CEE: Logistics goes from strength to strength
The Covid-19 pandemic has advanced the sector and experts predict further growth. Paul Strohm reports.
In 2021, as Europe – west, east and central – emerges chrysalis-like from its pandemic lockdowns and as vaccines help to rebuild public confidence, it will be apparent that the region is on a different trajectory to that which seemed likely before the covid crisis began.
It is a now familiar litany. The expected trends are the same, but their timescale has been compressed. “In general, 2020 has taught many companies a lot of lessons,” says Harry Bannatyne, partner and regional director of industrial and logistics at Colliers International. “And it has accelerated things that were already happening in the market.”
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Logistics developer/investor Panattoni Europe’s CEO Robert Dobrzycki explains that trends that were expected to take some time to bed in have matured in just a few months. “Obviously, the pandemic is still around, which affects our daily lives, but logistics has been a clear beneficiary of the shift,” he says.
Renata Osiecka, managing partner of Warsaw-headquartered property consultancy Axi Immo, agrees: “The pandemic has revealed the strength of the sector and demonstrated how solid its fundamentals are. All the trends were accelerated, driving demand for warehouse space, mainly from online shopping.”
While the logistics and industrial property sector has gained ground because of this acceleration, the sector in the Central and Eastern Europe has other advantages which mean the region’s strategic importance has increased dramatically during the year as supply chains have adapted to the pandemic.
Bannatyne believes that due to risks to global supply chains, companies that ‘offshored’ processes outside Europe will start to return, he said.
“I think CEE will be the biggest winner in this because it is centrally located, very cost effective and it has come on leaps and bounds in the last few years in terms of connectivity, power and infrastructure in general,” Bannatyne says.
‘The pandemic has revealed the strength of the logistics sector and demonstrated how solid its fundamentals are.’
Renata Osiecka, Axi Immo
“It will take time but, in the interim, e-commerce will continue to grow because we are way behind Western Europe. If you look at Poland it has been an unbelievable story. The stock in Poland is more than the stock in Czech Republic, Slovakia and Hungary put together and consumer demand in Poland is growing and growing,” Bannatyne says.
Frank Schuhholz, founder of FMS Advisers, agrees and says that for the last nine months, Poland and the CEE region have already benefited from the fact that there is a land connection from the Far East into Europe and that this will aid the process of nearshoring.
Referring to the Eurasian Land Bridge – also referred to as the New Silk Road – which links China and Siberia to the West, Schuhholz says: “We have seen that in the railway sector volumes have almost doubled compared to 2019. Last year we had 200,000 to 250,000 TEUs (Twenty foot Equivalent Units) up to October 2019. This year we are already up to about 400,000 TEUs imported from China.”
Overland supply chains
“Lots of that was PPE but Poland and the rest of the CEE has benefited because they could ensure that the supply chains would work overland while there were major interruptions in sea freight.
“Nobody could access factories [in China], containers were not delivered to the ports and everything more or less came to a standstill. Airfreight rates rocketed and there was limited capacity because passenger flights were not available. But rail could demonstrate that there was a reliable link between the Far East and Europe and that it would continue.”
‘Overall 2020 is going to be very good for logistics. In Western Europe there is huge potential so you can only imagine how much growth there is ahead for Central Europe.’
Robert Dobrzycki, Panattoni Europe
While German cities, notably Duisberg and Leipzig, have been beneficiaries of the East-West rail traffic, CEE countries have the capacity for growth in all areas of logistics. “Overall 2020 is going to be a very good year for the logistics sector. Central Europe is very behind in terms of stock per capita and e-commerce penetration. In Western Europe there is huge potential so you can only imagine how much growth there is ahead for Central Europe,” Dobrzycki says.
“Also there is the phenomenon that Poland and the Czech Republic are bordering the largest economy in Europe,” he adds. “It is becoming pretty obvious that western parts especially are e-commerce hubs for Germany and Western Europe.”
Generalising about the CEE is difficult as it is such a large and heterogeneous region. CMS Cameron McKenna Nabarro Olswang partner Natalia Kushniruk points out, for example, that across the region logistics represents 30% of investment volumes, but in Poland it is as much as 48%.
In Ukraine there is strong demand from occupiers but very little supply. Kushniruk points out that the scale of the market is much smaller – the total stock in Ukraine is 3 million sq m whereas in Poland the total is 19 million sq m and in Czech Republic it is 9 million sq m. However, in terms of land mass Ukraine is nearly twice the size of Poland and its population is larger.
The mismatch between supply and demand from occupiers in CEE makes it a landlord’s market and Osiecka says property owners are beginning to think it is better to allow a certain amount of vacancy to be able to hang on and choose the best tenants.
“This strategy makes sense because the supply dynamics are changing as well.” She agrees that there has been little development activity in 2020 and one explanation for this is that banks have taken a more conservative approach to lending, particularly for speculative development.
Potential for more growth in CEE industrial markets
As with the rest of Europe, the logistics and industrial property markets are currently among the safer bets in Central and Eastern European countries and are benefiting from the acceleration to online shopping that Covid-19 and the resulting restrictions have brought.
The difference is that the CEE market started from a much lower base level than Western Europe when the pandemic began. As Kevin Turpin, regional director of research at Colliers International, points out, the potential for growth is thus greater both in terms of potential increase in online retail penetration – less than 10% in many CEE countries – and in terms of the scope to build more space.
While Europe has a total of around 350 million sq m of industrial and logistics space, the CEE share of this is about 50 million sq m, or 15%. Germany alone has 70 million sq m and the Netherlands more than 30 million sq m.
Meanwhile, the CEE vacancy rate in industrial and logistics buildings is sometimes as low as 5%.
Turpin explained to an online audience at the recent CEE Summit, held on the REALX.Global platform by Real Asset Media, that total investment flows into the region across all sectors fell by 12% in the first three quarters of the year. By the end of Q4, this seems likely to have extended to a 20% shortfall compared to 2019.
But while investment transaction volumes fell, average deal size, including portfolio acquisitions, increased by about 31%. “This shows that investors are looking at larger deals and also portfolio transactions,” Turpin said.
‘Overall, real estate is compelling. The question for industrial and logistics is how far yields will come in.’
Kevin Turpin, Colliers International
And for the logistics and industrial sector, investment flow increased on 2019 during the first three quarters.
One of the main constraints on investment deals is a familiar one: lack of stock. Among the key reasons for that is that the major developers creating new space are also investors and retain the assets they develop. The names are familiar: P3 and its Singaporean parent GIC; China’s CIC; GLP, which owns Gazeley and bought Goodman’s CEE portfolio; Mapletree; CTP; and CBRE GI.
Rents are largely stable, says Turpin, and range from €2.9 to €5.5/sq m/month. Land is available, although it is tougher to obtain permits in some countries than others. Obviously, land supply around capital cities is more restricted and the price of land can be over €100/sq m, while Turpin says the “sweet spot” for developers is around €50/sq m.
Construction costs range from around €300 to €600/sq m. Turpin says they are stable but have risen considerably in the last few years – in some countries by as much as 25%.
This year investment prices/initial yields have adjusted. While office yields in CEE have moved out 25bps and shopping centre yields by 50bps, industrial and logistics have either compressed or remained stable, depending upon location.
“Overall, real estate is compelling. The question for industrial and logistics is how far yields will come in. In a couple of markets they are already challenging shopping centres,” Turpin says. “Investor appetite is incredibly strong and given that some outer sectors are off the radar, industrial and logistics is number one on many lists for acquisition.”
Although the second wave of Covid has hit CEE harder than the first, the future for the region is promising. Turpin says it is well positioned to take advantage of global supply chain restructuring over the coming years, although he adds: “It is a large and complicated process and not something that can be done overnight.”