European logistics investment reached €12.2 billion during H1 2019 (Chart 4), 5% below the previous five-year H1 average. The UK (€3.3bn) accounted for 27% of volumes, followed closely by Germany (€2.5bn), Sweden (€1.7bn) and France (€1.3bn) during the first half.

Despite several markets exceeding their five year H1 average investment volumes including Sweden (+91%), Poland (+83%), Czech Republic (+80%) and Norway (+16%), total volumes were held back by weaker performances from the UK (-19%) and Germany (-18%) both saw falls on half-year averages.

Strong investment volumes in recent years have resulted in yield compression for the larger markets. Average European prime logistics yields compressed 20bps from 4.9% to 4.7% during H1 2019, though generally remained steady for the core markets (Chart 5). Further inward yield movement has been witnessed for Prague (-150bps), Stockholm (-30bps) and Madrid (-25 bps) during the first half of the year.

Outlook

Long-term borrowing costs remain low, or negative across Europe, with the Germany 10Y bond yield at -0.65% and France 10Y bonds yielding at -0.35%, which will maintain an attractive yield spread for logistics real estate going forward. Investors will be paying close attention to each city’s development pipeline which will reflect the relative risk premium between countries. Likewise, the likely prospect of strong rental growth across Europe’s most urbanised cities and low Eurozone inflation will be factored into logistics yields.

Indeed, investors will be eagerly analysing pricing relative to other commercial property sectors. In the UK, for example, prime industrial yields (4.00%) are currently 90bps below the all-sector average, whereas 24 months ago, prime yields were 4bps above the all-sector average. This is a shift we could see transpiring in the most constrained European markets over the next 18–24 months. Looking forward over the next 12 months, further industrial yield compression is expected across Germany, France, Portugal, Greece, Sweden, Czech Republic, and Romania.

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