Emerging Trends in Real Estate® Europe 2006 - Urban Land Institute

eflecting increasing investor confidence in the sector.
While logistics prospects are higher in the rankings, competition
from other sectors has pushed them down a few places
compared with 2005. The sector’s third- and fourth-place
rankings have been replaced by fifth-, seventh-, and eighthplace
spots. Prospects for total returns were modestly good,
giving it a fifth-place ranking, with those surveyed expecting
this to be fed by a fairly good prospect for capital growth.
Letting it down with an eighth-place ranking are its prospects
for rental growth. The buy/hold/sell graph is almost a mirror
image of its manufacturing property subsector, with almost 49
percent hoping to buy and just 13 percent wanting to sell.
Industrial has been a beneficiary of a flood of capital in
the market and this is starting to be reflected in its yield compression
and causing some to believe that “standing investment
logistics are too competitive on pricing.” Madrid has
seen a 125–basis point fall in yields from third-quarter 2004
to third-quarter 2005, and three other markets—Prague,
Paris, and Oslo—have each seen a 100–basis point fall,
according to CBRE; most other cities have seen drops of
25 to 75 basis points. The markets with steady yields were
Vienna, Frankfurt, Amsterdam, and Zurich. Just Stockholm
saw its yield move out. Our survey results suggest that yields
will likely remain stable, with some further yield compression
possible in 2006.
Exhibit 4-10
30%
25%
20%
15%
10%
5%
0%
IPD Industrial Property Total
Returns for Selected Countries
Ireland
Netherlands
United Kingdom
Sweden
France
Finland
Portugal
Spain
1999 2000 2001 2002 2003 2004
Source: Investment Property Databank (IPD).
Note: For Ireland, 2004 figure was not available; figure shown is for the
12 months ending in third-quarter 2005.
It is a mixed bag of responses reflecting the lack of harmonisation
in the sector across the continent, with each
country offering some merit for investors. Many countries
still have substandard stock that needs replacing.
There continues to be a massive restructuring play in
central Europe, “where the infrastructure is being improved,”
which explains the yield fall in Prague and interest in Budapest
and Warsaw. However, many prefer the more mature “usual
hot spots”: the Netherlands, particularly Rotterdam; Paris and
northern France; and western Germany.
Best Bets
The best bets are still central and eastern Europe as they continue
to benefit from E.U. funding for improved infrastructure,
enabling them to fulfil the appetite of growing consumer
spending. The preferred industrial “buy” markets in
our survey are Warsaw, Moscow, Prague, and Budapest, with
over 70 percent of respondents rating these cities as good buy
opportunities. “The best prospects are southern Poland,
where you can already be connected with the Czech Republic
and Germany. The worst will be northern parts of Poland.”
There is the view that in this region “all capital cities are
underprovided with logistic space,” making it a strong sector
for acquisition and development, but many feel the sector is
taking a more regional approach, with logistics spreading out
from the capital cities as long as it is “close to harbours, airports,
and highways.”
Respondents do consider what the rise of the east will do
to more traditional western locations. “There is a threat to
northern France as there is a general shift to the east—it’s not
imminent, but it is in the short term.” However, Jones Lang
LaSalle says the effect on existing centres in Belgium and the
Netherlands has been slight, as the change eastwards has been
incremental. Third-party logistics providers have tended to
split service provision among three regions—western Europe,
central Europe, and the Nordic countries.
There were favourable words for Spain as well, which still
has good prospects in many of its major arterial routes. “Not
only do we expect growth in the sales market, but also that of
rents.” The corridors between the capital and cities such as
Barcelona, Valencia, Toledo, and Zaragoza were highlighted.
Barcelona and Madrid both received strong “buy” recommendations
in our survey for warehouse/distribution.
Weaknesses
The U.K. market is causing some concern for investors. “I
don’t expect the U.K. to perform strongly,” says one, and
another felt underweight in the market, but “pricing is too
high.” More broadly, there were also worries of the knock-on
Emerging Trends in Real Estate ® Europe 2006 55