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AEW: light industrial and urban logistics will benefit from e-commerce boom

Hans Vrensen, Head of Research & Strategy, AEW

Many investors are focusing on large scale logistics warehouses in Europe, but they may want to turn their attention to light industrial and urban logistics, as the sector benefits from strong logistics momentum and prospects are bright, according to a new report by AEW.

E-commerce had already doubled its share of retail sales between 2012 and 2019, but last year the Covid-19 pandemic further boosted online shopping, especially during lockdowns. It’s a trend that is unlikely to be reversed, according to the report, as new habits will last and mobile app-powered sales will continue to support e-commerce expansion.

‘More urban logistics will be needed to deal with the growing number of parcels and to provide faster and more affordable services’, said Hans Vrensen, Head of Research & Strategy, AEW and author of the report. ‘Furthermore, Europe is experiencing a 4th industrial revolution focusing on high value-add industrial production, triggering an increased need for modern and flexible light industrial space close to highly-skilled workers’.

Therefore ‘scarcity of land together with strong demand should provide a solid driver for high land values and sustainable rental growth for some time to come for urban logistics and light industrial (re)-developments’, he said.

Traditional scepticism on light industrial tenant quality is misguided, the report argues, as it confirm the diversity and average credit score across a large sample of tenants, showing it is in line with other property types.

Prime rents for light industrial are ahead of logistics, as it comprises smaller buildings with a higher office component and located in more dense urban locations. Rental growth for light industrial in the last five years has been in line with strong growth in prime logistics rents.

Lockdowns have had an impact on industrial take-up, but the German, French and Dutch markets in particular proved resilient last year after reaching a near-record 17.4 million square metres in 2019.

Prime yields for light industrial across the German, French and Dutch markets have come down by 220bps over the last five years to reach 5.3% at mid-year 2020.

‘Surprisingly, prime light industrial returns across the three most established Western European markets are in line with prime logistics for both 2018 and 2019,’ said Vrensen. ‘Since 2017, light industrial returns have been ahead of both offices and retail. Light industrial offers good stable income returns due to its diversified tenant base and multi-let nature’.