Despite falling yields, France is set to remain a key destination for logistics operators and investors, says Stephan Riechers, head of investment management logistics & light industrial at Union Investment.
France was relatively hard hit by the coronavirus pandemic, with freight traffic and the logistics sector – like the wider economy – being significantly impacted by border closures, declining demand and production shutdowns.
But for one segment in particular, the Covid-19 restrictions created a powerful tailwind, namely e-commerce. According to a study by market research institute Kantar, the share of consumers that do 50 per cent or more of their total purchases online increased by between 25 and 80 per cent in Europe’s biggest e-commerce markets – the UK, Germany and France – during the pandemic.
The decline of bricks-and-mortar retail in the non-food sector has triggered a boom in the logistics markets, which has attracted an increasing number of real estate investors in recent years. The pandemic has further accelerated this underlying trend.
Union Investment’s first logistics investment in France is a development project in Ensisheim (north-eastern France), in the tri-border area of Germany, France and Switzerland
France is one of the three largest logistics property markets in Europe. Despite the coronavirus pandemic, the French transaction market posted its second-best year ever in 2020, with logistics properties worth a total of around €3.4 billion changing hands. Demand in the French logistics investment market is likely to remain buoyant this year as well, supported by good liquidity.
No covid discounts
Prices for French logistics properties are holding up, with no sign of coronavirus discounts. In fact, the situation is gradually easing and the seven-day incidence rate in France has dropped below 50. Prime yields for logistics real estate in the country declined from 3.9 to 3.5 per cent in the first quarter of this year. Given strong demand and increasingly constrained supply, the likelihood is that yields will fall further in the medium term.
Union Investment has been active in the French market for around 20 years, primarily as an office investor. The Hamburg-based real estate investment manager has also had its own asset management unit in Paris since 2005. The company entered the French logistics market in 2019 when it acquired Logistrial Real Estate AG from Garbe Industrial Real Estate. The associated portfolio of 19 logistics properties included a development project in Ensisheim in north-eastern France. A second acquisition is set to follow this year via a sale-and-leaseback transaction.
Such transactions are becoming increasingly common and are particularly attractive for logistics services providers who develop their own properties – partly because payment is based on construction progress and thus makes the financing easier. Union Investment is aiming to double the size of its logistics portfolio in the medium term. A total of 12 European countries are on the acquisition radar alongside France, including Germany, the Netherlands, Scandinavia and Poland.
‘Despite the coronavirus pandemic, the French transaction market posted its second-best year ever in 2020, with logistics properties worth a total of around €3.4 billion changing hands.’
Stephan Riechers, Union Investment
Despite the prospect of lower yields, it is not too late to increase exposure to the French market – market players and the big property brokers agree that in-demand logistics regions will continue to suffer from a lack of space. In the first quarter of 2021, there was 2.8 million sq m of empty space in the French logistics market, corresponding to a vacancy rate of circa 5.8 per cent.
Against this backdrop, sites are likely to increase in value in many regions, while the constrained market will put upward pressure on rents. Last year rents rose in some places despite coronavirus, and rental expectations remain positive in most locations. Another factor is that acquisition yields on logistics real estate in many French regions, especially Greater Paris, are still higher than comparable office yields.
The French logistics rental market is in buoyant shape, as evidenced by the findings of a recent survey by real estate adviser CBRE and Analytiqa that covered more than 100 of the biggest European logistics occupiers. A quarter of the respondents said that they expect to expand their presence in the country, ahead of Germany (20 per cent) and Spain (19 per cent).
All the big international companies have a base in France, with the country benefiting from its central location within Europe and two major ports, Le Havre and Marseille, plus having access to the UK via the Channel Tunnel.
Overall, the market is well supported by strong demand for e-commerce and urban logistics. That trend is likely to grow over the coming years. And demand for logistics space could even rise significantly in the medium term. Many just-in-time concepts, where production materials are not delivered until the moment they are needed, have been reassessed in the wake of the coronavirus pandemic.
This strategic shift will lead to a marked increase in domestic production capacity and higher demand for storage space. The first signs are already apparent in France. Online sales and last-mile delivery are additional factors that will drive demand for logistics space.