Yields fall and rents rise as CEE logistics demand grows

The competitive yield spread is one of the attractions of the CEE market for foreign investors, experts agreed at Real Asset Media’s Hot Assets in CEE: Market Update & Investment Outlook – 2022 briefing, which took place online this week on the REALX.Global platform.

“We see great appetite from retail as well as institutional investors for CEE real estate,” said Anna Duchnowska, managing director – asset management Europe, Invesco Real Estate. “The CEE region is attractive because of the yield premium compared to mature European markets. The yield of an office in Warsaw is 4.7%, in Paris or Milan is less than 3%.”

Anna Duchnowska, Managing Director – Asset Management Europe, Invesco Real Estate

In Q3 2021, prime office yields were 4.25% in Prague, 4.7% in Warsaw, 5.25% in Budapest, 5.50% in Bratislava, 6.75% in Bucharest and 8% in Sofia, according to Colliers figures.

Offices have remained largely stable, but the industrial and logistics sector has seen yields compress to an unprecedented degree.

“Around 70% of the logistics market is controlled by long-term holders who do not intend to sell, so the 30% that is on the market is being chased by a lot of people,” said Kevin Turpin, regional director of research CEE, Colliers. “Since Q1 2020 I&L yields compressed by almost 100 bps on average in CEE and by a phenomenal 180 bps in Poland and they are coming down further.”

Demand is such that there is speculation in the market that yields could fall as low as 2%. “It would be record-breaking but it’s not inconceivable,” said Turpin.

“I thought we had reached maximum yield compression but the demand from occupiers keeps rising and it’s difficult to tell where we’ll get to,” said Duchnowska. “I think the downward trend will continue for another two or three years. We’ re still developing product and still making money, but we need rental growth for it to work.”

Rental growth is in prospect as demand outweighs supply

That is already on the cards. Demand for logistics assets is so high that the few developers who control the market will demand and achieve higher rents.

We like logistics everywhere,” said Petra Blazkova, senior strategist, European research and strategy, LaSalle Investment Management. “Going forward good locations close to consumers, like urban fulfilment centres, can demand low yields, but we’ll definitely see substantial rental growth.”

The industrial and logistics sector has also been helped by the fact that the quality of the product is on a par with Germany or the UK. Many assets have been built recently and are in line with sustainability criteria, which makes them even more attractive to investors.

It is not all about e-commerce or urban logistics because the industrial side is very strong. Even the automotive industry, which has been going through challenging times, has adapted as demand for electric cars and batteries has been growing.

There are a few clouds on the horizon for the sector, but experts agreed that it will continue its positive trajectory for a few years yet.

“The concern is costs rising, from rent to energy to labour, costs which ultimately will be borne by the tenants and the customers, pushing inflation up even further,” said Turpin. “So there are some concerns over the future, but things look pretty healthy at the moment.”