Leasing of industrial property on the rise in CEE

Prague, 13 December 2010 – Demand for industrial and logistics space in Central and Eastern Europe (CEE) is rising following improved industrial output in the region, according CB Richard Ellis’ (CBRE) latest CEE Big Box Logistics report. CEE’s leasing activity in Q1 – Q3 2010 was up by 65% on the same period last year. Net absorption was positive for the second quarter in a row resulting in a decreasing vacancy rate by the end of Q3 2010.

Development activity has picked up in line with regional economic improvements, following the lack of a development pipeline in early 2010. A significant amount of space under construction across more mature CEE logistics markets is built-to-suit or considerably pre-leased. Projects are being started on a speculative basis only in Eastern European cities, while having tenant commitments in place remains a strict condition for new developments in most other markets.

Jos Tromp, Head of CEE Research & Consulting, CB Richard Ellis, said: “Logistics demand and industrial output are closely linked - now that economic growth is returning to the region, logistics markets are expected to grow again, most likely at more sustainable levels than we have seen since 2005.

“Growth potential is to be found particularly in South-Eastern Europe where logistics markets have remained small. Regional cities have gained momentum in more mature markets such as Poland and the Czech Republic, which is a unique trend unfolding currently. Not only are year-to-date completion volumes higher in regional markets than in capital cities but also more space is under active construction outside of the capitals. Limited supply in Czech regional cities as compared to Prague, and falling vacancy rates on the back of increased demand in regional cities in Poland are factors driving the change.”

Following a period of significant downward pressure, resulting from high availability and low demand of logistics property, rental levels are perceived to be bottoming out in most CEE markets. In general the expectation is that rental growth will return to the markets but not until more of the currently high levels of vacancy are absorbed. Potential exceptions to this trend are regions where current vacancy is getting tighter in combination with region-specific demand drivers.

Economic fundamentals are diverse across the CEE region, so rental levels vary significantly. For the most mature capital city markets in CE, net effective rents vary between €3.00-4.50 per sq m per month. In contrast, Russian cities are significantly more expensive, with net effective rents up to €5.40-7.25 per sq m per month.

Investment activity has picked up following significant lows in H1 2009. Year-to-date 2010 industrial and logistics investment volumes reached €252 million, compared to €107 million achieved in first three quarters of 2009, with activity spread across a number of markets. Investor focus remains on income producing assets of high quality, offering long leases and high quality covenants. “Based on several assets and portfolio’s in CEE currently under negotiation, it is expected that investment liquidity in the industrial market will continue to increase in 2011,” concluded Tromp.

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