European industrial investment
activity continued to accelerate in the final quarter of last year, when approximately €3 billion of transactions took place, the highest quarterly volume since the final quarter of 2007.As a result, full-year volumes totalled €9.9 billion, up 18% year-on-year, marking the third largest annual transaction volume on record, topped only by the boom years of 2006 and 2007.
“Final figures show that, despite the numerous economic headwinds, European industrial assets continue to attract significant interest. Notably, we see increasing demand from a growing range of investors targeting the sector, in particular global players seeking larger portfolio logistic deals in Europe” comments Penny Hacking, Director, Jones Lang LaSalle European Industrial Capital Markets.
Industrial transaction activity across the region remained uneven. The UK, Germany and France continued to be the most traded markets, accounting for over €6 billion, more than 60% of total full-year volume. Investment activity intensified throughout the second half of the year as investors targeted markets with large pools of trade-able assets perceived as a “safe haven”. Significant competition for limited core assets within the three main country markets also benefited neighbouring Benelux, where volumes increased by 126% in the full year to €820 million.
The healthiest annual growth was recorded in the core Central European (CEE) markets, including Czech Republic, Hungary, Poland and Slovakia. Transaction volumes reached €630 million, 156% ahead of 2010. As a result, with 6% of the European total, capital invested in CEE industrial assets reached its highest share to date. While final figures were significantly skewed by two large portfolio deals in the Czech Republic which accounted for almost 54% of the CEE total, it nevertheless reflects the continued investor appetite in the region.
Elsewhere, volumes contracted in Russia, down almost 50% on the stellar 2010 results, as persistent limited opportunities in the market mean that investor activity continues highly volatile. However, there remains strong investor appetite for institutional quality product which is reflected by the significant pipeline of deals in the market. Despite full year volumes declining by 9%, the Nordics nevertheless recorded the third strongest volume across Europe and there continues to be a strong investor appetite to invest in the region, driven by Nordic pension funds and international investors seeking diversity from Euro dominated markets. However, the Nordic region is impacted by limited product on the market.
Cross border volumes dominated 2011 with a total of €6.5 billion of cross-border transactions recorded, reflecting 65% of the European total – notably up from 34% in 2010. The significant jump was largely driven by a strong increase in capital sourced internationally and structural changes in the logistics market leading to a maturing institutional industrial market.
International investment reached 38% of the European total in 2011, significantly up from 13% in 2010 and its last peak in 2005 (30%). More than half of this capital was invested in the UK, followed by Germany with 17%. “However, investments by international investors elsewhere in Europe, including destinations such as Russia, Italy and Spain, highlight the strong attraction of modern distribution assets let to prominent covenants on a longer-term lease base in markets with a higher growth potential over the medium term” adds Penny Hacking.
While continued strong investor competition for core assets led to yield compression in several markets over the year, the weighted European net initial prime yield was unchanged during the last three quarters of 2011 at 7.40%. “We expect that yield levels will remain flat in 2012 overall. With rental growth prospects downgraded across the board this means capital growth will also remain subdued this year” comments Alexandra Tornow, Jones Lang LaSalle EMEA Industrial and Logistics Research.
She adds: “Nevertheless, we expect that industrial investment activity is likely to remain in line with last year’s level, driven primarily by attractive income returns, although downside risks from the Eurozone sovereign debt crisis could have a substantial effect on transaction activity.”
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• Charts available upon request.
• Our investment market analysis is based on the whole European region and includes transactions >EUR 3.5 million (US $5million).