LIP Invest Releases Market Report for the Fourth Quarter of 2022

LIP Invest, provider of real estate special funds for institutional investors in the asset class of logistics real estate in Germany, publishes its quarterly market report “LIP UP TO DATE – Logistics Real Estate Germany” detailing current developments in the highly sought-after asset class of logistics real estate.

(Munich) In addition to a review of the 4th quarter of 2022, the report also provides an outlook on the development of the investment market for the 1st quarter of 2023. The market report includes figures and information on transaction volume, space turnover and new construction volume, yield development depending on building age, location, property quality, and lease term, as well as interest rates and market developments.

Market Overview

The logistics real estate market was also influenced in the 4th quarter of 2022 by ongoing geopolitical developments, high interest rates, rising prices, and declining economic performance. The buyers’ reluctance was clearly felt; a trend that continues into 2023. The annual result in the investment market for logistics real estate is very good overall, with over 9.0 billion euros. However, it is predominantly based on deals from 2021 with ownership transfer in 2022 or transactions from early 2022.

Interest rate increases of over 3 percent last year, competition from alternative asset classes, and exceeded real estate quotas have led to caution and higher yield expectations among institutional investors. Nevertheless, investments in logistics real estate remain attractive for investors. A high demand for space, for example, from the restructuring of international supply chains, meets with further declining availability of land.

With a more predictable capital market situation, logistics real estate with its inflation-protected leases and its rental growth and value appreciation potential will assert itself against bonds as alternative investment options. Transactions are also expected to pick up pace again throughout 2023. The gross initial yields are expected to stabilize around 5 percent.

“The leverage effect of low interest rates has led to high purchase prices in recent years. In some cases, investors were even willing to pay over 30 times the annual rent. After the interest rate turnaround, the financing and investment environment has completely changed. After our last market report in November 2022, interest rates have increased again by 0.5 percent. The ECB has announced further interest rate hikes due to persistently high inflation rates, and many market participants no longer rule out a key interest rate of 4 percent. The pressure on the real estate markets will continue to intensify. The initial yields of 5 percent that we predicted last November in connection with further rising interest rates are already a reality. Logistics real estate remains an attractive asset class for institutional investors – provided a corresponding yield premium over risk-free bonds can be achieved. Given the scarcity of available building plots and increased construction costs, sellers and buyers will likely only come together on the basis of significantly higher rents,” says Bodo Hollung, Managing Director and Partner of LIP Invest.

Investment Market

The reluctance of buyers and investors is palpable in the transaction market. A significantly lower number of deals resulted in a transaction volume of only 1.2 million euros in the 4th quarter. Nevertheless, some selected transactions were completed in the asset class. For example, the project developer Panattoni sold its logistics park Bremen Süd, completed in 2021, which covers approximately 67,000 square meters. Overall, the year 2022 concludes with a high transaction volume of 9.2 billion euros, primarily due to the 1st quarter, which accounted for nearly half of the annual volume.

The gross initial yield for modern logistics properties has risen again and stands at 4.85 to 5 percent in the 4th quarter. A well-founded statement regarding the current yields of existing properties is currently not possible due to the lack of transactions in this segment.

LIP continuously analyzes developments in the German logistics real estate market. This includes monitoring the supply situation. In the 4th quarter, properties with a volume of around 850 million euros were offered to LIP. Compared to previous quarters, this indicates a further decline in transaction activity.

In the 4th quarter, logistics service providers and trade were almost equally represented as user groups of the logistics properties available on the market, while industry accounted for a significantly smaller share.

Space Turnover

With 1.8 million square meters of rented logistics space, space turnover remained stable in the 4th quarter compared to the previous quarter. A total of 8.0 million square meters were rented or newly constructed in 2022, which represents only a minimal decline compared to the record value of the previous year. In the 4th quarter, it also became clear that large space turnovers are increasingly occurring in peripheral locations away from established logistics regions. For instance, Alcaro Invest has long-term leased its new building of 47,500 square meters in Frankfurt/Oder to the EV Cargo Group for the storage of lithium-ion batteries for electric vehicles.

At the end of the year, new construction activity has decreased. In the 4th quarter, 1.0 million square meters of new logistics space were constructed. In Elsdorf, between Bremen and Hanover, for example, the project developer bauwo has begun construction of a logistics park covering 70,000 square meters. With new construction activity of 5.1 million square meters, the overall result for 2022 is high and only slightly below the previous year’s result of 5.3 million square meters. For the year 2023, a decline in speculatively constructed new buildings is expected due to more difficult financing conditions and uncertain exit factors.

Trends in Logistics

On January 1, 2023, the Supply Chain Due Diligence Act (LkSG), also known as the Supply Chain Act, came into force. It requires German companies with initially more than 3,000 employees to bring transparency to their supply chains. The law aims to counteract violations of human rights along global supply chains, such as forced or child labor. By requiring companies to take responsibility for their procurement paths, the environment as well as human and children’s rights are ultimately to be better protected.

The Federal Office for Economic Affairs and Export Control (Bafa) acts as the control authority, which can conduct risk-based inspections at companies. Particularly smaller companies are struggling under the bureaucratic burden that the Supply Chain Act brings with it – especially since another supply chain law will follow at the European level.

The market report is available for free download at https://www.lip-invest.com/downloads/.

Photo: © LIP Invest GmbH