Real estate continues to offer solid returns through inflation-adjusted income

Now that we have spent over two years living with the COVID-19 pandemic, the long-term economic effects are finally becoming clear. Currently, despite the growing importance of nearshoring and e-commerce, the most dangerous macroeconomic trend could turn out to be steadily rising prices.

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

Surviving the Pandemic

The main effect of the pandemic has been to accelerate many of the changes that were already evident in the market, but it has also severely dampened the short-term outlook for several real estate sectors, including hotels, offices, and retail. However, the impact of COVID-19 on logistics and warehousing has been somewhat limited.“The impact of these changes on logistics and warehouse assets has been to increase demand from businesses for their logistics and warehouse needs, and this has helped the warehouse sector remain resilient in light of everything that is happening and the challenges faced by many businesses,” notes 7R’s Chief Investment Officer, adding that:“For certain goods and services, people have realized that there is an advantage to staying at home and shopping online. The trend has definitely been established, and I think it will 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 disrupt the logistics and warehouse sector. Covid-19 caused major disruptions to international supply chains, prompting international manufacturers to consider relocating their factories back to Europe, closer to their consumers. Although this trend is clearly evident, it has not yet proven to be as revolutionary as some initially predicted.

Looking beyond borders

7R is currently the second-largest logistics developer in Poland, capturing approximately 20% of the market each year, and from this position of strength, the company is now considering expanding abroad. “We provide a demonstrably higher standard of facilities and service to our tenants compared to what many other developers offer, and that is something our tenants and customers appreciate. They are the ones approaching us and saying, ‘We really like what you’ve done for us in Poland; can you do something similar in Germany and the Czech Republic?’ We will continue to grow strongly in Poland, but there are new markets we can enter to achieve even greater growth.”

For manufacturers, the Czech Republic’s appeal lies in its low costs, 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 undertaking 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 simply less suitable space available. That certainly affects rental rates and certainly impacts land costs due to limited availability,” says Christopher Zeuner when discussing 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 the 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 the permitting process is the lack of availability of plots registered under the required planning certificate. Also, due to the limited number of plots suitable for logistics use as a result of the sector’s rapid growth, local councils are prioritizing light industrial projects and are trying to limit the number of newly built logistics and warehouse facilities. This results in very limited land availability,” he explains, adding that: “Germany is a challenging market; while it has a very stable economy, cap rates are lower and 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 disclose 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.”