Global logistics property is in boom mode, at least in 2018, when institutional investors are continued flocking to the stands. The effect has been a compression in capitalization (cap) rates for logistics properties, to near record lows. Cap rates measure the ratio of a property’s value relative to annual net operating income. A lower the capitalization rate or ‘yield,’ means a higher price or value of an asset.
According to a CBRE report in March, 47 of 63 global markets recorded lower yields in 2018 than in 2017. Europe, the Middle East and Africa (EMEA) reported the lowest yield at 5.41 percent, as well as the steepest decline in cap rate at 35 basis points while Asia-Pacific region, considered the relative laggard of the three major regions because of keen competition with other real estate types like residential and commercial office, reported a yield of 5.97 percent, a 16 basis point year-over-year decline.
Global investment in logistics real estate reached $153.6 billion in 2018, a 5.3 percent gain year-on-year, according to data from Real Capital Analytics cited in the report. The CBRE report analyzed data exclusively on logistics real estate trends, with an emphasis on trends in prime markets.
According to CBRE, prime yields are expected to maintain the current status in 2019 even as e-commerce fulfillment needs continue to grow based on demand by property logistics occupiers. In Africa, may markets are operating at a deficit in grade A logistics properties, despite the fact that e-commerce is just in the early stages of establishment in most markets.
Regarding e-commerce, most African markets have not reached the tipping point yet, hence the effects of rapid e-commerce growth are still kept on hold. When it happens, higher e-commerce adoption coupled with a growing middle class could push demand for logistics property further up.
Africa’s largest e-commerce operator last month listed on the New York Stock Exchange, betting on the potential for e-commerce growth in African markets. This will call for further investments in logistics property assets.
Asia-Pacific for instance are benefiting from rapid e-commerce growth, an abundance of global capital and a push toward asset modernization with investments in robotics and other technologies that boost property values and the efficiency of shipment throughput.
“E-commerce operators require up to three times more space than traditional warehouse users due to a greater diversity in products handled and the need to have them immediately accessible. Global investors have caught on and are keen on adding industrial assets to their portfolios,” said Jack Fraker, CBRE’s global head of industrial and logistics, capital markets.
Understandably, Hong Kong prime logistics market had the lowest cap rate of any global market at 3.4 percent.
Walaszek said higher rents aren’t likely to blunt the appetites of leading occupiers for top-flight properties. Besides the fact that they can’t do without it, prime occupiers spend a relatively small portion of their total budgets on occupancy costs, Walaszek said. Occupancy accounts for 3 to 6 percent of a typical large corporation’s annual budget, he estimated.
Related; Kenya Logistics Market Snapshot