Real estate continues to offer solid returns with inflationary tracking income

Now that we have spent over two years living with the Covid-19 pandemic, the long term economic effects are at last coming into focus. Currently, despite the increasing importance of nearshoring and e-commerce, the most dangerous macro-economic trend could prove to be continuously rising prices.

According to Christopher Zeuner, Chief Investment Officer and Board Member of warehouse developer 7R, there is still a lot of international capital looking for investment opportunities. “There’s no question now whether or not inflation is going to be a blip. It is going to be something that is going to take longer than was initially earmarked by most central bankers,” he explains. Rising interest rates and rising government bond prices might stem short term inflationary pressures but, “Real estate is a solid asset that gives income which can help mitigate such pressures,” he says.

 

Surviving the pandemic

 

The main effect of the pandemic has been to speed up many of the changes that could already be seen on the market, but it has also severely dented the short term prospects of several real estate sectors including hotels, offices and retail. However, Covid-19's impact on logistics and warehousing has been somewhat limited. “The impact of those changes on logistics and warehouse assets has been that it has increased demand for businesses in regard to their logistics and warehouse needs and this has helped the warehouse sector to be resilient in the light of everything that is going on and the challenges that are faced by many businesses,” points out 7R’s Chief Investment Officer and he goes on to say that: “For certain goods and services people have realised that there is an advantage to sitting at home and doing your shopping online.  The trend has definitely been set and I think that is going to continue to be a very strong driver of growth within the logistics and warehouse sector.”

 

But it is not only e-commerce that has threatened to shake up the logistics and warehouse sector. Covid-19 brought major disruption to international supply chains, with international producers considering bringing their factories back to Europe, closer to their consumers. Although the trend is clearly evident, it has not proven so far to be as revolutionary as some people had at first predicted.

I remember at the beginning of the pandemic there was a lot of talk that this would be a seismic change to the business and that everyone would be wanting to nearshore. I think that although there have been some problems, in general, supply chains held up incredibly well during the pandemic. Nearshoring has happened to a degree but not to such a great extent as some commentators were predicting at the beginning.

explains Christopher Zeuner

Member of the Board and Chief Investment Officer

Looking beyond borders

 

7R is currently the second-largest logistics developer in Poland and takes around 20% of the market every year and from this position of strength, the company is now considering expanding abroad. “We deliver a demonstrable higher specification and service  to our tenants compared to what many other developers provide and that is something that our tenants and our customers like. They are the ones coming to us and saying ‘We really like what you have done for us in Poland, can you do something similar in Germany and Czechia.’ We will continue to grow in Poland strongly but there are new markets that we can enter to have even greater growth.”

 

For manufacturers, the attraction of the Czech Republic is cost and it also helps that the country shares a very long border with Germany. That, however, does not mean that warehouse development is an easy business there. “The challenge is that unlike Poland, which is a large relatively flat country, the Czech Republic is quite small and very mountainous. When it comes to finding space for large logistics projects, there is just fundamentally less space that is suitable. That certainly has an impact on what your rents are and it certainly has an impact on the cost of land due to the lack of availability,” says Christopher Zeuner when talking about the challenges.

 

In addition, the process can also present challenges. "This process can take considerably longer in the Czech Republic than in Poland. In the Czech Republic, it is quite a long, convoluted process. Industry groups, such as the Czech Association of Developers, and government authorities are working to improve this, and progress is being made, but more still needs to be done to make Czech Republic more comparable to most of the rest of the EU,” he explains and then Christopher Zeuner compares the process to Germany: “The main constraint in permitting process is the lack of availability of plots registered under the required planning certificate. Also, due to the limited amount of plots suitable for logistics use as a result of the rapid growth of the sector, local councils are prioritizing light production programs and are trying to limit the amount of newly built logistics and warehouse facilities.  This results in very limited land availability.” he explains and he believes that: “Germany is a challenging market, where yes it is a very stable economy, cap rates are lower, the rents are higher. There are many benefits to a developer being active in Germany, But from a sourcing perspective Germany is very challenging.” The difficulties arise because the land registry will not divulge who owns a given parcel of land so contacting landowners is not an easy process. 7R’s Chief Investment officer explains that: “You need to have that in-depth local knowledge and use good local agents to be able to source land to grow a business."

If you look at take-up Poland is the largest market in Europe. We are seeing rental growth in the vast majority of Europe and I think that it will come very soon to Poland as well. The challenge is inflation; however, of the real estate sectors, I believe the logistics and warehouse sector, which has proven the most resilient over the last few years, will remain to be the most resilient going into a more inflationary environment.

adds Christopher Zeuner

Author: Christopher Zeuner

Member of the Board and Chief Investment Officer at 7R

Christopher Zeuner has over 20 years of experience in the commercial real estate market, including real estate advisory agencies and global investment funds. He joined 7R in 2019, and from January 2021 he is a member of the company's management board and Chief Investment Officer, responsible for 7R's expansion into new European markets.

Contact: [email protected]

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