Logistics Portfolio Resilient But German Economy Could Be Achilles’ Heel
Germany imports 55% of its natural gas from Russia and its economy is besieged by surging energy prices that have increased 10x compared with pre-COVID-19 levels. Fortunately, FLT’s Germany portfolio has a long WALE of 6.3 years and annual rental escalation is CPI-linked. Germany accounted for 22.9% of FLT’s portfolio valuation as of Jun 22. Distribution yield is attractive at 5.8% for FY23. Maintain BUY but lowered target price to S$1.60.
• German economy in limbo. The German economy is slowing down due to supply chain disruptions, surging energy prices and the slowdown of its second largest export market — China. The auto manufacturing industry suffered the hardest hit. Germany is on the brink of slipping into a recession. Germany imports 55% of its natural gas from Russia through the North Stream pipeline. Energy prices have increased by 10x since the Russia-Ukraine war started and are 50% higher compared with neighbouring France. The Bundeskbank warned that an immediate ban on Russian gas imports would reduce GDP growth by 5ppt, dragging Germany into a deep recession.
• Prolonged stress from high energy prices and supply chain disruptions. German foreign minister Annalena Baerbock cautioned that the Russia-Ukraine war could drag on for years. Heat wave and dry spells have lowered water levels on the Rhine, which hinders the movement of barges to transport raw materials and finished goods in Germany’s most heavily industrialised areas, causing more supply chain disruptions.
• Resiliency from limited supply. The structural limited supply of logistics space and rising costs of land and building materials have fed into steep increase in asking rents. Prime rents have increased 7% to €96/sqm/year in 1H22. Financing costs have increased as reflected in the increase in yield for 10-year bunds, which reversed from -0.18% to 1.60% in 8M22. According to CBRE Group (CBRE), yields for prime logistics properties were pressured by higher interest rates and expanded 15bp to 3.15% in 1H22.
• The Germany portfolio has a long WALE of 6.3 years. It benefits from higher inflation as annual rental escalation is CPI-linked. Rental reversion was +3.3% in 1HFY22 (average vs. average). Occupancy was maintained at 100%.
• Australia: Favourable demand-supply dynamics. E-commerce penetration inched slightly higher by 0.3ppt hoh to 14.6% in 1H22. Vacancy rate declined 0.5ppt yoy to reach a record and global low of 0.8% in 1H22 (Brisbane: 2.3%, Melbourne: 1.1% and Sydney: 0.2%). The pipeline of new supply for 2022 is 53% pre-committed due to pent-up demand. Supply of logistics space is expected to fall in 2023 and beyond.
• Logistics rents maintain an uptrend. According to CBRE, super prime rose 13.1% on a nationwide basis in 2Q22 (Sydney: +22.8% yoy, Melbourne: +13.9% yoy and Brisbane: +3.7% yoy). Incentives fell 2ppt. CBRE expects super prime rents to grow at a CAGR of 5.0% during 2022-26.