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GLOBAL INVESTOR 2.07 Basics — 28<br />
Figure 2<br />
Leasing rental cycle for warehouses<br />
The rental cycle for logistics warehouses is currently attractive <strong>global</strong>ly. Rents have<br />
either bottomed out or have started to increase again. Source: Credit Suisse<br />
Downturn<br />
Decreasing rental<br />
prices<br />
High vacancies<br />
Excess supply<br />
Eastern Europe<br />
Alsace<br />
Italy<br />
Recovery<br />
Decreasing to stable<br />
rental prices<br />
Declining vacancies<br />
Reduction of<br />
oversupply<br />
Germany<br />
Ile de France<br />
US average<br />
Shanghai<br />
Expansion<br />
Growth in rental<br />
prices<br />
Declining vacancies<br />
Absorption of new<br />
supply<br />
Slowdown<br />
Stagnating rental<br />
prices<br />
Increasing vacancies<br />
Increasing supply<br />
transportation. Its portfolio includes everything from oil fields to<br />
container shipping and facilities. As long as demand is rising ahead<br />
of new supply, the pricing situation is favorable. In our view, 2006<br />
marked the peak, since more new capacity, mainly in overseas<br />
transportation, is coming to the market. Capacity expansion for<br />
container shipping is expected to rise by 12.5% in 2007 after increasing<br />
13.8% last year. Airline transport capacity is expected to<br />
improve by 5.1% after 3.6% last year. Pricing power has already<br />
started to fade on main transportation routes, with an immediate<br />
effect on the bottom line. Besides transportation, the most important<br />
physical component in logistics operations is warehouse real<br />
estate. Up to the present, warehouse real estate has mainly been<br />
owner-occupied. But recently, there has been an emergence of<br />
sale and leaseback agreements, which result in a transfer of ownership<br />
and management to specialist real estate companies. We<br />
see this trend of efficient sharing of competences continuing in the<br />
next few years. As logistics providers expand internationally, competition<br />
intensifies and economies of scale appear. There is thus a<br />
consolidation process underway in the logistics sector, which has<br />
led to stronger demand for larger warehousing units.<br />
Logistics real estate as a new investment theme<br />
Figure 3<br />
Warehouse yields<br />
Purchasing yields for logistics warehouses are still significantly higher<br />
compared to the office sector. As the investment markets mature,<br />
warehousing capital <strong>value</strong>s are expected to grow and purchasing yields<br />
to decline. Source: Cushman and Wakefield, JLL, Credit Suisse<br />
10<br />
9<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
Paris<br />
Prague<br />
Strasbourg<br />
Berlin<br />
Budapest<br />
Warsaw<br />
Milan<br />
Hamburg<br />
Zurich<br />
Shanghai<br />
(Shanghai Exchange)<br />
Sofia (Bulgaria govt.<br />
10/01/07)<br />
Bucharest (10yr series,<br />
maturity 06/06/12)<br />
Current industrial yield Current prime office yields 10y govt. bonds<br />
This change in the logistics real estate landscape offers potential<br />
for real estate investors. Due to the relatively high rental yield levels<br />
in the sector (6.5% − 8%), investors can benefit from relatively high<br />
income returns. Investors are also exposed to changes in capital<br />
<strong>value</strong>s. This can come from one of two sources: either a change in<br />
rents or a valuation change in property (for instance due to higher<br />
demand, rising real estate prices, etc.). The latter is usually called<br />
a change in purchasing yields or yield shift. We think that investments<br />
in warehouses are supported <strong>global</strong>ly, yet we would focus<br />
on investments and developments in Continental Europe and Asia,<br />
as investors are likely to benefit from capital appreciation due to<br />
stable-to-increasing rents and a further expected yield shift.<br />
Global rental cycle attractive<br />
Investments in logistics real estate should find support in the segment’s<br />
currently attractive position in the rental cycle. In almost all<br />
regions, warehousing rents are increasing or have started to bottom<br />
out (see Figure 2, illustration of the <strong>global</strong> rental cycle). In the USA,<br />
the cycle for warehouse rents is the furthest advanced. However,<br />
the outlook is still positive for 2007 and 2008, with an expected<br />
annual growth rate of warehouse rents between 5% and 6%.<br />
Pickup in warehouse demand in Western Europe<br />
The warehousing rental cycle in Europe has just passed its bottom.<br />
Warehouse rents in Europe have fallen due to supply overhangs in<br />
the last five years. Driven by a pickup in demand, rents have begun<br />
to bottom out and have been stable in Central Europe over the last<br />
year. In France’s most important logistics area, Ile de France, they<br />
have already started to increase again. Based on our forecast of<br />
robust demand, we are expecting rents to remain stable or to increase<br />
slightly throughout Europe in the year ahead. This pickup in<br />
rents should also find support in strong investment demand. Yields<br />
for logistics real estate have thus started to fall. Since we expect<br />
the warehouse investment sector to continue to mature, we foresee<br />
a further drop in yields. In Germany and Italy yields are currently<br />
around 7% − 8%, which we still consider to be an attractive level. In<br />
France, yields are lower at 6.5% − 7.5%, but the rental growth up-
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