Rental growth compensates for costs rise in logistics sector

The logistics sector is facing several challenges but rental growth makes it all worth it, delegates heard at Real Asset Media’s European Logistics Investment briefing, which took place recently at MIPIM.

“Inflation is going up, construction costs have risen by 10-15% across Europe last year, planning times have got longer and ESG factors have to be taken into consideration,” said Frank Pörschke, CEO, P3 Logistic Parks. “Construction costs are also increasing dramatically. There has to be an impact on the rental side to make it viable.”

In the past year rental growth has come through in most markets as demand has kept increasing and supply has been restricted.

“Projects that used to take six months now take two or three years,” said Logan Smith, senior managing director – head of European logistics, Hines.  “If you add all the challenges together, you can justify rental growth in Logistics more than in other sectors. There are structural demand drivers and real market forces, e-commerce first of all, behind the unprecedented and unexpected rental growth we have seen and which is set to continue.”

Europe has seen double-digit growth in some markets but it is still lagging behind the UK.

“Rents are still low in continental Europe compared to the UK, which has always been the first mover and where values have gone up by 25% in the last six months,” said Robert Cotterell, head of investment Europe and head of UK , Cromwell Property Group.  “We believe that pressure and demand will come to Europe, but not as quickly”.

Continental Europe could catch up faster than expected

Once that growth dynamic is set in motion, though, continental Europe could play catch-up faster than expected.

“It’s just historic reasons, the UK has always been more expensive,” said Pörschke. “But now we are seeing similar developments in European countries. After all, population density is similar to the UK in many places and it’s even higher in the Netherlands, so the same pressures should apply.”

Companies are expected to do more to make the asset sustainable and human-centric. All these interventions come at a cost, but they are made possible by the success of the sector, which has led to rental growth.

“In a high rental environment you can afford to make those improvements and you can spend the money efficiently,” said Daniel Harris, senior managing director, head of European investments, Cain International.

The demand/supply imbalance is particularly stark in the UK and internet penetration is by far the highest in Europe.

“We’re focused on the UK because supply is so restricted,” said Harris. “There are stats that in London supply will run out in five months. It’s very challenging but there are opportunities everywhere, whatever your risk profile is.”

The positive outlook for the sector has led to the return of speculative development, especially in the UK.

“It is not just happening in London but all over the country,” said Cotterell. “There is such a need for space and such a spread of tenant demand that allows that spec development to happen. The numbers work.”