long term leases. A sale and leaseback is seen as good business strategy.”
French multi-format retailer fnac secured a sale and leaseback with MEAG for its 38,200 sqm facility in Wissous adjacent to the Paris Orly International Airport. The deal was secured off a nine-year lease. Heitmann advised.
Tim Davies, head of EMEA industrial at Colliers International, says: “Sale and lease-backs were pre-eminent during periods of financial crisis or poor performance in industry, but corporates are now realising that there are a number of competitive advantages in using these as part of a detailed ownership strategy.
“We are seeing the biggest movement in corporates exploring an SLB strategy in the industrial and logistics sector, where the traditionally high-income component of industrial properties, relative to other property types, coupled with the e-commerce growth story, means that there is unrivalled interest and new pools of capital coming from overseas points. This includes North American and Canadian pension funds as well as further capital coming out of Europe. These sources are looking for investments in large, good quality industrial portfolios, and in less strong properties with asset management potential.”
The more liquid European markets have been the most active, including the UK, as well as France, Sweden and Finland. There has also been some activity in Europe’s manufacturing and distribution core of Benelux and Germany, and this is seen as continuing.
Recently Delin Capital Asset Management bought a high specification warehouse in the Port of Amsterdam for around €30 million, through sale-and-leaseback transaction with G-Star Raw, the jeans retailer.
The transaction represents the second acquisition by DCAM in the Amsterdam port, following its purchase of Casablancaweg 8, a 107,000 sqm multi-let logistics asset in December 2014.
The 37,000 sqm modern property, which was built by G-Star within the last two years, and is used as the global e-commerce and fulfilment centre for G-Star Raw. The property is let on a full repairing lease with an unexpired weighted average term of 11 years.
Christian Jamison, chief executive officer of DCAM, said: “This, our second sale and leaseback transaction, provides us with access to a high quality asset with a strong covenant.
“As retail patterns continue to shift towards the e-commerce market, we believe we are strategically positioned to benefit from this growth, having invested in core, well located assets. We look to continue to build relationships with strong tenants, such as G-Star Raw, and the structure of this agreement is one we would like to continue to replicate across the logistics market.”
DCAM was advised by JLL, CVO and CMS, Nauta advised ING and Houthoff and DTZ advised G-Star.