Logistics investors cautious as rising costs impact returns

Investors are keen to buy logistics assets but rising costs are making them more cautious, experts agreed at Real Asset Media’s European Logistics Investment Outlook briefing, which took place recently at Savills’ headquarters in London and online on the REALX.global platform.

“We’re in the middle of a correction playing out right now in front of us,” said Marcus de Minckwitz, head of EMEA industrial and logistics, Savills. “A year ago it was normal to have 25 bids, different rounds of bidding and higher prices, but this year that has stopped. The impact on returns is making a difference.”

Rising costs across the board – materials, transport, labour – are squeezing people’s margins, while rising interest rates are making financing more expensive. Geopolitical risk is also making it easier to lenders to say no.

“Buyers still want to buy even at the lowest possible rate of return, but with rising costs and rising interest rates they find it difficult at these high prices,” said de Minckwitz.

Buyers are more selective and negotiations now tend to take longer.

“Interest rates have moved from below zero to well above 1% and this is having quite an impact on financing costs and returns,” said Mehdi Bourassi, director of finance, Tritax Eurobox. “Investors are taking this into account when bidding for an asset and this will make a difference in the market.”

More attention will be paid to the quality of buildings, to their ESG credentials and to the capacity to capture rental growth in future.

“We are more bullish on the UK than on Continental Europe but we are very bullish on the logistics sector”, said Benoit de la Boulaye, CEO, BNP Paribas REIM. “The will to invest is definitely still there, but we have adapted our approach and business plan: the quality and the location of a property are even more of a focus, and when buying spec we’re very conscious of the strength and solidity of the developer.”

Despite these issues coming to the fore, however, experts agree that in the case of logistics the positives outweigh the negatives.

“I am convinced the tailwinds are stronger and longer-lasting than the headwinds,” said Mike Forster, director, head of UK logistics, Trammell Crow Company. “Significant demand, lack of supply, low vacancy rates and investment growth will continue for the foreseeable future, while inflation will subside in the next two or three years and on materials and labour costs we can see light at the end of the tunnel. We are building for the next 15-20 years.”

The sector’s fundamentals mean that rental growth is set to continue, even if there is a correction on the capital markets side driven by the increasing cost of debt, which means that logistics will be less negatively affected than other asset classes.

“There is a lot of capital out there and a strong belief in the prospects of the sector, so liquidity won’t be impacted,” said de Minckwitz. “Logistics still comes out on top”.