Managing Director of GARBE Industrial Real Estate
5 Questions Put to Our Expert
Demand for logistics facilities in Europe exceeds supply, and significantly so. We asked Jan Philipp Daun, the Managing Director of GARBE Industrial Real Estate, about the background to this and talked to him about low vacancy rates, tight regulations, and the sizeable potential on the European logistics real estate market.
Demand for industrial and logistics real estate (I&L) in Europe outpaces the economic growth by a significant margin. How do you explain that?
There is no doubt that economic growth drives real estate market trends. But most relevant in the I&L sector are structural factors. These generate a robust demand that is largely autonomous from the general dynamic of the economy. These structural factors include, for one thing, the nascent nearshoring trend, meaning the development of manufacturing sites in neighbouring countries. On the other hand, European markets have a history of being notoriously undersupplied. We need to remember that the pan-European networks and the institutionalisation of the I&L asset class did not start until the early Zero Years, once the Schengen Agreement was ratified. Especially Central and Eastern Europe (CEE) as well as the southern European countries show an urgent need for I&L real estate. The trend is likely to persist in the future.
The European Market is Subject to Supply Constraints and Heavily Regulated. Challenge or Opportunity?
The supply in available land has been drying up everywhere in Europe, most notably near major population centres. And whenever principal contractors do manage to buy a piece of land, they face complex regulatory processes in the next step. In the ten countries where GARBE is active, it takes more than 170 days on average to obtain a planning consent, according to the World Bank. For the sake of comparison: The average period in the United States is a mere 81 days. In other words, things move twice as fast there. This, of course, is increasingly becoming a problem for developers in Europe. At the same time, the limited land availability and the long-winded regulatory processes are causing supply bottlenecks which, in turn, are reflected in low vacancy rates and reduce the risk of oversupply.
From an investor’s point of view, what would encourage a commitment of the European logistics real estate market?
The European market is considered relatively low-risk compared to other major markets. This is illustrated by a look across the Atlantic: While roughly 84 percent of the completions in the United States were of speculative nature in 2023, the share of speculative structures out of the total construction volume was far lower in the leading European markets. It approximated 64 percent in Italy, for instance, and barely 40 percent in the Benelux countries and Germany. The lower percentage in speculative investments is attributable to a more safety-oriented culture in Europe, but also to the fact that a far greater number of projects in the European countries represent “built-to-suit” (BTS) developments than is the case elsewhere. The BTS approach implies bespoke developments. This means a given property is designed for the purposes of the incoming tenant. For the respective businesses, it is a very attractive approach because the property will meet all of their requirements, some of which can be rather unique. What makes the BTS approach a winning proposition for investors is the combination of low risk with comparatively high returns.
There is still plenty of room for rent increases in Europe before markets become overpriced
What sort of potential for rental growth do you see in Europe?
There is significant potential. Although rents have gone up in recent years, they did so at a slower pace and at a later stage in the cycle than in the United States, where they registered double-digit growth for several years in a row. In many European markets, inflation-adjusted rents are still below the level of 2006, undercutting it by an average of ten percent. By contrast, rents in the US are roughly 45 percent above the level of 2006 now. So, there is still plenty of room for rent increases in Europe before markets become overpriced. From an occupier’s point of view, the real estate expenses account for only a fraction of the core costs within the supply chain, and are unlikely to make a big difference in future. All things considered, fixed costs including rents make up only three to six percent of the core costs.
Going forward, which trends will play a major role on the European logistics real estate market?
A decisive factor will be the intensifying focus on ESG aspects both on the investor and on the occupier side. Europe is considered a global trailblazer in this regard. This goes not just for new-build construction but also for portfolio development where “manage-to-green” and “manage-to-social” approaches play an ever more important role. The former approach centres on reducing the carbon footprint of a given property and on the responsible use of primary energy. The latter approach seeks to enhance the wellbeing of those using the property. Other important factors on the demand side include the previously mentioned nearshoring trend and the growing need for efficient supply chain solutions. Online retail has undergone a certain correction following the COVID-19 pandemic. However, continuous growth is expected again in the coming years. On the supply side, regulatory requirements will continue to keep the oversupply risk manageable while bolstering the market stability and rental growth.
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