Uncertain economic conditions and limited product availability has led to industrial real estate investment volumes stagnating, with activity slowing down rapidly in May and June. This resulted in the second quarter of 2011 (Q2 2011) seeing the first significant decline on a 12 month rolling basis, down 12% quarter-on-quarter, even though it remained 5% higher year-on-year. €3.5 billion or 80% of the total investment volume was transacted in Western Europe in the first half of the year, highlighting ongoing investor focus on core Western European markets, although this total reflects a 7% decline on the same period last year, with individual country falls seen in Germany (-32%), the UK (-24%) and Norway (-9%). South Europe recorded a 40% fall in activity and whilst this was driven by concerns over the sovereign debt crisis, significant changes in investment activity in these markets are not unexpected due to the volatile nature of this market. Eastern Europe, on the other hand, saw activity escalating during the first six months of 2011. Whilst overall transaction volumes in Eastern Europe (excluding Russia) remained low, they increased 82% compared to H1 2010. In comparison investment volumes in Russia saw a dramatic eightfold increase compared to H1 2010.
International investors (sourcing capital from a wide range of markets) returned in force and accounted for €1.9 billion of total activity, compared to €0.3 billion overall in 2010. While the group’s main focus unsurprisingly was the core Western European markets (the UK and Germany in particular), they were also active elsewhere, as they purchased assets in the Czech Republic, Russia, Italy and Spain. Preliminary domestically-sourced capital remained dominated by UK investors, followed by Swedish, German and Norwegian capital. Cross-border investment activity accounted for almost 70% of the total transaction volume. However, the majority of European investors invested close to home – for example, all of the H1 2011 UK invested capital remained in UK assets. Chris Staveley, Director, Jones Lang LaSalle EMEA Capital Markets said: “Despite a good start to 2011, economic volatility has clearly impacted the total level of investor activity in Europe’s industrial real estate sector. Whilst the market in certain countries like Germany and parts of Eastern Europe looks resilient, if widespread economic uncertainty and limited product availability continues, investor demand will remain constrained over the rest of the year.”
Following seven consecutive quarters of compression, the prime European distribution warehousing yield remained unchanged at 7.40% by end of June, 10bps below the 10-year average. “Despite isolated further yield compression driven by scarce prime opportunities in core markets, we anticipate that overall the potential for further inward movement will be restricted in the reminder of 2011” adds Chris Staveley. Annual take-up in Q2 2011 marked the sixth consecutive quarter of expanding occupier activity. Total take-up in H1 2011 stood at 8 million sq m, 6% lower than H2 2010 but 23% higher than Q1 2010. This can be attributed to steady positive growth in Poland and Russia, which offset declining market activity caused by occupiers postponing leasing requirements in the Czech Republic (-42%) and the UK (-32%). Completion volumes of industrial stock over H1 2011 amounted to 2 million sq m, the lowest level recorded since the start of the downturn. However, development activity started to gather pace in the second quarter, driven by expanding build-to-suit occupier transactions. The development pipeline has hit the highest level since the start of the downturn, with 4.8 million sq m under construction at the start of July 2011, 29% higher than 12 months earlier. Western Europe accounts for most of this pipeline, with 3.6 million sq m of industrial space under construction.
Despite accelerating development activity, in H1 2011, vacancy rates decreased to around 10%, a fall from 12% just six months earlier. Furthermore, the development pipeline remains still well below its five-year average in all markets except for Belgium, where volumes continue to be however limited. Increasing uncertainty in the market is likely to keep any growth potential in future supply on a low level. Rents currently remain depressed across the majority of European markets and lower than several years ago. As the supply gap for modern assets deepened in many markets, this has prompted acceleration in rental growth during the first half of 2011. However, the positive patterns in rental growth seen in H1 2011 are likely to be affected by the increasing economic uncertainty. Therefore, ongoing rental growth over H2 2011 is now looking less likely for the majority of markets. Alexandra Tornow, Jones Lang LaSalle Head of EMEA Industrial & Logistics Research commented: “There were plenty of reasons to be optimistic at the start of the year, with active investors, solid occupier demand and a strong pipeline of build-to-suit industrial units. However as we move through 2011, sustained economic headwinds are hinting at slowing activity. Whilst caution is the main watchword, we can expect occupiers to maintain their pursuit of network optimizations and by doing so will keep activity in good shape. Still, with no end in sight to the economic uncertainty, many occupiers will think twice before signing up for new leases.”
Rita Tuza, Head of Research at Jones Lang LaSalle Hungary added: „ We believed that the industrial sector in Budapest would pick up at a quicker pace than the office market. Unfortunately by now it is clear that those expectations were false. Occupier activity slowed down drastically, several tenants gave back spaces as the result of their optimization and although there has been no new supply since the beginning of the year, the vacancy rate did not manage to decrease. Given such market conditions, further rent reduction is likely.”
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