Light industrial is a term not yet widely understood by all property market players. It is mostly heard in connection with logistics properties, which are now an established asset class alongside office, retail, residential and hotel properties. This niche status could soon be a thing of the past, though. “Light industrial is moving up investors’ agendas and becoming more established as a discrete real estate asset class,” says Michael Morgenroth, CEO of debt fund provider Caerus Debt Investments. Martin Czaja, a partner at Berlin-based light industrial specialists Inbright, confirms that the asset class is gaining ground. “Many investors have stated that they want to become more active in this segment,” says Czaja. “The number of pan-European investment vehicles in this space has also increased.”
Examples include the Edmond de Rothschild Euro Industrial Real Estate Fund, which invests in light industrial assets across the Benelux countries, France and Germany. Other investors are adding light industrial properties to existing logistics funds. In spring 2022, for example, Union Investment acquired a logistics and manufacturing facility in Kassel, which on completion in mid-2023 will become part of the UII Garbe Logistics Real Estate Fund. Components manufacturer Hexagon Purus is lined up to occupy the property.
Market segment still lacks transparency
But what are the hallmarks of this asset class? As defined by Johannes Nöldeke, a partner at Inbright, “light industrial properties are commercial properties with a mix of different uses – including offices, R&D labs, manufacturing, warehousing and logistics. They are typically at least 10,000 square metres in size and located in city centres or on the urban periphery.” Pure logistics properties or manufacturing facilities associated with high levels of noise or odour emissions are thus not included in this category.
In Germany, the asset class is sometimes referred to simply as corporate real estate or included under business parks. The term “light industrial” is not clearly defined according to Rainer Koepke, Head of Industrial & Logistics Germany at real estate consultancy CBRE. He points out that in other European countries it is understood to include small warehouses and substantial manufacturing units.
Light industrial assets are considerably more management intensive and user requirements vary much more than is the case with large warehouses.
In European market reports by the big consultancies, the light industrial segment comes under the broader term “Industrial & Logistics”. It is not therefore possible to give exact details of transaction volumes, prime yields and rents from a Europe-wide perspective. More precise information is available for the German market, however. According to industry body “Initiative Unternehmensimmobilien”, which brings together several major market players, the German light industrial market is worth a formidable €565 billion, making it almost as big as the office segment. Having said that, transaction volumes in Germany are comparatively modest and put by the Initiative at €4.3 billion for 2021.
From the investor perspective, light industrial properties offer numerous advantages, says Stephan Riechers, Head of Logistics at Union Investment Real Estate GmbH. He cites the diverse tenant base, which offers broad risk diversification, and good alternative use options, plus low tenant mobility, which boosts the resilience of this asset class. “The segment is a sleeping giant,” says Riechers, “because many properties are still owned by manufacturers.”
Deglobalisation and ESG giving the market a fillip
That may be about to change, though, believes Inbright partner Martin Czaja. The growing importance of ESG criteria requires such buildings to be made sustainable and existing owners often lack the necessary funds, he argues. Changes in the automotive industry are also boosting supply because carmakers need new spaces that are more research-oriented and less focused on production. “What’s more,” says Czaja, “the trend towards deglobalisation and re- and nearshoring means that manufacturing is returning to Europe.”
According to Inbright, investors can expect a return which is 50 to 100 basis points above that of logistics properties. “That’s because light industrial assets are considerably more management intensive and user requirements vary much more than is the case with large warehouses leased to a single user,” explains Johannes Nöldeke. Rents are also higher. According to CBRE expert Rainer Koepke, they exceed the rents of pure logistics warehouses by 10 to 20 percent.
On the downside, they are also more expensive to build than logistics properties, adds Koepke. “Often there are no sprinkler systems because the sections are smaller. However, there are more windows and the outdoor areas and entrance area need to be more elaborate.” Ensuring suitability for third-party use is also of crucial importance, says Inbright partner Nöldeke. “For example, for a logistics warehouse to be repurposed as a manufacturing facility at the end of its lease, you need to be able to heat the space to 21 degrees Celsius, and access has to take account of different occupier requirements,” he explains.
Users typically include medium-sized manufacturing businesses, service companies, e-commerce providers and logistics specialists. But occupiers can also be more exotic. Rainer Koepke says the spectrum is so broad that you might find a climbing centre in a light industrial property.
By Christian Hunziker