Prime logistics has been European real estate’s star performer for a decade, notching up an annualised return of 15% since 2013 according to CBRE. It has been a major beneficiary of structural changes in our shopping habits, supply chain adaptation and localisation trends. Vacancy currently sits at a record low of 3.1%, according to Savills, with rental growth and yield compression occurring as a result.
Logistics has not been immune from recent price corrections. CBRE estimate average prime yields moved out by 62 basis points to 4.8% in the 6 months to Q1 2023, but they still predict it will be the best performing real estate segment over the next five years. Given its prospects, investment is competitive. Stock is tightly held, and quality assets can be subject to aggressive bidding. But investors are missing an alternative path which can deliver logistics-style returns at better entry prices: light industrial.
What is light industrial?
Light industrial is a type of use, rather than a type of physical asset like “big box” logistics. It is space used for value-added activities like goods assembly, production and storage or research and development. It often includes a logistics component. Typically, light industrial has higher office content than logistics and consists of smaller assets below 15,000 sq. m (160,000 sq. ft) or multi-let tenancies of 250–2,500 sq. m (2,700–27,000 sq. ft). A wide variety of activities occur under one roof making it a more complex product.
In most European markets, the amount of light industrial stock far exceeds logistics stock. However, it is overlooked, because it is largely held by non-institutional owners and it is bespoke and broadly distributed within business parks or stand-alone sites. This is a mistake. Light industrial has powerful fundamental drivers which point to sustained future performance. It takes a hands-on, detailed approach to unlock its value but investors who do so are set for rich rewards.
