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CONTRIBUTORS

Bruno Berretta

Head of Research, European Markets

Clarion Partners

2023 was a challenging year for European logistics property—caught in the middle of a sharp increase in interest rates and normalising demand from e-commerce. Heading into 2024, despite some short-term challenges, market fundamentals remain healthy, and we think the sector is well positioned to outperform.

With the European economy expected to stagnate during 2024, current softness in the occupier market may endure over the next several months. Some occupiers—including e-commerce—have more space than they need, and this hidden vacancy could hamper take-up. That said, we have seen an encouraging pickup in occupier enquiries over recent months. If the economy turned to be stronger than anticipated, as was the case recently, we could well see demand rebounding sooner rather than later.

Nonetheless, we expect market fundamentals to remain healthy. Vacancy rates have increased over the past quarters (European vacancy: at 3.5% as of third quarter 2023) but remain close to record lows. Moreover, the sharp slowdown in new development starts in the past 12 months should curtail new supply from 2024. This in turn should drive continued rental growth, especially for well-located, modern, ESG-compliant assets for which, in our experience, demand continues to outstrip supply.

More importantly, we think that 2024 will likely bring more stability to the capital markets. Inflation has fallen considerably from its 2022 peak and if the current trend is sustained, central banks may be persuaded to pivot from 2024. We believe that would eliminate an element of uncertainty that has hold back investors during 2023. Stabilizing valuations may also entice buyers. In our view, the UK market has repriced the fastest so far, with Germany and Netherlands not far behind, followed by France. Spain and Italy are less obviously priced, and values may need to adjust further there to reflect fair value.

Overall, our conviction in European logistics is undiminished. Recent fundraising activity and investor surveys show that there is no shortage of capital looking to get into European logistics. In addition, debt is generally available for institutional-quality product. The sector has some of the best rental growth prospects of all commercial property in Europe. Combined with the ongoing asset repricing, we think that 2024 could bring attractive opportunities for investors.

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