Real estate
Real estate

The Decisive Eye

European logistics: An evolving landscape

April 1, 2024 | 13 min read
Daniel Tomaselli
Manager, Global Research
Chris Game
Fund Manager, Principal Real Estate Europe
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Introduction

The logistics industry has become vital to our global and interconnected society. Once purely related to the military art of supplying and moving troops across the battlefield, in today’s world, the industry encompasses a large group of companies specialising in the transportation, warehousing, and management of goods. These companies are the backbone of international trade, global supply chains, and e-commerce services. They ensure the seamless flow of raw materials, semi-finished products, and consumer goods from all continents to our doorsteps.

Over the last few decades, the industry has undergone a remarkable transformation and is still evolving. In this paper, we will first present the state of the industry, then examine emerging trends and their impact in shaping logistics requirements.

We believe that investors should pay keen attention to:

  • Land scarcity in core markets;
  • The potential impact of new sustainability legislation; and
  • Opportunities arising from the implementation of warehouse automation and AI-based technologies.

This issue of The Decisive Eye does not address demand-side market trends (e.g. e-commerce) as these topics are covered widely and more comprehensively in other reports from Principal Real Estate.

Logistics investment boom

Following the end of the Second World War, international trade arguably experienced its most rapid growth in history. Commerce and investment barriers gave way to trade agreements that allowed for greater market efficiencies. Companies started establishing branches and subsidiaries outside their domestic markets, and supply chains stretched longer and became more intertwined. Consequently, logistics became a crucial topic discussed in board meetings as the competitiveness and survival of businesses started to depend on the ability to source and manage suppliers effectively.

These changes have had profound implications on the demand for warehouse space. However, until the middle of the last decade, logistics assets remained inexpensive on a per-squaremeter basis compared to other real estate property types from both a purchase and development standpoint. This valuation gap has now narrowed. The global pandemic and the rapid increase in e-commerce sales that followed have led businesses and investors to a race to secure warehouse and distribution facilities, in strategic locations along the continent’s supply chains and, perhaps most importantly, in proximity to the largest consumer markets. As a result, logistics assets have increased significantly in value, particularly in the UK, and have outperformed the other traditional property types across the continent since.

Rotterdam is a prime example. Home of the largest container port in Europe, benefiting from an extensive intermodal network connections with the rest of the continent, and with an affluent population catchment of around 52 million people within a 3-hour drive time, it is one of the most desirable logistics hubs for operators in need of a getaway to the European markets. Not surprisingly, demand for warehousing space in and around Rotterdam has been exceptional. The market benefitted largely from the pandemicinduced rise of trade and e-commerce, resulting in record take-up levels in three of the last four years, which, in turn, pushed up valuations and rents.

According to Property Market Analytics (PMA), an independent real estate information provider, the average capital value of logistics assets in the Rotterdam area has increased by 27% over the three years to December 2023. Similar increases have been recorded in other European prime markets, led by London with a rise of 30% over the same period, followed by Rotterdam, Berlin, Manchester, Paris, and Rome. Logistics demand and prices softened in 2023 amid a recessionary environment, the elevated cost of capital, and the erosion of property premiums over other asset classes, such as government bonds. However, once the economy regains momentum and yields stabilise, possibly in the second half of 2024, we believe that warehouse space competition will grow again and extend into new locations. As land constraints intensify, construction planning becomes more complex, and environmental laws impose more stringent limits to greenfield investments while accelerating old assets’ obsolescence, the demand-supply imbalance in the sector will underpin a solid performance over the medium term.

EXHIBIT 1: European industrial and logistics investment market
Annual transaction volume (€bn) and source of capital (%), 2022 and 2023 average.

This exhibit demonstrates the current European industrial and logistics investment market.
Source: RCA, Q1 2024
Due to rounding, figures may not equal 100. €45bn includes the markets of Italy €1.9, Spain €1.6, and Poland €1.3

CONCLUSION:

The logistics market has witnessed radical changes over the last decade and the real estate investors who positioned themselves in advance to capitalise on new trends were rewarded handsomely. However, the market is still undergoing important transformations as new forces are at play. These include construction bottlenecks, changing operational models, sustainability legislation, and radical new technologies. We believe these forces will play a crucial role in dictating the demand for warehouse space, including its location, design, and format. Embedding these considerations into the investment process will have an even greater importance today than it had in the last decade, when the performance of real estate assets was largely driven by yield compression amid ultra-loose monetary policy. Our analysis shows it is now a good time to think about positioning for the next cycle. As the logistics market continues its maturing momentum there will be increasingly specific emerging opportunities, especially for those investors with a ‘decisive eye’—able to discern the suitable asset type in supply-demand unbalanced locations.

Over the last few decades, the logistics industry has undergone a remarkable transformation and is still evolving. Download the latest edition for our full perspective.

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