Central Europe's industrial light is magic

By bne IntelliNews April 27, 2015

Nicholas Watson in Prague

It's been a difficult time for the industrial and logistics real estate business since the 2008 crisis. But the recovery in the sector that began in the US in late 2010 has fed through to Europe in the last 12-18 months, putting companies like Prologis back in the driving seat.

Looking at the two biggest industrial and logistics property markets in Central Europe, Poland and the Czech Republic, Colliers International reports that 2014 proved to the strongest year for this segment in terms of development completions since 2009, the depths of the economic crisis.

In Poland, industrial real estate projects with a total space exceeding 1mn square metres (sqm) were delivered to the market, a record amount that far exceeded the 400,000 sqm seen in 2013. In Czech Republic, a total of 356,000 sqm was completed, which was up 31% from the year before. "The vast majority of this new industrial space was pre-leased, as speculative development remained limited," Colliers noted.

Prologis, which was formed out of a merger in 2011 between ProLogis and AMB Property Corporation to create one of the world's biggest industrial real estate firms, is playing a large part in that development. Poland is about 50% of the company's Central European portfolio, which totals 4.2mn sqm of industrial space in 44 logistics parks, with Czech Republic, Slovakia, Hungary and Romania making up the remainder. "In 2008 the music stopped. Globally, the industry had a particularly challenging time, then the market came back in US in late 2010 and Europe only in the last 12 to 18 months," says Ben Bannatyne, managing director and regional head of Prologis in Central and Eastern Europe, which has currently five buildings totaling 121,000 sqm under construction.

That improvement is down to the economic recovery in the Central European region; Poland was the only EU economy not to fall into recession in 2009, while Czech Republic and Slovakia pulled quickly out of the nosedive, returning to positive growth the following year (though the Czech economy dipped back into negative territory in 2012) as the anchor economy in next-door Germany bounced back.

As the region's economic prospects have improved, Bannatyne says there has been a "wall of money" into Europe over the last 18 months from investors around the world looking to acquire industrial real estate assets. That money has anticipated the rise in occupier demand, which over the last year has seen the occupancy rate in the Prologis portfolio in CEE rise to 93.1% at the end of the first quarter of 2015. "Vacancy rates have decreased significantly over the last 12 months. [An occupancy rate] above 90% is good, above 95% is exceptional, so we are in good position," says Bannatyne.

Poland has become the largest real estate investment market in CEE, accounting for over 50% of the total 120 transactions worth over €10.5bn carried out in 2014. "Poland has thus become the leader in the investment market in Central and Eastern Europe, gaining a 30% share in value terms," says Colliers.

2015 and beyond

All the signs are that the region's industrial property sector will continue to improve as the Eurozone economies and Germany continue to grow - if not exactly at a fast pace, then at least in a stable manner. For 2015, Moody's Analytics forecasts Germany's GDP to increase by 1.4%, marginally less than the 1.6% recorded last year, while the Eurozone's GDP growth should accelerate to 1.4% in 2015 from 1.0%. The most recent ZEW Indicator of Economic Sentiment published on April 22 showed that expectations for the Eurozone economy rose to 64.8 from 62.4 (a reading above 50 is positive).

In Poland, at the end of December some 685,500 sqm remained under construction, of which around 70% has already been leased. "The majority of those projects will be delivered to the market by the end of 2015," says Colliers, noting that the supply of modern industrial space in major Polish markets now totals over 8.8mn sqm. In Czech Republic, an unusually large number of pre-leases signed in 2014 means 2015 is on track to exceed last year's supply levels and take the stock of modern industrial space to over 5mn sqm. "With positive economic growth (2.5%) forecast and a number of known occupier requirements on the market, demand should be around 1mn sqm for 2015," Colliers says. A major source of that growth will come from the rapidly expanding e-commerce market.

Bannatyne reckons that with plenty of room for growth, Central Europe's industrial and logistics property market could grow 30-40% over the next five years. "Poland is one of the top five or six emerging markets for industrial real estate in terms of growth, while Czech Republic and Slovakia are among the most stable markets. Hungary is a market that has really come back in last nine months, while Romania is still many years behind the rest of Central Europe," he says.

Prologis is well placed to take advantage of that potential boom. Almost unique in the industry, it works across the business lines of the industrial property sector. The standard industrial developer is a trader of properties, developing one site and then selling it before moving on to the next project. Prologis does some of that, though the majority of its developments it holds, operates and makes available for investors to participate in. "Prologis is almost unique in what we do. We are a developer-owner-investor-manager - you don't normally get those things under one roof," says Bannatyne.

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