It has been a tough period for commercial real estate, with interest rates rising and capital values falling. The logistics sector has not been immune to this change and even though it continues to see low voids, strong demand and robust rental pricing, sentiment has been damaged.

Despite this, it’s worth noting that logistics assets have been significantly more resilient than some other real estate sectors, such as offices and retail. As such, the structural growth story for logistics remains intact and the outlook for rental growth is encouraging.

The weakest areas within the wider logistics market have been those with a lot of liquidity but speculative capital has now left these markets and pricing has become more favourable.

Structural strength

Despite macro-economic headwinds, the long-term structural argument for the logistics sector is still strong. There is a chronic shortage of supply and the continued growth of e-commerce has created significant demand for urban logistics, where tenants need to be as close to consumers as possible.

The sector is also benefiting from companies reconfiguring supply chains and near-shoring production. Rising geopolitical tensions and the supply chain vulnerabilities exacerbated by the pandemic have encouraged companies to bring production closer to home and hold higher inventories, a trend we are seeing across all markets.

The strength of these trends is shown by continued demand for logistics assets even amid the recent weakness in the European economy. According to Savills’ report on the European logistics market this March, take-up reached nearly 38 million sq m in 2022, a total second only to 2021’s series high of 40.2 million sq m and 18% higher than the five-year average.

The overall vacancy rate across Europe is low at between 2% and 3%. For example, in abrdn European Logistics Income’s portfolio, we only have one void across our 27 assets. Higher borrowing costs are making it more difficult to bring new supply onto the market and while there have been short-term declines in capital values, the lack of supply is likely to put a floor under further price falls.

Buoyant rents

The lack of supply also means that rental prices remain robust. Logistics rents increased by 3.2% year-on-year in the second quarter of 2022, but even higher rental growth was recorded in the most supply -constrained parts of the market. 

European logistics rents also have a strong link to inflation. Around two-thirds of the abrdn European Logistics Income tenant portfolio has no cap on Consumer Prices Index (CPI) linkage, enabling rents to rise annually in line with inflation. The remainder also rises with inflation, but to a lesser extent. This further supports rental growth in the year ahead and helps offset yield expansion.

Trust positioning

Logistics doesn’t face the challenges of other parts of the commercial property market, such as the office market or high street retail. Its long-term investment credentials are robust. However, it still requires careful navigation and effective diversification.

As trust managers, we can’t influence pricing in the sector but we can influence what happens on the ground, working hard on lease renewals and unlocking additional rental value. We can ensure we have a balanced portfolio and that our tenant profile is robust.

In the longer-term, we are hopeful that more speculative capital has moved out of the sector. We are seeing new institutional investors taking an interest across Europe and the Middle East, with private equity capital waiting on the sidelines. These are long-term traditional real estate investors who are putting capital to work and bringing stability to the sector.  

Logistics is a core part of a commercial property portfolio which is supported by the tailwinds of record-low vacancies and structural demand drivers. Even if capital values are volatile in a rising rate environment, rental growth is expected to retain momentum in most European logistics hotspots.

Important information

Risk factors you should consider prior to investing:

• The value of investments and the income from them can go down as well as up and you may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment companies can borrow money in order to enhance investment returns. This is known as ‘gearing’ or ‘leverage’.
• However, the use of gearing can result in share prices being more volatile and subject to sudden or large falls in value. Where permitted an investment company may invest in other investment companies that utilise gearing which will exaggerate market movements, both up and down.
• There is no guarantee that the market price of the Company’s shares will fully reflect its underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• Investing globally can bring additional returns and diversify risk. However, currency exchange rate fluctuations may have a positive or negative impact on the value of your investment.
• The Company may hold a limited number of investments. If one of these investments declines in value this can have a greater impact on the fund’s value than if it held a larger number of investments.
• Property values are a matter of the valuers’ opinions and can go up and down. There is no guarantee that property values, or rental income from them, will increase so you may not get back the full amount invested.
• Property investments are relatively illiquid compared to bonds and equities and can take a significant length of time to sell and buy.
• The Company invests in a specialist sector and it will not perform in line with funds that have a broader investment policy.
• Derivatives may be used, subject to restrictions set out for the Company, for efficient portfolio management in order to manage risk. The market in derivatives can be volatile and there is a higher than average risk of loss.

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.

Find out more at www.eurologisticsincome.co.uk or by registering for updates. You can also follow us on social media: Twitter and LinkedIn.