AEW RESEARCH | EUROPE

Monthly Research Report

JUNE 2022

EUROPEAN LOGISTICS REACHING A TURNING POINT

 The ECB has signaled a 25-50 bps rate hike in July and September as on the back of the on-going Ukraine conflict, inflation
has continued to move up. Depending on the country, European government bonds have spiked by 100-200 bps over the last
three months. These higher bond yields will impact on logistics markets as measured by our new Jun-22 base case and
downside scenarios.
 Despite unchanged GDP forecasts, manufacturing and shipping activity across Europe is expected to pick up in the next ten
years based on the increasing trend of re- and near-shoring. This will drive demand for logistics space going forward.
 Another key driver of logistics warehouse demand – the share of on-line retail sales – is projected to further increase to 40% in
the UK and 25% in Continental Europe over the next ten years regardless of the recent Amazon news or economic outlook.
 As the pandemic exposed supply chain vulnerabilities, many logistics operators have moved from just-in-time to increase their
capacity to absorb disruptions, which we can define as just-in-case. This has allowed take-up levels to set new records in 2021.
 High inflation and specifically concrete construction product costs will negatively impact on the profit margin of developers
and could trigger a decline or delay in new supply in marginal markets where tenants can not absorb higher rents.
 New development has accelerated to meet the demand. But, future supply might come down as construction costs and site
shortages increase. Vacancy rates are expected to stay at a record low 3% level, as demand and supply remain balanced.
 Given the largely unchanged GDP forecasts across Europe between Mar-22 and Jun-22, we keep our forecasts for logistics
rents unchanged at an average of 2.3% pa over the next five years.
 As investment activity has also set new record levels and yields have been driven down with strong bidding, we are now
expecting a turning point in yield movement. Investors will require higher yields going forward with elevated bond yields.
 Total returns for logistics markets across Europe are now estimated at 5.1% pa for the next five years in our Jun-22 base case,
down 40 bps from our Mar-22 base case. Based on our Jun-22 downside scenario, total returns are projected at 4.1% pa.
 In our Jun-22 downside scenario, capital growth is projected to turn negative for most non-core CEE and Southern European
markets. But, core markets like the UK, Netherlands, Germany and France are projected to maintain positive capital growth.

Logistics Average Annual Prime Total Returns by Country (2022-26 pa, %) – Various Scenarios

0
UK (7) Benelux(3) France (4) Average (37) Germany (5) Southern Europe (4) CEE (6)

Sep-21 Base Case Mar-22 Base Case Jun-22 Base Case Jun-22 Downside Scenario

Sources: CBRE, AEW Research & Strategy

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AEW RESEARCH MONTHLY REPORT | EUROPE

JUNE 2022

MACROECONOMIC FUNDAMENTALS

BOND YIELDS SPIKE AS RATE HIKES BITE 10-year European Government Bond Yields (% pa, Average Across 20 Countries)

 On the back of the on-going Ukraine conflict, inflation has continued to 5.0
move up. This has forced the ECB to signal a 25-50 bps hike in July. 4.5
 European government bonds have spiked by 100-200 bps over the last 4.0
three months on the back of rate expectations and actual hikes from the 3.5
Fed and Bank of England. 3.0

 Apart from the impact on investors, rate hikes could further impact 2.5
2.0
consumer sentiment as increasing cost of living has already been hurting
1.5
them.
1.0
 To catch up with this higher than expected actual bond yield widening,
0.5
we have created an interim Jun-22 downside scenario to assess the
0.0
impact on logistics.

2003

2005

2007

2010

2012

2014
2013

2015

2017

2020

2023
2011

2021
2008

2018
2006

2009

2016

2019

2026
2004

2022

2024
2025
 In our Jun-22 downside scenario, we project government bond yields
across Europe to move up to 2.8% by year-end 2026. Also, we adopt our Mar-22 Base Case Bond Yields Jun-22 Base Case Bond Yields
Mar-22 downside scenario as our Jun-22 base case.
Jun-22 Downside Bond Yields

Sources: CBRE, AEW Research & Strategy

MANUFACTURING & SHIPPING TO REGAIN MOMENTUM

Container Traffic, Eurozone Gross Value Add in Transportation and Storage,
Manufacturing (base 2011 = 100)
 Long-term macro fundamentals remain marginally positive. However,
based on the increasing trend of re- and near-shoring, manufacturing and 140

shipping activity is expected to pick up in the in the next ten years.

130
 While over the last 10 years there was negative or low growth of GVA in
transportation and storage across Europe, the sector is expected to regain 120
momentum in the next 10 years with solid growth.
110
 Urban densification remains the main driver for the growth of the sector
as distribution centres and last mile logistics will continue to develop 100
around major cities.
 Altogether, GVA in manufacturing is also expected to post double-digit 90
growth during the same period, in particular in manufacturing-driven
80
cities, also pushing demand for warehouses next to nearshoring activities.
2012

2014
2013

2015

2017

2030
2011

2021
2018
2016

2019

2026

2028
2029
2020

2022

2024
2023

2025

2027
 The European container traffic, which had already started to slow down
Gross value added, real, € - Manufacturing
on the back of the US-China trade war, slumped in early 2020, delaying
Gross value added, real, € - Transportation & storage
the supply of construction materials and pushing prices to soar. Once
European Container Traffic (TEU)
supply chains have reorganised, we expected trade to catch up with
Sources: Oxford Economics, ISL, AEW Research & Strategy
long-term growth.

ECOMMERCE DRIVES DEMAND FOR LOGISTICS SPACE Share of Online Sales as % of Total Retail Sales

 The share of online sales is expected to double in the next ten years in 45%
Europe compared to pre-Covid levels. 40%
 After a rolling series of lockdowns during the pandemic and the lack of 35%
open physical retail stores consumers stepped up their online shopping.
30%
 Online-ordered groceries, which accounted for a smaller share of sales
compared to non-food products are expected to drive future growth. 25%

 The share of online sales was particularly boosted in the UK, reaching 20%
30% on total sales in 2021 and is projected to reach 40% in the coming 15%
decade.
10%
 In the rest of Europe, e-commerce represents a lower share of retail sales
5%
and lockdowns impacted sales differently depending on markets but the
share of online sales is also expected to increase with online sales 0%
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032
reaching 25% of sales by 2032 on average in Europe.
 This trend will support a continued demand for logistics warehouse European 18 Country Average UK
space in the coming years, regardless of the macro economic situation.
Sources: CBS, ONS, Euromonitor, AEW Research & Strategy

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AEW RESEARCH MONTHLY REPORT | EUROPE

JUNE 2022

INDUSTRIAL DRIVERS

AMAZON PULLBACK HAS LIMITED IMPACT ON EUROPE Amazon Country Presence vs E-commerce Sales (2022E)

 Amazon has invested heavily in its logistics network, tripling it in the last Legend
40
five years in the US and doubling it in Europe, anticipating the growth in
USA
online sales share. 35
40 Million sqm


Amazon Sqm Per 100 Households

In late April, Amazon had a profit warning stating that due to excess 10 Million sqm
30
capacity it would be rolling back its expansion plans. 1 Million sqm
 However, detailed analyses by Green Street shows Amazon’s presence in 25

continental Europe is less than one third the US level. While the giant 20
retailer represents nearly 10% of total warehousing stock in the US and
15
more than 7% in the UK, it makes up for a relatively lower proportion of 3%
UK
of the stock on continental Europe. 10 Germany
Spain Europe (7)
 As the chart shows both the European average as well as individual
5
countries have lower e-commerce sales and Amazon space than the US. Italy France
Belgium NL
 While Amazon pulls back, other large food and non food retailers have 0
€ 0 € 2 000 € 4 000 € 6 000 € 8 000 € 10 000
been increasing their purchase and lease of industrial space, continuing
Ecommerce Sales per Household
to feed demand for logistics space.

Sources: Green Street, AEW Research & Strategy

STOCK MARKET’S OVERREACTION TO AMAZON NEWS Premium on NAV

Cross Sector Premium NAV - 2017-2022

 Over the last three years, industrial REITs have been the favorite sector for 20%
investors as it consistently traded above Green Street’s NAV on a 12-
10%
month moving average.
 The Amazon profit warning in late April, combined with increasing 0%
construction costs and some news Amazon might be looking to sub-let
space triggered a REIT share sell-off at discounts to NAV as can be seen -10%

on the monthly moving average. -20%

 It seems very likely that REIT investors have over-reacted on the news
since the fundamental drivers for logistics remain strong. -30%

 In the medium term, we expect REIT investors to recognize the relative

-40%
strength of logistics again and trade the sector nearer to the traditional Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22
premium.
Industrial Yearly Average Office Yearly Average
Retail Yearly Average Residential Yearly Average
Industrial Montlhy MA
Sources: Green Street, AEW Research & Strategy

LOGISTICS TAKE-UP POSTS NEW RECORD IN 2021 Average Annual Logistics Take-Up by Period (‘000 sqm)

 As the pandemic exposed the vulnerability of global supply chains and 9 000
triggered longer delivery times, logistics operators have accelerated the 8 000
reorganization of their supply chain processes.
7 000
 Many providers have moved from just-in-time to increase capacity to
6 000
absorb future disruptions, which we can define as just-in-case.
 Logistics take-up reached another record in 2021 across Europe as 5 000
warehousing expansion is viewed as efficient to avoid bottlenecks. 4 000
 New standards in terms of technical requirements, such as increase of
3 000
ceiling height or demand for urban logistics also drove logistics take-up.
2 000
 Nearshoring benefitted Germany and Poland in particular, both
manufacturing driven and centrally located for European distribution. 1 000

 The UK logistics market was driven by the online growth as UK-based e- -

commerce companies gained larger market shares. Germany Poland France UK NL Italy Spain Belgium CZ Rep.

2009-2012 2013-2016 2017-2020 2021

Sources: CBRE, AEW Research & Strategy

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AEW RESEARCH MONTHLY REPORT | EUROPE

JUNE 2022

INDUSTRIAL OCCUPIER MARKET

CONSTRUCTION COST INFLATION MIGHT LIMIT SUPPLY Inflation & Concrete Construction Product Costs (y-o-y; base Q1 2019 = 100)

 Global supply bottlenecks in China and the Russian embargo have 12%
pushed both general inflation and construction costs up.
10%
 However, inflation is still expected to peak in the second half of 2022
before slowing down in 2023. 8%
 Given this trend and the ongoing disruption in trade, construction costs
are likely to continue to increase accordingly. 6%
 The increase in concrete construction product costs has led inflation and
4%
will continue to negatively impact on the profit margin of developers.
 Concrete make up about 40-50% of a typical logistics warehouse. 2%
 In markets where developers can not pass on these increased costs in the
form of higher rents, we could see supply falling back. 0%

2021Q3
2020Q1

2021Q1

2023Q1
2020Q2
2020Q3
2020Q4

2021Q2

2021Q4

2024Q4
2024Q3
2022Q2

2022Q4

2023Q2
2023Q3
2023Q4

2024Q2
2022Q3

2024Q1
2022Q1
 However, in markets where tenants can absorb them, rents might need to
increase to allow developers to maintain their profit margins and deliver
badly needed space to the market. Eurozone - inflation Eurozone Concrete Costs Construction Index

Sources: Eurostat, Oxford Economics, AEW Research & Strategy

COMPLETIONS KEEP VACANCY NEAR RECORD LOW Vacancy rate, Net absorption and Net completions (‘000 SQM)

 As demand for logistics space continued to increase, the development of 30,000 8%

new supply has accelerated over the last five years.
25,000 7%
 Going forward, we expect a stabilization of both demand and supply at
relatively balanced levels. 20,000 6%
 There might be some downside to new supply. This is because apart from 15,000 5%
increasing construction costs, the shortage of land for industrial
development is likely to increase as EU policy objectives aim at zero net 10,000 4%

land take by 2050. 5,000 3%

 With green field sites becoming less available, existing stock eligible for
0 2%
conversion or brownfield sites are increasingly considered by developers.
 With established locations experiencing record low vacancy, well
connected secondary locations benefit from spill over demand effects European logistics net absorption ('000 sq m)
triggering an increase in future supply. European logistics net completions ('000 sq m)
 Despite the acceleration of new supply, the average vacancy rate in
European average vacancy rate (%)
Europe is expected to remain stable at a record low level of 3% as net
absorption is expected to balance the limited level of future completions. Sources: CBRE, AEW Research & Strategy

SOLID RENTAL GROWTH AS VACANCY RATE REMAINS LOW Annual Prime Logistics Rental Growth for Base Case (2022-26, pa %)

4.5
 With record low unemployment and accumulated household savings,
4.0
consensus is not yet expecting a recession in Europe.
 Given the largely unchanged GDP forecasts across Europe between Mar- 3.5

22 and Jun-22, we keep our forecasts for logistics rents unchanged. 3.0
 This is supported by the strong underlying drivers of rebounding 2.5
manufacturing and shipping and increasing e-commerce penetration. 2.0
 With new supply of space only exceeding net absorption by a small 1.5
margin, we expect vacancy rates to stay near record lows.
1.0
 The stiff competition for land for industrial development is likely to
0.5
worsen going forward, driving logistics rents up.
0.0
 High inflation and increasing interest rates might impact on GDP growth
UK (7) Benelux Germany (5) France (4) Average (37) Southern CEE (6)
going forward. Europe (4)
 As the GDP growth expectations will change and might vary across
Europe, we will revisit our rental growth projections in more detail in Sep- Sep-2021 Base Case Mar-2022 Base Case Jun-2022 Base Case

22.
Sources: CBRE, AEW Research & Strategy

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AEW RESEARCH MONTHLY REPORT | EUROPE

JUNE 2022

INDUSTRIAL INVESTMENT MARKET

INDUSTRIAL SETS INVESTMENT VOLUME & YIELD RECORDS European Investment Volumes (€ bn)

 Industrial investment volumes over the last 12 months including Q1 2022 400 25%
are double their pre-Covid average and Q1 2022 posted a new record
350
high for any first quarter. 20%
 As investors’ appetite has been growing for the sector, industrial forward 300

acquisitions, including speculative schemes, are increasing, totaling EUR 250

EUR Bn
15%
7bn in 2021. 200
 This is nearly twice the amount recorded in 2018, and already at EUR 3bn 10%
150
for Q1 2022 alone. By contrast forward acquisitions in office reached only
EUR 2bn in the same quarter. 100
5%
 Other segments of the logistics investment market, such as last mile urban 50
logistics, cold storage logistics and light industrial have also seen strong 0 0%
growth.
 With investors demand increasing, core logistics assets hit record low
prime yields in Q1 2022.
Office Industrial Retail Residential Other Logistics share (%)

Sources: RCA, AEW Research & Strategy

INVESTORS REQUIRE HIGHER FUTURE LOGISTICS YIELDS European Prime Logistics Yields vs Governement Bond Yields (%)
6
 Despite the strong momentum in both the occupier and investment
markets over the last 5-10 years, we do expect prime logistics yields to 5
widen from their current record lows. This would represent a turning
4
point for the market.
 In our June 2022 base case, we expect a 20 bps widening over the next
3
five years. This is in contrast with our downside scenario which shows a
50 bps widening. 2
 This is based on our assumption that investors will accept a floor to the
1
excess spread of logistics yields over bond property yields of 25% of the
10-year historical average for each market.
0
 The precise timing of both bond and property yields widening might vary 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
considerably by country. But inter-period movements have limited impact
on our return projections over the five year period. Jun-22 Base Case Bond Yields Jun-22 Base Case Property Yields

 This is not only based on the depth of the investment market, but also Jun-22 Downside Bond Yields Jun-22 Downside Property Yields
dependent on the occupier market and its exposure to global supply
chains and the Ukraine conflict.
Sources: CBRE, AEW Research & Strategy

RESILIENCE IN CORE LOGISTICS MARKETS IN DOWNSIDE Logistics Annual Prime Total Returns by Country (2022-26 %)

 Total returns for logistics markets across Europe are estimated at 5.1% pa 8
for the next five years in our Jun-22 base case. This is down 40 bps from 7
our Mar-22 base case.
6
 Based on our Jun-22 downside scenario, total returns are projected at
5
4.1% pa as capital growth will turn negative for most non-core markets.
This is due to the higher yields and their impact on capital growth over 4
the five year forecast period. 3
 Core markets such as the Netherlands, Germany and France are projected
2
to maintain positive capital growth, even in our Jun-22 downside
scenario. 1

0
UK (7) Benelux(3) France (4) Average (37) Germany (5) Southern CEE (6)
Europe (4)

Sep-21 Base Case Mar-22 Base Case Jun-22 Base Case Jun-22 Downside Scenario

Sources: CBRE, AEW Research & Strategy

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AEW RESEARCH MONTHLY REPORT | EUROPE

JUNE 2022

ABOUT AEW

AEW is one of the world’s largest real estate asset managers, with €85.2bn of assets under management as at 31 March 2022. AEW has over 750
employees, with its main offices located in Boston, London, Paris and Hong Kong and offers a wide range of real estate investment products including
comingled funds, separate accounts and securities mandates across the full spectrum of investment strategies. AEW represents the real estate asset
management platform of Natixis Investment Managers, one of the largest asset managers in the world.

As at 31 March 2022, AEW managed €39.5bn of real estate assets in Europe on behalf of a number of funds and separate accounts. AEW has over 450
employees based in 10 offices across Europe and has a long track record of successfully implementing core, value-add and opportunistic investment
strategies on behalf of its clients. In the last five years, AEW has invested and divested a total volume of over €21bn of real estate across European
markets.

RESEARCH & STRATEGY CONTACTS

HANS VRENSEN CFA, CRE IRÈNE FOSSÉ MSC

Head of Research & Strategy Director
Tel +44 (0)20 7016 4753 Tel +33 (0)1 78 40 95 07
hans.vrensen@eu.aew.com irene.fosse@eu.aew.com

ALEXEY ZHUKOVSKIY CFA KEN BACCAM MSC

Associate Director
Tel +44 (0)78 8783 3872 Tel +33 (0)1 78 40 92 66
Alexey.Zhukovskiy@eu.aew.com ken.baccam@eu.aew.com

RUSLANA GOLEMDJIEVA ISMAIL MEJRI

Data Analyst
Analyst
Tel +33 (0) 1 78 40 39 81
Tel +44 (0)20 7016 4832
Ismail.mejri@eu.aew.com
ruslana.golemdjieva@eu.aew.com

INVESTOR RELATIONS CONTACT

ALEX GRIFFITHS BIANCA KRAUS

Managing Director Executive Director
Tel +44 (0)20 7016 4840 Tel. +49 893 090 80 710
alex.griffiths@eu.aew.com bianca.kraus@eu.aew.com

LONDON PARIS DÜSSELDORF

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