Industrial property continues to perform strongly
The investment market for industrial property (logistics and production property as well as business parks) has witnessed less activity than the last two years during the year to date. The transaction volume between January and July totalled approx. €3.3bn, representing a decrease of around a quarter compared with the corresponding period last year. From a long-term perspective, however, investment volume remains at extremely high levels, with 2019 ranking as the third strongest year of all time.
The current year has already posted a new record with regard to initial yields. At 4.1% (as at the end of June), the prime yield has reached a new record low, which we expect to fall further to 3.9% during the remainder of the year. By way of comparison, the prime yield for shopping centres has softened to 4.2%. Yield trends also illustrate that the lower investment volume is not attributable to declining demand but is rather the consequence of a growing supply shortage.
This is particularly true of the top seven logistics regions, where transaction volumes have fallen across the board with the exception of the Frankfurt/Rhine-Main region. The supply shortage is also particularly evident in the portfolio segment and in terms of high-value properties generally. Portfolio transactions have accounted for €1.4bn of investment during the year to date. This compares with €2.2bn for the same period last year and €4.4bn in 2017.
The rest of Germany is benefiting marginally from the shortage of high-value investment opportunities in the top seven regions. If investment over the last twelve months is compared with that over the preceding twelve months, the volume outside the top seven regions rose by 9% (in contrast, all top seven regions registered double-digit declines in investment volume). However, the relatively modest increase also indicates that investors are not shifting away from the top regions on a large scale. In other words, investors remain primarily focused on low-risk locations
(see our heat map) even at the risk of not being able to fulfil their investment plans.
The slower economic activity, and particularly the weakening industrial sector, also now appear to be impacting occupier demand. Nevertheless, space in the sought-after locations remains scarce, rental growth has exceeded the long-term average and we expect this growth to continue going forward. Indeed, in view of the massive increase in site and construction costs, rental growth has been surprisingly restrained. In the competition for development sites and (renowned) occupiers, developers are not passing on the full extent of their increased costs to tenants, particularly since achievable sale prices for their developments are still rising owing to sustained yield compression.