Improved returns and the suddenly wide yield gap with government bonds are speeding the recovery of the UK and European logistics sector.

So said asset manager AEW, which predicted a sharp upward tick in the logistics sector as investors digest repriced assets and robust rental growth.

Values in the UK and European logistics sector were among the first real estate asset classes to take a serious tumble in 2022. They will be the first to bounce back, new research predicted.

Behind the dip (and now revival) in investor interest is the suddenly yawning (and now closing) gap between lower repriced industrials and higher government bonds. That spread is expected to fall and stabilise at 2.7% by 2027, below the 4% average 2017-21 spread.

AEW projected total returns for logistics markets across Europe will be at 8.2% a year for the next five years, up 290 basis points compared to the firm's September 2022 base case. This is driven by faster-than-expected repricing, an improved rental growth outlook and projected yield tightening as inflation and bond yields are expected to normalise.

AEW reckons that, despite an economic slowdown and a crunch in consumer spending, UK and European logistics is the best-positioned sector in European real estate. AEW flagged opportunities in the UK regions along with the Nordics and Benelux regions, Paris, Oslo and Amsterdam.

“In 2022, logistics was the quickest sector to reprice, losing an average of 14% of value across all European markets," AEW Director, Research & Strategy Europe Ken Baccam said. "The 55% appreciation in value the four preceding years, the highest of any sector, offset this loss in 2022 for most investors, and we forecast that logistics values have nearly bottomed out, with a small further decline expected for this year.

“Whilst European logistics leasing activity has continued at a slightly slower pace, prime rents have remained robust and we expect take up to strengthen as the economy improves, supply chains start to normalise, and e-commerce penetration rebounds, having decreased slightly in the UK.”

Logistics values have nearly bottomed out with only 3% further value decline projected in 2023. After this significant 2022-2023 repricing, logistics prime property yields are expected to peak at 5.1% in 2024 and gradually narrow to 4.7% by 2027.

Leasing activity also appears to have hit the bottom, with European Q1 2023 take-up down by 44% compared to last year. However, many occupiers are maintaining their current footprints and take-up is expected to recover as the economy improves, shipping and manufacturing revert to long-term growth, and e-commerce penetration rebounds.

A short-term dip in vacancy rates is expected to have little impact on rental growth, which is forecast to be 3% a year 2023-2027.