Q3 2022 | Industrial Marketbeat | Belgium

BELGIUM

Industrial Q3 2022

Belgian economy braces for choppy waters.

The Russian invasion of Ukraine and its repercussions have significantly deteriorated economic conditions Due to its reliance on energy imports, Europe is severely affected, and Belgium is no exception While GDP held up well in the first three quarters of this year, continued high inflation is expected to cause GDP to stagnate in the final quarter of the year and the first quarter of 2023 The most recent figures indicate annual GDP growth is expected to be 2 44% in 2022, decelerating sharply to 1 03% in 2023 GVA (gross value added) growth in Manufacturing (+0.21% in 2022), and Transportation and storage (+3.74% in 2022) will face a challenging 2023 as manufacturers in particular continue to reckon with energy costs (-0.44% growth in 2023). The impact of this has already been brutal since the end of the summer: spiralling energy costs forced several energy-intensive companies in Belgium to (temporarily) shut down.

Furthermore, warehouse using industries are expected to see employment rates decrease by 0.29% in 2023 as cost of employment will soar on the back of continued inflation. The situation in this regard will worsen by the year up to 2025 ( 1.93%).

Inflation has reached its highest level since 1976. Following a brief pause in July, inflation increased again in August and September. As a result, inflation has been revised upwards to reach a sky high 9 35% for 2022 This level will decelerate in 2023 to 6 40% before broadly closing in on the ECB’s 2% target from 2024 It should be noted that the Federal Planning Bureau’s forecasts are more downcast

Regarding our outlook, Cushman & Wakefield forecasting has elaborated a baseline short term mild recession scenario for the Eurozone (50% probability) In this scenario, persistent inflationary pressures push the ECB to raise rates aggressively, stalling business investment and consumer spending. The Euro area economy would enter a mild recession beginning in Q4 2022 with threequarters of negative growth, before returning to moderate growth in the second half of next year.

GROWTH, GVA GROWTH: INDUSTRY & MANUFACTURING

INFLATION

UNTIL

growth

BELGIUM

Industrial Q3 2022

New semi-industrial occupier demand relatively resilient to spiralling energy costs.

It is doubtful that semi-industrial demand will reach the dizzying heights of 2021, this year. That is not to say the take-up so far this year is poor: 732,000 sq m has been recorded after three quarters, including 178,000 sq m in Q3, a very resilient if not remarkable level of demand in a difficult market climate.

Indeed, manufacturing production in Belgium has been hampered this year due to the ripple effects from the Russian invasion in Ukraine. Towards the end of the summer, spiralling energy costs forced several companies to (temporarily) shut down. Some energy intensive companies move or threaten to move abroad to countries with locally produced energy, or price caps. An energy survey of SMEs by Unizo in August revealed 25% of respondents were loss making. Furthermore, according to Moody’s Analytics, energy intensive industries are reluctant to shift price increases on to their customers.

It is therefore possible that the traditional end of year rush may not be as strong as is traditionally the case, as would be new occupiers, or companies seeking to move, grapple with burdensome overheads. On this topic, the owner occupier trend remains as strong as usual in light warehousing, with approximately 47% of take up linked to own occupier deals in Q3.

One of the above was also the largest piece of take up this quarter a 15,000 sq m own occupation development for Plastics Wauters in Gosselies (Hainaut). On average, though, the size of deals is stable, at 1,100 sq m in Q3.

Rental increases across the board.

The Belgian prime rent increases to EUR 64/sq m/year, its first increase since 2019, against a different set of circumstances, as increased constructions costs dictate rental growth, especially for sustainable buildings.

These increases have been witnessed across all of Belgium’ regions and also concern the average weighted rent which gains 2% in one quarter, now at EUR 46/sq m/year

As inflation is not expected to slow down significantly any time soon, further prime rental increases should be expected in the near term. Indeed, prime semi-industrial assets are often newbuilds, hence, the higher cost of construction directly impacts the rent

SEMI-INDUSTRIAL TAKE-UP PER REGION, 000s SQ M

RENTS, EUR/SQ M/YEAR

BELGIUM

Industrial Q3 2022

Logistics take-up continues to benefit from strong demand.

Post pandemic increase of demand by retailers (despite the current colossal consumer confidence plunge), manufacturers and other key logistics players has caused well-documented supply chain backlogs, which in a sense are good for logistics real estate (see more on this on the next page). Belgium’s take up figures certainly seem to support this argument, with 2022 well on its way to another very good year having already recorded 909,000 sq m after three quarters, including 197,000 sq m in Q3.

This dynamic is all the more notable in a situation further complicated by lack of available quality spaces and land in Belgium’s logistics hotspots. As a result, districts such as Hainaut and Liège (Wallonia), and East Flanders and Limburg (Flanders) continue to emerge as strong contenders for large scale projects, whether built-to-suit or speculative

North Sea Port area attracts another XXL deal.

Indeed, the three largest occupier deals in Q3 took place in these locations, led in no uncertain terms by a letting by AGP e-Glass of 70,000 sq m in Heylen Warehouses’ Ghent Logistics Campus – yet another large deal in the North Sea Port area this year. For more on this quarter’s largest transactions, see the final page of this report

Sustainable pipeline likely to include even fewer speculative deliveries.

Q3 was notable for a single modestly sized delivery (6,200 sq m), but especially for the identity of its occupier. Indeed, Belgium’s first Amazon warehouse has been delivered in Blue Gate Antwerp by Montea. The end of year delivery pipeline will more than double the current scale of deliveries this year, with 477,000 sq m awaited, including 65,000 sq m of speculative deliveries in a pair of projects in Limburg.

In the context of spiralling costs brought about by supply chain bottlenecks and inflation, the delivery pipeline plays a key role in optimising supply chain networks. As per a recent Cushman & Wakefield report, two considerations must be taken into account when developing a new project First, a supply chain network’s minimum life span of 5 to 10 years. Second, 80% of the value is locked in at the design stage. Therefore, critical decisions need to account for future demand and requirements This is where ESG (environmental, social and governance) plays a key role; today there is an ever-sharper focus on ESG targets, especially carbon reduction. In commercial real estate terms, decisions taken today need to deliver on achieving aggressive ESG targets over the coming decade Based on these considerations, speculative projects could become even rarer.

LOGISTICS TAKE-UP PER REGION, 000s SQ M

LOGISTICS NEW DEVELOPMENTS AND PIPELINE, SQ M

Flanders Brussels (incl. Brabants) Wallonia Deals (RHS)

Flanders Brussels Wallonia Pipeline

BELGIUM

Industrial Q3 2022

Logistics prime rent increases with demand for sustainable warehouses.

With sustainability poised to play an increasing role in logistics, owners are of the view that occupiers will be on the lookout for warehouses which can favour transportation, or energy cost savings by virtue of their location and efficiency As a result, such high-grade properties could vindicate higher rental levels With this in mind (not to mention increased construction costs) the prime rent increases to EUR 62/sq m/year in Q3. Furthermore, we forecast the prime rent to increase to up to EUR 64/sq m/year in the next couple of years as sustainability becomes a key issue for logistics occupiers (see the insert below for more on this topic)

Average rents remain stable at EUR 45/sq m/year but are increasing in Flanders (EUR 47/sq m/year) where the most market evidence is available.

LOGISTICS RENTS, EUR/SQ M/YEAR

The Most Disruptive Decade in Supply Chain History: Six Key Trends To Watch

The global pandemic was the main disruptor of the supply chain so far in the 21st century. Increase in demand is unquestionably good for logistics from a real estate standpoint. Nevertheless, a new set of challenges must be navigated. Cushman & Wakefield Research has put together a list of these trends and their implications for CRE.

1. Onshoring is on the Rise: diversifying the supply chain by on /multi shoring production to spread the risk of disruption. Prior to COVID 19, experts identified we had reached peak globalisation and that we would step back from that peak. A key reason is rise of domestic consumption a greater proportion of products are consumed domestically, mainly in China with the next wave expected in India and South East Asia Consumers also grow increasingly concerned with products’ carbon footprints

2. Container Shipping Costs are on the Rise, Too: real estate in alternative less congested port markets is less expensive, and becoming much more attractive (e g Zeebrugge and North Sea Port in the case of Belgium) Industrial developers will nevertheless remain conservative regarding speculative development as they have done since the global financial crisis (GFC)

3. e-commerce is not Equitable: Consumers expect bespoke and rapid fulfillment despite an uneven spread of order volumes and geographic situations. As a result of better understanding consumers, attention must be paid on the capital markets side to the headroom a location offers in terms of rental growth without impacting margin, in particular in the case of last-mile where not every location will be impacted equally.

4. Time Management Alternatives Beyond Last Mile Facilities: aside from expensive last mile DCs, investing in AI, automation, predictive analytics etc. can help lower fulfillment costs In CRE terms, growing synergy between warehouse and retail locations is useful, namely retail locations themselves can be used as fulfilment hubs which saves time and money

5. Increased Focus on Reducing Carbon Emissions: businesses are looking at their suppliers’ ethical and sustainable practices Transport is the biggest contributor to carbon emissions in most supply chains up to 80% in the case of consumer products In CRE terms, premia for assets featuring sustainability investments can reach up to 21%

6. Automation and Remote Supply Chain Labour Opportunities: pandemic induced wage inflation led to stronger case for automation as increased automation would enable remote warehouse work, employing a smaller labour force, and freeing up spaces within warehouses.

BELGIUM

Industrial Q3 2022

Investments close to EUR 1 billion after three quarters.

Q3 has represented yet another colossal quarter for industrial investments, further building on the record year which was already achieved at the end of H1. During the third quarter, EUR 251 million have been invested (including close to EUR 240 million in logistics), bringing the 2022 total to just under the EUR 1 billion mark with one quarter left.

WDP contributed the second largest investment of the year, a EUR 120 million sale-and-leaseback with Sedis Logistics for seven of their sites in Tournai on the basis of a 12 year lease term. Furthermore, Belgian assets were acquired by Prologis’ PELF fund as part of the Crossbay European portfolio The total value of the Belgian assets in this deal is estimated at EUR 70 million. Prologis also separately acquired three buildings in Zaventem, while Whitewood and Tristan Capital further expand into Belgian logistics, acquiring the Fnac/Vanden Borre DC on the outskirts of Brussels for EUR 40 million Geographically, these deals underline demand for assets in the Brussels periphery as well as an opportunistic approach for assets located across the country, and which now becoming commonplace

Investments in assets with longer than average lease terms are becoming the norm (as per the Sedis sale and-leaseback), however a counter-argument now emerges in favour of short-term leases Indeed, owners and investors appreciate the rental increase opportunities offered by the latter. The current economic environment coupled with strong occupier demand would suggest owners could increase rental revenue faster than if they choose to solely rely on indexing rents. This could translate into more assets with regular lease terms being traded.

A note on e commerce: certain investors are cooling on assets occupied by e commerce players as the market slows down after the pandemic, particularly with currently the deteriorating consumer confidence mentioned on page 3 of this report

Yields increase.

To counter inflation in the Eurozone, the ECB has raised its policy rate by 50 bps in July, followed by another 75 bps in September The pressure on European property values is evident Prime yields in both semiindustrial and logistics increase on the back of the ECB’s interest rate hikes, albeit at a slower pace, meaning the spread between both decreases further increases are to be expected over the next year with a further 25 bps increase expected in February

Prime yields for prime logistics assets increase 25 bps to 4 25%, while semi-industrial prime yields increase 10 bps to 5 95%

The long-term logistics prime yield is 3.75%

ANNUAL INVESTED VOLUMES, EUR M

INDUSTRIAL YIELDS

O’NEILL

CÉDRIC VAN MEERBEECK

CUSHMAN & WAKEFIELD RESEARCHPUBLICATION