Online boom delivers big returns for central European warehouses

Online retailers racing to build warehouses in central Europe are propelling the region’s real estate market to new heights and Asian investors on the hunt for higher yields are getting in on the act. 

Short distances to customers in bigger markets such as Germany, cheaper labor costs and good transportation links all helped attract a record 2.8 billion euros (USD 3.2 billion) of investment into the region’s warehousing market last year.

Singapore’s sovereign wealth fund GIC, which bought Prague-based P3 Logistic Parks in 2016, is now planning to double its 4.1 million square meters of real estate assets in the region in the coming years through acquisitions and by buying land.

 “Five years ago, I would not have expected to see Asian capital in the Czech Republic and Poland,” said Otis Spencer, P3’s chief investment officer. “What we have seen is more groups from Asia specifically targeting logistics assets.”

 P3 is looking to close a number of land deals in Poland and is scouring Romania and Slovakia for targets as e-commerce gives another boost to a sector already buoyed by manufacturers relocating operations to central and southeastern Europe. 

 “We are seeing more e-commerce related tenants and we are going to see this market adapt to those needs,” Spencer said. “The quality of asset you can get versus what you get in western Europe is higher for the same relative price.”

 The attractive returns from warehouses are both boosting investment from abroad and also propping up the wider commercial real estate market - despite signs of cooling economies in emerging Europe, market participants say.

 Online retailers Amazon, Tchibo, and Zalando - which opened a warehouse in Szczecin, Poland, in December and has plans for three more in the country - are just some of the e-commerce firms expanding in the region. 

Yields on industrial and logistics properties in the region range from 5.5 percent in Prague to 9.5 percent in Sofia, compared with 4.5 percent in Paris or Berlin, according to US  real estate company Colliers International Group. 

 “Not only is there local consumption and growth but the big western European e-commerce operators are seeing Poland and the Czech Republic as places to set up locations,” said Robert Dobrzycki, chief executive of Panattoni Europe, a commercial real estate developer based in California.

 “We are building German-driven e-commerce buildings in central Europe. On top of that we see a huge trend of investors outside the region trying to diversify and hedge against a slow-down in other real estate sectors,” said Dobrzycki.

 In October, Singapore-based Mapletree Investments announced the USD 1.1 billion acquisition of a global logistics portfolio from Prologis, with properties in the United States, France, Germany and also Poland.

 Other big investors include sovereign wealth fund China Investment Corp. It bought European warehouse firm Logicor for 12.3 billion euros in 2017 from private equity house Blackstone - which has since bought back a 10 percent stake.

 “Asian investors are starting to look around because they see the differences in yields with western Europe,” Dobrzycki said. “Sometimes the difference might be 30 kilometers to the border but a 100 to 150 basis point difference in yields.” 

Cheaper land and easier approval processes mean projects can get up and running more quickly in emerging Europe - while serving customers in western Europe, market participants say.

 While most of Logicor’s operations are in Poland, Bartek Mierzwiak, its managing director for central and eastern Europe, predicted that over the next few years the company would expand into other countries in the region.

 “There is a big wave of construction of big-box buildings for e-commerce for the purpose of delivering to western European countries,” he said. “This is driving demand for our sector.”

 Much of the investment is flowing into Poland, the region’s biggest economy, where deals in the logistics sector hit a record 1.9 billion euros in 2018, a 63 percent rise from a year ago, according to a BNP Paribas Real Estate report.

 Poland also leads the region in growth in warehousing stock with a 17 percent rise last year, ahead of double-digit increases also seen in the Czech Republic and Slovakia.

 Another 2.2 million square meters of space is under construction in Poland, in addition to the existing stock of 15.8 million square meters, according to data from US  real estate company Cushman & Wakefield.

 Overall, investment in the sector jumped 20 percent in 2018 to 2.8 billion euros with vacancies hovering at historic lows, helped by the e-commerce dynamic, according to Colliers.

 “The (economic) cycle is tipping over now and we are entering a soft phase,” said Mark Robinson, a specialist in central and eastern Europe at Colliers.

 “This dynamic is a great counter-cyclical movement that is mitigating any slowdown for logistics players.”