Logistics and Industrial - flexibility and sustainability are essential

19 July 2010

Logistical property has become more popular as an asset class. The downturn, however, has highlighted the differences between prime and secondary, even tertiary stock. Yields for prime logistics properties in the main western European trade between 7.25% and 8%, according to CB Richard Ellis. In the UK, currently an investment hotspot, the figure is closer to 6.5%. However, it is a different story for secondary stock and non-prime locations, where yields hover close to double digits.

With construction having fallen in 2009, most markets are almost entirely focused on build-to-suit. But little by little the huge overhang of vacant space speculatively developed during the boom times is being swallowed up.

In the first half of this year, the occupier markets have continued to look sluggish as rents fell in most markets. King Sturge's May European Property Indicator reported that during the first quarter 11 key centres registered falling industrial rents or softening lease terms.

With demand constrained, the occupier has been in a better position to dictate terms. But it is not clear how long this situation will last. Major occupiers, such as DHL, continue to lobby landlords and institutions to deliver the buildings and flexible leases they want.

Green buildings 'worth the cost'

Paul Graham, development director at DHL, says: "Green buildings may cost marginally more to construct but the argument for such investment in terms of payback and reduced obsolescence is compelling. It is time for the industry to listen to the occupier."

At the same time, developers are offering deals on existing stock that are hard to refuse. Amazon's recent 545,000 sq ft (50,630 m2) letting at ProLogis's business park in Peterborough, a two-hour drive north from London, was secured on a six-month lease. This sort of flexibility is creating a dilemma for the market.

"It is a good time for all sides to get to know each other, so that buildings are developed that suit on key issues such as, site density and green technology. At the same time, however, there is a window of opportunity, perhaps until the end of the first quarter next year, for occupiers to secure incredible deals in existing space,"says Graham Prisk, partner, logistics and industrial at Knight Frank.

More facilities management James Markby, director, EMEA logistics at CBRE says that landlords are providing more facilities management, in much the same way as serviced office operators do. But are occupiers really prepared to pay for this? While developers may have keen on the back foot during the downturn, the big players have in the main successfully managed internal restructurings and warded off consolidation or distressed asset sales.

Danny Peeters, chief executive Europe at Australian property trust Goodman, explains where the principal focus has been in a tough market. "We have kept the platform in place in all European countries by keeping the discussion with the client going. We have kept our promises and that has been well appreciated by the client and the investment side," he says.

Despite this, there is still plenty of good news for those targeting the sector, including a number of recent high-profile fund launches, anecdotal evidence of a pick-up in enquiries and opportunities created by the growing significance of online businesses and legislation on carbon reduction.

(source:EuroProperty, 19.07.2010)