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European industrial investment volumes in H1 2009 down 50% year-on-year; although activity is now improving

Occupier markets remain constrained by weak economic fundamentals according Jones Lang LaSalle’s latest European Logistics Report

Objemy evropských investic do průmyslových nemovitostí se za 1. pololetí 2009 meziročně propadly o 50%, ačkoliv aktivita na trzích se zlepšuje

Total direct industrial real estate investment volumes amounted to € 2.2 billion in the first half of 2009 reflecting a 45% fall on H2 2008 and a 50% fall on H1 2008 according to Jones Lang LaSalle’s latest European Industrial Markets Autumn 2009 report soon to be released.

Chris Staveley, Head of the Pan European Capital Markets team at Jones Lang LaSalle, said: “Although overall investment activity remained subdued in the first half of the year, in the second quarter investment volumes stabilised with a pick up in investor sentiment significantly more positive than transaction volumes would suggest.  Whilst a full recovery will depend on debt markets, and occupational markets, which look set to remain weak for some time to come, we anticipate transaction volumes to carry on improving with investor interest focussed on a narrow band of prime assets in core markets.”

Largely due to a strong price correction since the end of 2007, the UK industrial market saw its market share grow significantly, accounting for half of the total European volume invested in industrial assets in H1 2009.  The core Western European markets, on the other hand, recorded only € 750 million of transaction volume, reflecting a fall of 61% on H1 2008 and by 40% on H2 2008. The sharpest drop in investor activity was in Germany where it was down by 80% on H1 08 and by 86% on H2 08.

The findings of Jones Lang LaSalle’s report also suggest that industrial yields appear to be on the verge of stabilisation. In Q2 2009 the Jones Lang LaSalle weighted average European prime logistics yield  stood at 8.00%. Following outward shifts of 60bps in Q4 2008 and 40bps in Q1 2009, with a further 30bps outward movement continued to ease in Q2 2009.

No significant investment activity was recorded across the Central European region in H1 2009. Despite strong outward movements of yields of 250-275bps from their relative peaks, investors are reluctant to commit to transactions in industrial property. Yield levels are expected to move out further in H2 2009, although they are likely to remain below their long-term average.

Total occupier take-up in the main European distribution warehousing markets covered in Jones Lang LaSalle’s analysis amounted to 4.7 million m² in H1 2009. Compared to the previous half year (H2 2008) take-up declined by 28% and was 36% lower than in H1 2008.

In Central Europe in H1 2009 take-up was down by nearly 50% on the previous half year (H2 2008) and by 56% on H1 2008. Pushed by development starts in late 2008 on the back of strong demand, new completions grew to 1.3 million m2 in H1 2009 up from the one million m2 recorded in the two previous half years (H1 2008 and H2 2008), accelerating the growth in vacancy rates. However, future supply under construction at end June 2009 dropped by nearly 70% compared to 12 months ago, with just over 300,000 m2 left to be completed during the remainder of the year. High vacancy rates and limited demand have turned the market into an occupier market and prime rents continue to be under downward pressure.

Alexandra Tornow, head of EMEA Industrial & Logistics Research at Jones Lang LaSalle, commented: “Whilst credit conditions are starting to ease, industrial development continues to be hampered by financial constraints and with demand levels expected to remain limited for at least the next 12 to 18 months, which will significantly limit the number of new construction starts.

However, we expect favourable occupier conditions to sustain a more dynamic occupier demand in 2010 as many companies will be keen to secure space which they previously ruled out as too expansive. Furthermore, with increasing signs of improving GDP growth prospects and forecasts predicting stronger GDP growth in 2011, which will lead to an increase in international trade volumes, existing vacancy in prime markets could be absorbed quickly. As it will take some time for industrial developers to react to growing demand, limited development activity might therefore lead to a short-term supply shortage in 2011.”

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