According to Savills, the average spread between prime industrial and prime shopping centre yields across mainland Europe has converged for the first time in our historic series as demand for logistics and soars as a result of increased levels in e-commerce.
Data from the international real estate advisory shows that the historic average spread between prime shopping centre and prime industrial yields was at 143bps until 2018, when it dropped to 108 bps, to 54bps in 2019. Then in Q1 2020, for the first time, prime industrial yields were 9bps lower than prime shopping centre yields, at 4.95% vs 5.04%.
This rapid convergence has also been the result of a gradual softening of shopping centre yields over the past two years, by 40bps.
Marcus de Minckwitz, Director in the Regional Investment Advisory Team, EMEA, commented: “This convergence of prime industrial (mainly logistics) and retail (shopping centre) yields reflects the shift of investor interest into logistics properties and away from physical retail, along with the rise of e-commerce and the growing demand for warehousing space by 3PL providers and retailers. This trend is one that has been exacerbated in recent months with the arrival of Covid-19 across Europe which has meant more consumers than ever have been shopping online; not only out of choice, but also out of necessity.
“Although the end of Q1 has been quieter year-on-year from an investment perspective and, we predict, as has Q2, we expect a strong recovery of the industrial sector driven by logistics transactions. As a result, and with retail being disproportionately hit by the pandemic, the spread between yields for logistics and shopping centres could increase further throughout 2020.”
Fraser Watson, Director, Investment Advisory, Savills CZ&SK, commented: “This is a historic milestone for both the industrial and retail sectors, and certainly corresponds to the general trend we are witnessing first hand on the Czech and Slovak markets. The recent lockdowns in both countries have exacerbated an already present and growing sentiment, whereby the wider global uncertainty around retail has seen prime yields in this sector being challenged. Simultaneously, industrial is seeing sharpening prime yields as the need for warehousing and logistics space increases to cater for a wider user base, encompassing the growth of 3PL and e-commerce, current supply side constraints and increased investor demand. However, we do need to differentiate between use type allocations within the term ‘industrial’, as production and manufacturing specifically are perceived by investors as more susceptible to recessionary downside pressures and a divergence in yield is increasingly present between these use types and the more pure warehouse/logistics uses.”
Rising allocations in logistics have been supported by strong performance metrics, with the industrial sector returns outperforming all property returns over the past three years across most markets (MSCI). This pattern should continue over the next five years, with Industrial properties projected by Capital Economics to achieve a total return of 6.6% vs 2.7% for Retail and 4.6% for All property in the Euro zone countries.
This positive performance will be supported by the growth of e-commerce, which is generating demand for logistics warehouses as well as by the rising weight of capital in the sector.
Eri Mitsostergiou, Research Analyst, European Research Division, Savills, added: “Given the scale of investor demand and low vacancy rates, the prospects for logistics are the most positive, with 79% of our markets expecting an increase in transaction volumes in the second half of 2020. This is a trend expected to be sustained into 2021 and 2022. Logistics capital values are anticipated to increase accordingly, with 47% of markets predicting increases from H2 2020.
“The pandemic could force many companies to reassess their regional supply chains and near shoring, potentially creating new manufacturing hubs, boosting further the overall industrial investment volumes.”