A lack of core industrial assets in Germany, coupled with low yields across all real estate sectors are adding to the investment appeal of the country´s smaller industrial and logistics properties – many of which for now remain in the hands of their occupiers.
International investors have largely been absent from deals in the sub- €15 million, mid-cap bracket, where domestic investors – as well as a handful of European industrial and logistics specialists – are more established. That could change, says Eric Leiss, Industrial Investment Director at JLL Frankfurt.
“As domestic – as well as those international investors who are already established in Germany – increase their investment in smaller properties, there will come a point where these assets could be then traded on to larger, global international investors as part of portfolios,” he says.
Smaller industrial properties come with their own benefits for investors. Demand from occupiers for German logistics space is solid, with stable economic indicators, strong online retail and a healthy domestic economy – despite recent political instability.
Germany’s unique industrial sector
Longstanding financial stability among German small and medium-sized firms – known as ‘Mittelstand (which typically have a high proportion of equity in their total share capital) make them more likely to commit to longer-term arrangements, whether renting industrial properties or more commonly owning them outright. However, such firms – often family-owned – have traditionally been reluctant to release real estate via sale-and-leaseback strategies.
Companies such as Conrad Electronic, based in Hirschau near Munich, are firmly established. Rather than take subsidies and set up elsewhere, the family-owned firm has invested in its existing facility, expanding and modernising its logistics center in Wernberg-Köblitz.
Such scenarios are commonplace, says Leiss.
“Properties have been adapted and re-adapted to suit the changing production demands of Mittelstand firms – at their own cost,” he says.
But some are open to new opportunities and attitudes could change.
“There´s potential in the Mittelstand,” says Leiss. “These tenants are well-positioned, they are competitive in their respective sectors. So far, sale-and-leaseback has typically come from corporate manoeuvres, such as a private equity purchases of a Mittelstand businesses.
“However, if corporate need for capital rises, then real estate could indeed be released.”
Smaller industrial and logistics properties have not been the focus investors because they take the same effort as larger properties, says Joachim Smejkal, Industrial Investment Consultant at JLL Munich, a region where large-sized logistics and industrial assets are scarce.
“Less size does not automatically mean less effort, just as the transaction processes take as much diligence for smaller as well as bigger properties,” says Smejkal. “There is a lot of potential for investors who are willing to get involved in the more hands-on management, which some of these smaller assets come with. Industrial investment is experiencing more professionalism and investors are starting to see the chances within the mid-cap market segment.”
Investment in Germany’s industrial sector could reach €6 billion this year, according to JLL, not far off the €8.7 billion reached last year due to large portfolio sales. More crucially, prices rose rise last year, with yields compressing by 50 basis points to 4.5 percent.
Broadly speaking, opportunities to invest vary greatly across the country, with low supply of modern space in the five major cities of Berlin, Düsseldorf, Frankfurt, Hamburg and Munich. In large cities, Leiss says “creative” investors are seeking out development opportunities and the potential for favourable returns, pointing to the likes of Beos and Sirius Facilities´ development of former production properties in areas where there is high security of tenant demand.
Just 152,000 square meters of new warehousing space was completed in the first quarter of this year, according to JLL. In northern Germany, the range of classic logistics properties is limited and light industrial – as well as sale-and-leaseback properties – are more likely to offer sustainable value creation potential and more attractive returns.
Last year, large deals played a significant role in last year’s total annual investment volume. With demand remaining high and properties of all sizes in short supply, smaller assets could potentially play a bigger part in the industrial and logistics investment scene over the coming years.
Click to read more about how investors are finding value in converted warehouses.