BELGIUM / Industrial Q1 2023

Opportunities and Challenges in the Industrial Sector

From every point of view, 2022 was a highly peculiar year. High energy prices, unprecedented levels of inflation, and rising interest rates from multiple central banks in an effort to combat the inflation have all had a significant negative impact on the economy

Economic conditions have suffered throughout the year 2022 in the aftermath of the conflict in Ukraine. While GDP held up well last year, a recession is looming. GDP growth is expected to stand around 0.2 and 0.6% in 2023 according to the National Bank of Belgium and the IMF. The Belgian economic outlook is thus mitigated for 2023 while a more important GDP growth is expected as from 2024. According to the International Monetary Fund, Belgian public deficit will remain important in 2023 while public debt could continue to deepen if any adjustment is taken by the authorities Successive interest rates hikes also weigh on the public debt

The semi-industrial and logistic markets are essential to the economy’s overall health. It supplies infrastructure required for product manufacturing, supply chain providers, logistical services, and many more. The demand in those assets has strongly increased since the strong development of e-commerce, especially in areas close to city centers and traffic junctions. It is no secret that the COVID-19 Pandemic has further driven the trend of online purchasing which stimulated the demand for semi-industrial and logistical assets.

At the same time, the semi-industrial and logistic markets have been facing challenges in the last quarters. As mentioned above, the sky-high inflation, rising construction costs and the lack of available assets had and still have an impact on multiple factors Together with the decrease in the growth of both industry & manufacturing and transport & communication, the industrial assets will face multiple difficulties along the financial consequences in the upcoming year.

Inflation

GDP Growth, GVA Growth: Industry & Manufacturing And Transport & Communication

Strong semi-industrial momentum in Q1…

The first quarter of 2023 has shown a strong level of take-up (296,000 sq m) compared to the previous five years. The start of 2023 has surpassed the five-year average with nearly 7.5%. Even with all the challenges, such low vacancy rates, the market has shown resilience from many potential negative effects in the occupier markets.

Of the 150 transactions recorded, 8 transactions were above 10,000 sq m and account for 138,000 sq m of take-up, which is a record high first quarter. The largest deals this quarter were two purchases: a 27’000 sq m in Ostend, West Flanders (Stationstraat) and 19,345 sq m in Brussels (DeltaTech).

Slowdown in the logistics occupier market…

The logistics market has known is second slowest year in terms of take-up these past five years. A remarkably low take-up (34,250 sq m) has been recorded in Belgium, of which 33,800 sq m in Flanders. The notable transactions for this quarter are the letting in Tongeren, Limburg by Tailormade Logistics for 22,500 sq m and the letting by BSD Trade in Mechelen for 11,395 sq m

Further increase in rent prices…

For two consecutive periods, the prime rent for semi-industrial assets has once more increased. Witnessing its first increase in the fourth quarter of 2022 since 2019, the prime rent has increased towards 66€/sq m/year. The low supply, delayed deliveries and low availability puts pressure on the prime rent.

The Belgian prime rent for logistical assets has increased once more. Due to the strong demand for high-quality assets and low availability, the prime rent has increased towards 66€/sq m/year.

The average weighted rent for both semi-industrial and logistical assets have increased this quarter. Semi-industrial assets stand at 47€/sq m/year while logistical assets stand at 44€/sq m/year

Logistics Rents, EUR/SQ M/YEAR

Uninterrupted increase of prime yields…

The level for prime yields has again increased, compared to the final quarter of 2022 The prime yields for semi-industrial warehouses stand at 6.45% (+25bps) while the logistics prime yield stands at 4.75% (+25bps).

Due to the existing economic climate, there is still uncertainty amongst investors. The slow reviving in the first quarter is proof that the commercial real estate market has started to adapt to these circumstances since the final quarter of 2022. The European Central Bank's decision to introduce higher interest rates to fight inflation has had an effect on the prime yields for semi-industrial and logistic assets. However, going towards the end of 2023, the prime yields are expected to stay below 5% for logistic assets and below 7% for semiindustrial assets

Investors not out of the woods…

The first quarter of 2023 has started with the slowest pace in a decade (€ 33 MEUR invested), following a strong 2022 in which more than 750 MEUR (excluding the development of Montea-Cordeel in Vilvoorde) was invested in the semi-industrial and logistic markets. The most notable deal in the first quarter was the sale and leaseback of Skaldenstraat by Intervest Offices & Warehouses for 14.25 MEUR.

Interest Rates

The ability to generate higher cash-on-cash returns

Is

decreasing as cost of debts are increasing The wait-and-see approach adopted by investors further widens the gap between buyers and sellers

Investors will likely maintain a cautious approach for a while as the Belgian industrial interest rates (loans to non-financial companies) have and are increasing. As a result, the ability to utilize effects, such as financial leverage is reduced, which currently slows down the investment market.

Next to the challenging financial difficulties, the semi-industrial and logistic markets are vulnerable to the continuing lack of supply and rising construction prices The latter has caused several developers to delay their projects, decreasing market liquidity.