A desire to diversify away from office or retail investments, coupled with a high-income return offered by the European industrial market is motivating a range of investors including German open-ended funds and US institutional and private equity funds, according to CB Richard Ellis' Q2 2009 index of prime industrial rents and yields.
According to CBRE, prime industrial yields rose by 10 basis points (bps) in Q2 2009 to 7.93%, having risen by an average of 30 bps per quarter over the previous year. The pace of yield increase is clearly slowing, with the repricing that has already taken place proving attractive to some types of investor.
David Turner, Executive Director, EMEA Capital Markets, CBRE said: "Outside of the German Funds and US Core-plus Funds we have also seen a resurgence of interest from local property companies and private investors as pricing has eased, many of whom had been shut out of the market by the surge of interest in the sector from pan-European buyers over the last five or so years. As we get through the cycle, we anticipate seeing more European institutional money coming back into the market, and there are strong indications that this process has already started in the UK. The sector remains a hardy perennial to a wide audience."
Turnover in the European industrial and logistics market totaled nearly 2.5 billion in the first half of 2009, thus maintaining its 10% share of the overall investment market. Key transactions that took place in this period included Harbert's purchase of a portfolio of UK logistics assets from ProLogis for 73.9 million; AEW's acquisition (also from ProLogis) of a portfolio of distribution warehouses in Germany and The Netherlands for 119.5 million; and Deka's purchase of the Sainsbury's distribution warehouse at Enfield, London, from Aviva for over 70 million.
Despite some improvements to economic indicators, occupiers of industrial property remain predominantly cautious and continue to control costs to protect margins. Whilst many manufacturers have reduced production levels in order to match levels of demand, most major European economies remain in recession with the eurozone area as a whole expected to contract by over 4% this year. Recent data suggests that producer sentiment has seen some improvement in the last two to three months, with some measures of trade volumes also stabilizing.
CBRE's index of prime industrial rents for the EU-15 area fell by 1.5% in Q2, and has slipped by 5.3% over the past year. This conceals the fact that large declines in the quarter were confined to a small number of markets, including Spain, Ireland and Belgium. There is also considerable variation in the degree of rental change that has taken place since the peak of the market ranging from declines of over 20% in places such as Lisbon, Dublin and Madrid, to rental stability in the main German and Dutch markets. Reductions in take-up levels have also been only moderate in some key markets, and mainly confined to small to medium-sized units.
Occupier caution is being reflected in extended decision-making periods with some requirements being shelved. There is also a widespread focus on optimizing capacity, sometimes through consolidation into fewer buildings, with some companies taking the opportunity to vacate outdated premises in favor of newer, more efficient buildings.
According to Guy Frampton, Head of Industrial and Logistics for EMEA, CBRE: "Occupiers are looking at numerous ways of cutting occupational costs. Rent is the obvious one, and many are seeking to renegotiate lease contracts across the board where practical. Some of the more substantial savings, however, can be found in space utilization, service charges and supply chain reconfiguration."