Investors Are Increasingly Focusing on Logistics Real Estate
The Swiss logistics real estate market is on the move. Online trading, urbanization, and digitization are the megatrends characterizing the development of this market. Credit Suisse’s 2018 Logistics Real Estate Report shines a light on the market for logistics real estate and shows how the market for these special properties is developing.
The flow of goods around the globe is rapidly increasing in the wake of globalization, with the result that the logistics industry is flourishing across all continents. The more intensive trading and exchange of capital allows countries to specialize in their own core competences. The goods produced are exported worldwide, and conversely, greater quantities of goods are imported. Although Switzerland is not an international logistics hub because of its high wage and land costs, the domestic logistics sector is handling a sizable and increasing flow of goods. Export volumes have steadily increased since 1990 to over 20 million tons, and imports to over 51 million tons. According to GS1 Switzerland, the overall Swiss logistics market has a volume of around CHF 40 billion, meaning logistics has become an important part of the Swiss economy.
Online trading causes a surge in logistics flows
As with every sector, the logistics industry is also undergoing pronounced changes. By far the biggest influence comes from the constant growth of online trading. In online trading, consumers prefer the provider that offers the simplest and fastest delivery. This means that the value of logistics has soared from a purely mechanical activity to a strategically important service – because it also influences the decision to buy. Online trading volumes in Switzerland have risen by 8.7% annually over the past three years, to nearly CHF 9 billion (2017). The shift in sales from over-the-counter retail to online is accompanied by greater logistics requirements. This is mainly due to the smaller individual deliveries, taking over the “last mile” of transport to the consumer, and the substantial increase in the rate of returns. Since 2013, the number of packages shipped has increased by around 20 million to a record 165 million (estimate by Credit Suisse based on figures from Swiss Post) – a trend that will likely continue in the years to come.
Dynamic development of construction activity
Over the past 20 years, an average of approximately CHF 0.7 billion per year has been invested in logistics real estate across Switzerland (new buildings and renovations). In 2015, the amount invested in warehouses and storage facilities amounted to more than CHF 1 billion. Unlike other commercial real estate markets, logistics properties are still largely owned by private companies. It appears that the vast majority of the investments here are used to cover the company’s own space requirements, for the carriers, logistics providers, retailers, and industrial manufacturers. This is also reflected in the fact that only around 13% of investments are made by institutional investors or construction or real estate companies (mid-2010 to 2015). In contrast to Germany, the US, and the UK, for example, there is still hardly any real developing market for logistics real estate in Switzerland.
Attractive yield level, but limited market liquidity
Logistics real estate is also slowly grabbing investors’ attention in Switzerland. Driven by low interest rates, the high demand for real estate investments has put initial and cash flow yields in all segments under pressure. Buying higher-yielding logistics space can counteract falling cash flow yields and provide greater diversification for portfolios. This is an interesting option, particularly for large real estate portfolios that are geared toward commercial space and investors with a long-term orientation. According to the MSCI Swiss Real Estate Index, over the previous 15 years, net cash flow yields for commercial and logistics space were higher than those of residential, office, and retail space – usually by more than 100 basis points. However, investors also need to keep certain disadvantages in mind: limited market liquidity, the very user-specific requirements of tenants, and the need for in-depth market knowledge and a long-term investment horizon.
An ideal instrument for diversification
The diversification issue comes increasingly into play as an argument for investing in logistics real estate. Different segments of the real estate market often find themselves in differing stages of the real estate cycle, as they are not subject to the same drivers. The cyclical drivers of the logistics space market are, in particular, the development of foreign trade, consumption, and the overall economy. In recent years, the overall returns on office space have displayed little correlation with the returns for commercial and logistics space, with a substantially negative correlation between the latter and residential properties. There are other cyclical drivers at work here compared to logistics space, such as population and employment growth. By contrast, the cyclical drivers of retail space are similar to those of logistics space. Accordingly, the overall yields of logistics and retail space have been quite closely correlated for many years. While overall yields for retail space have suffered since 2012, those for logistics space have seen a sharp upward trend since 2014. Here, a significant structural driver is set to come into play: e-commerce, which has risen sharply over the past few years, is putting the yields of the stationary retail trade under pressure, while at the same time logistics areas are benefiting from the shift toward online retailing. The overall conclusion from the above considerations is that logistics space can make a significant contribution to risk diversification in a real estate portfolio.