Savills Investment Management has urged caution because surging demand for ‘Big Box’ logistics assets has forced prime net initial yields in core European markets down to historically low levels of 3.5% to 4.0%, and sometimes lower.
Stock selection and rental growth are now among the most important considerations for investors, the firm points out.
In a new research report, Thinking Outside Big Boxes, the firm states that while mainstream ‘Big Box’ buildings continue to display strong fundamentals, pricing pressures and newly emerging themes are creating alternative opportunities in other industrial sub-sectors.
The report states that urban and last-mile logistics, light industrial and cold storage sub-sectors offer investors with diversification opportunities because they benefit from the long-term trend towards the faster movement of goods and supply constraints on urban land, the report states.
The fundamentals of long-term demand – economic growth, trade volume, manufacturing output and retail sales – continue to support demand for ‘big box’ logistics and warehousing the firm added, but the availability of these remains limited in major European markets and vacancy rates are at historic lows. Meanwhile, online sales are expected to grow strongly and be a key driver for occupier demand.
Value in being more selective says logistics head
Savills IM estimates that demand for additional logistics space totalled more than 10 million sq m in Europe in 2020 alone and another 21 million sq m could be added by 2025.
“Secular economic, technological, consumer and demographic trends are bolstering the strong fundamentals that already exist in European industrial and logistics markets,” said head of logistics, Europe, Alistair Ennever.
“The dynamic growth of e-commerce has been accelerated dramatically by the Covid-19 pandemic, boosting the success of the logistics market even further. For this reason, we continue to see value in buying and creating modern, flexible logistics and industrial facilities in the key hubs, though in a more selective manner.
“With yields at historically low levels, stock selection, rental growth and sustainability of income are now the most important factors for investors to consider.”