DACH Industrial & Logistic Property

Author: Anna Bossong Companies Mentioned

Companies	Market cap ($m)	Share price ($)
Mobimo	1,731	262.3
HIAG	1,013	125.8
Intershop	1,012	506.2
VIB Vermoegen	765	27.9
Deutsche Industrie REIT	399	17.7
Cargo Sous Terrain	–	–
Virgin Hyperloop One	–	–

Source: Refinitiv at 21 June 2019

Executive summary

With global economic headwinds and trade conflicts likely to affect industry in DACH markets in the short to medium term, we see the potential for a divergence in the outlook for logistics and industrial (manufacturing) property. Growth in e-commerce as well as evolution in consumer buying habits and supply chains should continue to drive demand for well-positioned logistics space. In the industrial property sector, if realised, the threatened imposition of trade tariffs from the US and China as well as Brexit are likely to put pressure on Mittelstand industrial tenants, particularly those supplying auto industries. Assuming current trade conflicts do not precipitate a global downturn, we see the potential for some better-insulated industrial property portfolios to perform well in view of the acute shortage of well-located industrial property in Germany. We would focus on portfolios with tenants oriented to domestic markets (eg consumer goods, government) and limited exposure to auto production. DACH property investment companies discussed in this report include: Deutsche Industrie REIT (DIR), Mobimo, VIB Vermoegen, HIAG and Intershop. Shortage of supply driving property values: vacancy rates in DACH logistics properties have fallen to historical lows, reflecting strong underlying industry and investor demand for prime sites, high construction costs and onerous requirements on developers. Similarly, low rental prospects (relative to residential and office markets), strict zoning regulations, rising construction prices and construction capacity shortages have choked the supply of new industrial properties in recent years. Location and quality of site becoming more important: under intense pressure to cut delivery times and cater for more automated and complex supply chains, logistics firms face an increasing range of site requirements, differing by distance to populations, stores and transport nodes. In addition to mega-distribution centres, these include last-mile facilities, urban consolidation centres and third-party locker stores. Industrial tenants are also more demanding, requiring efficient workspaces with access to skilled workforces and transport infrastructure. With yield compression slowing, rental growth has returned to logistics:in 2018 the scenario of strong demand and constricted supply resulted in average rent increases of 5% in the European logistics sector, up from the normal 2–3% of the previous two years. Germany was at the forefront of the trend with rental growth at five of its seven logistics hubs exceeding 5%. We expect this rental growth to be sustained in the areas of tightest supply but for rents on secondary properties to be constrained by the low margins of the logistics industry. Switzerland and China have big plans: China’s Belt and Road Initiative is already a reality in Germany, which possesses the principal European rail depot for scheduled freight trains making regular trips to and from China. Equally, an ambitious Swiss automated underground logistics system looks set to transform Swiss logistics and may well become a model for other countries. Key sensitivities: increased warehouse automation and expansion of multi-story developments could weaken demand for logistics properties chosen primarily for employee access. Trade disruption and rising tariff barriers pose challenges to industrial property returns in the export-oriented DACH sector. An Amazon move into Switzerland would likely result in a surge in demand for logistics properties, with a positive impact on Intershop and HIAG. Slowing/negative yield compression or rising interest rates could affect property values, especially if rental growth stalls.

Industrial/logistics property market

In 2018 both industrial and logistics property experienced continued strong demand from investors. Interest in the logistics sector continued to be fed by the boom in online shopping and evolving consumer habits (eg more frequent, smaller orders). This fuelled surging demand for warehouse space in major hubs and near urban centres. In the face of this strong demand, land supply shortages and high construction costs, particularly in Germany, rents moved upwards in response to slowing yield compression. At the same time, Colliers also reported that investor interest in purely industrial space was at an all-time high in Germany in 2018, reflecting the broader risk diversification and higher rental yields available in the sector when compared with logistics property.

Yields and yield premiums at historically low levels

Apart from during the global financial crisis, the global yield on industrial property has declined steadily over the last 20 or so years to 4.6% in 2018, less than half of its peak of close to 10% in 1992 (see Exhibit 1). This can be attributed to sharp falls in global interest rates as well as a dramatic narrowing in yield premiums on industrial property versus the office and residential markets. We see this as primarily reflecting yield seeking by investors in response to low interest rates and the improving fundamentals of the logistics sector. In 2018, in a continuation of this trend, the yield premium to global office property declined further to a 30-year low of 40bp. In 2018, after a second year of exceptionally strong portfolio investment and sustained industry demand for logistics properties, German net prime warehouse yields narrowed 45bp to 4.05% (see Exhibit 2). We also understand from Bulwiengesa that yields in sought-after smaller inner-city logistics properties contracted sharply, reflecting strong corporate demand. Austria saw lower, but also above-average for Europe, yield compression of 40bp to 5.40%, reflecting the trend for portfolio investors to seek yield.

Rental growth increased in 2018 as yield compression slowed

In 2018 European industrial property landlords pushed through rent increases averaging 5%, up from the 2–3% normal over the previous two years. This reflected the impact of slowing rates of yield compression and strong underlying industry demand in the sector. In Germany, the particularly strong position of landlords was amply demonstrated with five of the seven major logistic hubs experiencing rental growth rates in excess of 5% despite landlords benefiting from above-average yield contraction of 45bp. The increase was not uniform across the market, however, with Bulwiengesa data showing that the bulk of yield compression occurred in the sub-prime sector during 2018, versus a flat trend in prime warehouse/logistics yields. We see this as reflecting a switch in portfolio investment from prime to secondary properties during the year as occurred in the UK after e-commerce penetration rose to over 11%. In the Viennese logistics hub, rents grew a more moderate 2.5–5.0%, although landlords were rewarded with above-average yield contraction of 40bp to 5.40% (see Exhibit 2).

Prospects of diverging trends between logistics and industrial property

Fuelled by the developments in e-commerce and with greater independence from the business cycle, we expect logistics property to remain attractive to investors relative to other property classes over the next one to two years. With an expected continuation of supply shortages in Germany, we also see the potential for further yield compression, assuming no upturn in interest rates.

Industrial property more exposed to trade conflicts

As with the logistics sector, we note that supply of new industrial properties in Germany is very limited. Based on Bulwiengesa property pipeline data for 2019, the supply of both industrial and logistics properties looks set to be limited to only c 0.2% of the underlying stock value in each segment this year. Nevertheless, with regards to industrial property, we see a strong likelihood that China-US-EU tariff issues/currency wars, the fallout from Brexit and the problems of the auto industry will affect underlying demand for industrial property. We also see portfolio investors potentially re-risking DACH industrial property for these reasons. For the longer term much depends on whether the next year or two brings a resolution of the current trade conflicts between the US, EU and China as well as the outcome of Brexit. By 2020, we note, however, that there are prospects of the German auto industry successfully overcoming some of the current headwinds arising from new auto-emission rules, which have been partly to blame for poor auto sales data from the region. In the event of a sustained global cyclical downturn, we would expect a negative overall trend in auto and capital goods sales, especially if prompted by escalation of these trade disputes. Given this, we see industrial property oriented to domestic and non-commercial sectors (eg consumer goods production, government) as offering lower risk exposure to the sector. With regard to the outlooks of individual portfolios it is worth noting that owners of light industrial estates such as Deutsche Industrie REIT (DIR), with rentable space at only 53% of total land holdings and diversified portfolios with less than 3% exposure to the auto industry are quite well situated. Owners of portfolios such as these have the potential to increase rental income/development earnings by increased use of multi-storey buildings and the construction of office/residential space on sites in the proximity of urban areas. We also note the importance of tenant selection and lease terms in sustaining rental income and property values.

Why invest in industrial property?

Financial investors overcame industry players to become the largest investors in logistics properties in Germany in 2017. Although low interest rates, inflation concerns and diversification are key incentives to undertake portfolio investment in property, investment in industrials and logistics brings additional benefits:

• • Portfolio diversification and exposure to fast-growing industries that are hard to invest in: investment in logistics property gives exposure to the e-commerce boom as well as the EU transport sector, which generates 9% of gross value added in the EU economy. Investment in industrial property also provides exposure to the largely unlisted Mittelstand companies sector.
  • Above-average property yields versus other property categories.
  • Minimal state involvement in terms of regulation and rent controls.
  • Attractive lease contracts: logistics and industrial property leases often contain indexed rent clauses that protect the investor from inflation and triple-net clauses, where the tenant is solely responsible for the costs of the leased asset.
  • Low refurbishment costs: Savills Investment Management puts the refurbishment cost for industrial property at typically less than €100 per sqm for logistics properties vs €300–500 per sqm for office property.
  Exhibit 7: Map of key logistics sites in Germany Source: BNP Paribas Real Estate

  Exhibit 8: Manufacturing as % of total value added by country (2018)

  Source: OECD National Accounts Statistics https://data.oecd.org

  Geography matters

  Germany: Well-connected logistics network at the heart of Europe Germany has a particular prominence in the logistic industry within the DACH region and in Europe. Its position at the heart of the Europe as well as its efficient road and rail links and sea ports means it is a top choice internationally for Europe-wide and local German distribution. Its position as a major export-oriented manufacturing nation added to its wealthy and decentralised multi-urban population has also contributed to the development of multiple major logistics hubs in Munich, Hamburg, Berlin, Leipzig, Dusseldorf, Cologne and Frankfurt. In terms of prime logistic rents, in Q418 Berlin and Munich were at the upper end of both German and Continental European ranges for warehouses over 5,000 sqm, at €86 and €84psm/year, respectively. Hamburg suffers most from lack of space but with lower regional importance, its prime rents were lower at €72psm/year (see Exhibit 6). Brexit may also bring some good news for owners in the German logistics space. At present a number of shippers and third-party logistics suppliers are reported to be looking to move their pan-European hubs from the UK to Continental Europe after Brexit, with Germany one of three top choices. With the centre of the EU also moving further east, Germany may also win further market share from the Benelux countries. Firms such as VIB Vermoegen with 65% exposure to logistics properties in Germany look well positioned in this regard.

  Industrial property: Long-term solid fundamentals vs cyclical economic factors

  It is a mark of the strength and adaptability of industries in the DACH region that manufacturing value added has continued to be maintained at a significantly higher proportion of GDP than in the US, France, the UK and the EU as a whole (see Exhibit 8). Helped by strong capital goods exports around the world, but particularly to Asia, Germany has seen an increase in the relative size of its manufacturing sector over the last five years to 23% of total value added. Switzerland and Austria both stand at 19% versus a 16% average for the EU and 12% for the US. For the longer term, the ability of industry in the region to adjust to a high wage environment and increasing competition from Asian producers as well as to make high ongoing investments in technology should continue to serve the region well. At this point of an extremely long cyclical upswing, however, it must be said that the region’s significant exposure to the highly cyclical capital goods exports and rising levels of protectionism are significant risk factors for the future. In Germany, the current shortage of industrial land arising from high construction prices, shortages of construction capacity and stiff competition from the booming residential and office development markets have given landlords significant power to put through rent increases. Prime light manufacturing rents grew at a high c 12% CAGR between 2014 and 2018 to €104psm/year . Nevertheless, with the continuation of the current challenging conditions for industry, particularly the auto sector, we see the potential for vacancies to rise and rental growth to slow in the medium term despite the minimal amount of new supply (0.2% of value) in the 2019 construction pipeline. If this is accompanied by a decompression in yields caused by a re-risking of the sector by investors, then it may result in a downturn or a flattening in property prices. In the more optimistic scenario of the threatened tariff impositions from US and China not materialising and conditions in the auto industry improving, as the industry recovers from issues related to the introduction of new emissions standards, we see it as likely that ongoing rental growth would resume, underpinning property values.

  The rise of long distant rail: China’s Belt and Road Initiative

  Exhibit 9: China Europe Rail Route and Frequency (2018) Source:Center for Strategic and International Studies,The Rise of China-Europe Railways Jonathan E Hillman, March 2018 China’s $900bn Belt and Road Initiative, which was launched in 2013, is already starting to have an impact on the logistics industry in Europe and the DACH region. The ‘China-Europe Railway’ initiative has been a prime mover in creating 65 regular freight train routes from 35 cities in China to 44 European destinations. At present, assisted by Chinese subsidies, these rail routes have significant cost advantages over air travel and speed advantage over sea travel. Helped by this, the number of freight trains journeys between China and Europe grew 73% to 6,363 in 2018. As part of the project, the German former rust-belt city of Duisberg, just north of Dusseldorf, was selected to be the principle European terminus for these freight services, becoming the world’s largest inland port. This has led to the number of Chinese businesses operating in the city increasing from 40 in 2014 to more than 100 in 2018 and created 6,000 logistics jobs. A study commissioned by the International Union of Railways estimates that Asia-Europe rail services will grow at a CAGR of 14.7% over the next decade, which could lead to a significant increase in demand for Germany’s onward logistics facilities. We have some concerns about the plans of the Chinese government to scale back subsidies, which may slow the growth in freight traffic. Nevertheless, the closer links between the two countries should result in increased Chinese investment in Germany and its infrastructure, which is likely to be positive for logistics and industrial property values.

  Switzerland: Potentially major changes in the works

  Switzerland’s high land costs as well as heavily congested transport infrastructure and difficult terrain have made it unattractive as an international logistics hub. Nevertheless, transport is still an important industry supported by strong export industries and large-scale cross-border trade with the EU. Currently, close to 60% of logistics revenues are generated from bulk items where the whole load is transported directly to the end-user without the use of intermediary warehouses while Swiss Post still plays a major part in the courier, parcel and letter services business. The bulk of the country’s logistics services are located across the country’s east-west infrastructure and transport corridor between St. Gallen and Geneva. Unfortunately, the small size of the rental market for logistics facilities means that there is little public data on average rents. Credit Suisse Asset Management estimated rents at a high CHF70–103 (€63–93)psm in a 2018 report on the sector. We see two significant possible events as having the potential to transform the Swiss logistics industry in coming years. The first is the possibility that Amazon will establish operations in Switzerland in response to the Swiss government requirement from 1 January this year that e-commerce suppliers from outside the country pay VAT on shipments to Swiss consumers. The second is the potential fruition of plans by the Swiss company Cargo Sous Terrain (CST) (which includes Virgin Hyperloop One as a shareholder) to build a revolutionary fully automated underground freight transportation system spanning from Geneva to St. Gallen near the eastern border of the country, that would completely transform the industry.

  Amazon to enter the Swiss market?

  Within the DACH region, Austria and Switzerland lag Germany in terms of e-commerce. In 2018 only 60% of individuals in Austria and 71% in Switzerland purchased goods or services online, versus 77% in Germany. It is also worth noting that although Swiss consumers buy significant quantities of goods online, the lack of a local Amazon platform means the purchases are made on foreign platforms and much of the fulfilment work is done abroad. As discussed above, new laws were introduced at the beginning of this year requiring larger foreign e-commerce providers to charge VAT on sales in Switzerland. We see this as providing an incentive for e-tailers such as Amazon to establish logistics facilities in Switzerland to reduce cross-border friction. If it happens it would be easy to understate the potential impact of this on the market – in 2017 Savills reported that Amazon was absorbing 25% of big-shed take-up in the French market as part of its rollout in France. As such, this could present significant opportunities to owners of existing Swiss logistics facilities such as HIAG and Intershop Holdings, as well as potentially result in potential new logistics development projects for major Swiss land-owner HIAG.

  Cargo Sous Terrain: Working to create a visionary Swiss logistics system

  CST and its large group of stakeholders, including many of Switzerland’s largest transport, logistics and infrastructure providers, propose to build the network under the existing logistics road corridor between St. Gallen and Geneva. The above-ground route is already heavily congested. As a result, forecasts of a 37% increase in the volume of goods to be transported in Switzerland between 2010 and 2040 have led for calls for an environmentally friendly solution. The system will work by loading cargo into small, automatic, driverless containers that travel on wheels utilising an electric drive with induction rails. These will operate in three-track tunnels and travel at a constant speed of around 30km per hour. An overhead track attached to the ceiling of the tunnel will also transport smaller parcels at higher speeds. By enabling a continuous flow of containers the system should make it economic to ship as little as two pallets rather than whole truckloads as now. Operated entirely with renewable energy, the system is expected to also have significant environmental advantages over road transport, emitting 80% less CO2 per tonne of goods transported. CST estimates that the implementation of the system should result in the removal of 40% of heavy good vehicles from Swiss roads and reduce city logistics delivery traffic by 30%. According to the company, reduced noise emissions and land usage will also make the system greener than all other transport scenarios, even after the introduction of electrically drive HGV’s. The Swiss Federal Council has been evaluating the project since January 2018 as a precursor to presenting an enabling legislation proposal to the Swiss Parliament. The partners, which include several major Swiss banks, have pledged CHF100m (€90.3m) towards the project. They are expected to undertake further rounds of fund raising and loan issuance in order to enable construction of the first 70km segment between a logistics hub at Harkingen Niederbipp (see Exhibit 10) and Zurich, which is expected to take place between 2025 and 2030 at a cost of CHF10bn (€9.0bn). The full network is scheduled for completion by 2045 at an additional total cost CHF30bn (€27.1bn), which the partners intend to fund without public subsidies. Once complete it is expected to have more than 500km of tunnels served by 80+ hubs, mostly at the sites of existing logistics hubs. CST also plans to create one million sqm of underground space and numerous city logistics systems to minimise emissions.
  Exhibit 10: Proposed Swiss Cargo Sous Terrain automated logistics tunnel plan Source: Cargo Sous Terrain

  Exhibit 11: Proposed Swiss Cargo Sous Terrain planned integrated logistics system Source: Cargo Sous Terrain
  We anticipate that project approval will result in increased in interest in logistics property located around the system’s planned hubs. This assumes logistics firms will see significant cost and speed benefits from using the system and will therefore wish to build partly or fully automated warehouses at the hubs that are directly integrated into the CST system. Considering CST’s ambitions for the system to encourage small automated shipments, we envisage some industries wanting to locate and integrate production into the CST hubs. For example, fresh-food suppliers and 3D printers could choose to convey their goods direct from the production line to urban destinations and other transport nodes around the country using just-in-time principles. With road freight volumes expected to decline, we also expect a reduction in demand for more marginal logistics properties without significant infrastructure or urban access advantages. Additionally, CST expects the system to enable users to reduce their temporary storage space requirements by virtue of the continuous flow system. CST also plans to build large underground storage areas, such that we expect there to be a reduction in overall demand for above-ground warehouse space. Helped by this, we expect to see greater demand for smaller warehouses at the CST hubs as well as smaller urban and urban-edge last-mile sites near CST-linked infrastructure. The likelihood of premium rents being charged at the system’s hubs and the advantages of direct, automated connection with the CST system should also motivate logistics companies to adopt higher levels of automation and to adapt to the use of multi-storey warehouse properties.

  Austria: Regional hub and city focus

  Austria’s largest logistics hub – the only one with 5,000+ sqm warehouses – is situated just outside its capital city, Vienna. In addition, the country has numerous smaller logistics centres on its major east-west transport corridor and in the southern city of Graz. A key focus of logistics in Austria is its international transit functions, reflecting its geographic position and its direct rail and road links to seven countries on its borders. The Vienna hub faces competition for its regional distribution functions from nearby lower-cost hubs in the Slovakian capital Bratislava and the Hungarian capital Budapest, where rentals are 57% and 66% of Vienna’s 2018 average of €82psm (see Exhibit 5). Nevertheless, its position as a major regional hub is strongly supported by its highly efficient transport and logistics infrastructure, as attested by its fourth position in the UN rankings for world logistics performance in 2018.

  Market drivers

  The e-commerce revolution: Driving demand for logistics space The boom in e-commerce is driving demand for logistics space across Europe and the DACH region. JLL reported recently that demand for European e-fulfilment space increased 68% in H118. Statista forecasts European and DACH e-commerce sales revenues to grow by a total of 33% and 28% between 2019 and 2023. Exhibit 12: E-commerce revenues

  US$bn	2017	2018e	2019e	CAGR 2018–23e
  Austria	7.7	8.1	8.8	7.2
  Germany	66.7	70.3	75.4	6.5
  Switzerland	7.6	8.0	8.6	6.8
  DACH	82.0	86.4	92.8	6.6
  Change (%)	–	5.4	7.4	–

  Source: Statista

  Volumes of goods in supply chains set to outstrip growth in e-commerce

  A number of factors indicate that supply chains in the DACH region will have to grow more rapidly than the rates solely dictated by the growth in e-commerce revenues. These include:
  • expectations of a take-off in sales of bulky grocery and FMCG items in keeping with UK and US trends;
  • the trend for consumers to purchase smaller items more often as delivery speeds improve;
  • growing urbanisation, which is increasing the addressable market for e-commerce;
  • growing competition among e-tailers in the areas of product choice, speed of delivery and stock availability, requiring innovative solutions and additional nodes in logistics chains;
  • high levels of returns volumes versus store sales; and
  • The trend for manufacturers and retailers to outsource production steps to logistics firms.

  Online logistics require triple the logistics space of physical stores

  Reflecting these circumstances, Prologis estimates online commerce outlets now require an average of three times more logistics space than physical stores. Taking into account that online stores are estimated to have taken only a 12% share of total retail trade in Germany as of 2018 (source: Bevh), with similar amounts in Switzerland and Austria, there appears little reason to expect a slackening in demand for logistics space oriented to e-commerce deliveries in coming years.
  Exhibit 13: Proportion of individuals who used the internet and bought goods online in 2018

  Source: Eurostat, International Telecommunications union, GlobalwebIndex (Switzerland, for Q2 and Q3 2018)

  Exhibit 14: Proportion of internet users who bought/ordered goods or services for private use

  Source: Eurostat

  Automation and digitalisation: Smaller, higher and faster

  Automation and digitalisation are revolutionising the logistics industry and having major influence on the types of logistics properties that will be in most demand in future years. Robotised automated storage and retrieval systems (RASRs) have become increasingly common in mega-distribution centres across Europe. These enable the industry to add scale and increase efficiency while reducing staff requirements, which can often dictate the location of traditional warehouses. Their key advances lie in:
  • Eliminating the need for staff to store and retrieve stock from the warehouse’s shelves.
  • Increasing warehouse capacity by reducing aisle sizes and enabling higher shelving systems.
  • Enabling employees to place stock randomly on shelves (after scanning the product and shelf’s bar code), thereby increasing stock density, employee efficiency and ease of access to single items (important in e-commerce).
  • Having the RASR deliver whole shelves to employees to pick and restock at the same time, further reduces labour inputs.
  Other developments that are transforming logistics in the digital, e-commerce age include:
  • Multi-party open collaboration platforms to bundle and optimise last-mile deliveries.
  • Urban consolidation centres to streamline the flow of deliveries into cities.
  • high levels of returns volumes versus store sales; and
  • The application of mix-move-match concept, whereby orders are assembled close to customer delivery locations. Collaborative routing further reduces overall van numbers and traffic levels.
  • Third-party parcel lockers to streamline deliveries from multiple sellers to multiple buyers.
  • Multi-storey logistics buildings for plot efficiency. These are well established in Asia, with Hong Kong warehouses, for example, averaging 12 stories. Adoption in Europe has been slow as it requires heavy investment in small trucks fleets capable of using ramps, but in coming years we see strong prospects for them being adopted in crowded hubs and urban sites in Europe as e-commerce volumes grow.
  • Predictive analytics to enable more targeted and therefore lower overall stock levels.
  Concepts still largely in the planning phase include:
  • The ‘physical internet’ whereby items are sent individually and automatically through the supply chain, being routed at each node (eg port, rail terminal), depending on factors such as time, cost, utilisation etc before being assembled close to or at the final destination. The aims are cost reductions and reliability but the demands on industry players to collaborate may make it unworkable.
  • Fully automated and integrated underground logistics systems as proposed in Switzerland.
  • Drones and driverless vehicles for use in last-mile logistics.

The next trend is smaller urban logistics centres

We expect many of these developments will lead to a greater variety of smaller logistics spaces in the future, especially within and around urban centres. With increased collaboration and automation, they should also slow the required expansion in total logistics space and employee numbers relative to growth in e-commerce goods volumes. With the expected growth in high volume online grocery and FMCG sales, mega-sized automated facilities at infrastructure nodes should be able to undertake most of the heavy lifting. The greatest uplift in site value is likely to take place in the smaller last-mile outlets in and around urban centres. We believe smaller sites located near large pools of employees (a must-have for manually operated logistics centres) but with poor proximity to urban markets are likely to do less well.

DACH likely to continue to lead in automation and innovation

The results of the 2018 UN survey into logistics shows how seriously the DACH countries take the quality of their logistics infrastructure and timeliness of delivery. As shown in Exhibit 15, in terms of speed of delivery all three countries in the region rate ahead of the US, France and Spain and in line or ahead of the Netherlands and Sweden. Considering this attention to delivery speed and the low unemployment/high wage levels in the region, we expect the DACH countries to maintain their position at the forefront of future logistics technology. Exhibit 15: UN ratings of global logistics performance: DACH world-leading region Source: United Nations: Logistics Performance Indicators, 2018

What sort of companies are likely to do well?

We believe investors should look for investment vehicles with the following features:

• • • • A strong tenant mix.
      • Good infrastructure connections.
      • Positioned for secular drivers or the potential for properties to fulfil future tenant needs.
      • Exposure to forward-oriented logistics properties, eg last mile, high automation.
      • Invested in industrial properties on key transport corridors with strong international connections.
      • Strong property pipelines with the potential to add value within the existing portfolio.
      • Strong technical specialisation, eg Mobimo in conversions of industrial property.
      • Ability and strategy to enhance value of existing properties, eg boosting lettable space.
      • Vacancy rates: structural problem or growth opportunity?
      • Balance sheet risk supported by revenue flows.
      • Development potential of land bank: ability to increase valuation with infill and going vertical.
      • Diversified rental client base, with larger and smaller firms.
      • Regionally ‘relevant’ firms that have above-average prospects to attract municipal/government aid in difficult times.

What sort of companies will struggle?

We highlight the following areas of potential concern:

• • • • High exposure to highly cyclical sectors given the late stage of the current business cycle.
      • Balance sheet risk not supported by revenue flows.
      • Exposure to property classes likely to fall out of favour.
      • High exposure to weaker regions.

Key trends to invest for

• • • • Growth in demand for last-mile logistics consolidation depots in and around major urban centres.
      • Brexit resulting in the migration of a number of pan-European hubs from the UK to Germany according to industry feedback. Moving the centre of the EU further east is likely to result in more pan-EU hubs being migrated from the Benelux countries to Germany.
      • Values of industrial property around German city centres rising due to strong demand for residential land as well as competition for available space from logistics and office developers.
      • Increased demand for Swiss logistics property at the planned hubs of the Cargo Sous Terrain automated underground system.

Source: Refinitiv. Note: The above P/BV and P/E ratios are based on Refinitiv definitions of BV and EPS, which may not correspond with definitions used elsewhere in this report. Priced 20 June 2019.

Company Summaries

Deutsche Industrie REIT

HIAG

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United Kingdom Neither this document and associated email (together, the “Communication”) constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith. This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “FPO”) (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing). This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person. United States The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the “publishers’ exclusion” from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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