THE EUROPEAN LOGISTICS MARKET

International investors are targeting logistics property. The total investment volume currently
exceeds €10 billion. Logistics property helps to diversify portfolios and compensate the poor
performance of other sectors. European distribution networks are still demanding large
distribution warehouses, and further growth is most likely. Although prime yields up to 13% for
opportunistic investments in emerging clusters are rather attractive, yield compression is
foreseeable in the near future.

The reorganization process of the European distribution systems which is changing from a
national to an international network is stillbgoing on. The structural transformation in logistics
once started with the creation of the Single European Market. In line with the expansion of the
European Union, logistics providers began to create pan-European networks.

The current adjustments reflect both the accession of the peripheral economies in the central and
eastern parts of Europe and the evolvement of a global distribution structure. In addition to these
geographic aspects the European logistics markets have been dramatically affected by numerous
factors in the financial, political and technological environment.

European Logistics and Industrial. Investment. Market Review.

2014 was a record-breaking year for investment into the logistics and industrial sector across
Europe. In total, €21.7 billion was invested across the region, the highest transaction volume ever
recorded in Europe. This marked an increase of nearly one-third compared to 2013, and is close
to double the volume in 2012.

The European economy continues to head in the right direction, but uncertainty
remains

2015 has begun with the announcement of a planned quantitative easing (QE) programme to help
stimulate the stagnant growth that continues to plague parts of the Eurozone. Expectations for the
year are for a continuation of the already record-low interest rates and, aside from the announced
stimulus package, early projections point to growth of 1.7% for the Eurozone GDP for 2015.
This is contrasted by Russia, where there will be a continued contraction in economic output.
The core markets of Germany and the UK are forecast to maintain their stability over the coming
year, while Poland also looks set to sustain its recent expansion.
Looking elsewhere across Europe, the Benelux countries are likewise forecast to see growth,
although less than the Eurozone average. Italy is anticipated to remain sluggish for the
foreseeable future, while Turkey is still leading the emerging markets and is expected to have the
largest relative growth through 2015 and into the coming years.
The overwhelming economic sentiment is more positive across the Eurozone compared to 2014,
driven in large part by an increase in consumer and retail trade confidence, but tempered by a
less than positive outlook in business services. Notably, industrial production has been increasing
and is expected to continue to rise in several markets. The Eurozone Manufacturing Purchasing
Managers’ Index (PMI) has seen upticks in recent months due mainly to increased output in
Germany, Italy, Spain, the Netherlands and Ireland. Looking ahead, the Manufacturing PMI is
expected to expand by 1.25% in 2015.

Volumes reach an all-time high in 2014

2014 was a year for the record books; almost 22 billion euros was invested across European

markets – the highest level ever seen. With rising capital values and yields lowering to near pre-

2008 peak levels, investors are expanding their presence in European markets and investing in

logistics and industrial assets at an increasing rate. Volumes rose 28% year-on-year in 201, after

a 93% increase in 2013, and climbed to 65% above their five-year average.

Logistics and industrial assets now account for over 10% of all property
investments
It is clearly evident that European logistics and industrial assets represent an increasingly popular
investment opportunity. Over the last 10 years, logistics assets have risen from 6% of total real
estate investment in 2004 to 10.5% in 2014, gaining on both office and retail investment. To
underline the strength of the trend, retail investment volumes in 2005 were five times that of
logistics and industrial; now, retail volumes are a little over twice industrial volumes. Moreover,
the rapid increase in investment in Europe is stemming from all over the world. Total global
investment accounted for €6.8 billion (+70% y-o-y) in 2014. The largest non-European
contributor was the Americas (primarily the U.S.), which in 2014 made investments totaling 1.9
billion euros, trumping all European nations with the sole exception of the UK. Even so,
European countries should not be dismissed as they represented €13.6 billion in purchases in
2014. Conspicuously, UK investors (€7 billion) still account for nearly one-third of all
transactions; in fact, sterling-backed deals increased 42% year-on-year and were 73% higher
than their five-year average. Other key European investor activity came from Germany (€1.3
billion), Sweden (€1.3 billion) and Norway (€1 billion).

Industrial investment continues to spread throughout the continent

Within Europe, the large increase in volumes over the last two years has not been primarily
within the core markets, as has historically been the case. While the UK, Germany and France
have consistently maintained their grip as the top three investment markets, in recent years
investors have spread their capital across the continent. For example, transaction levels in
both the Netherlands and Poland have averaged a 30% year-on-year growth rate for each of the
past five years. Markedly, Sweden had greater volumes than France in 2014 and both have
similar five-year averages Norway (1 billion euros), the Czech Republic (759 million euros),
Poland (€744 million), Switzerland (€720 million) and Spain (€550 million) all witnessed
transaction levels within their markets far above their respective five-year averages in 2014.
Yields compression continues

The large influx of capital into the European market, togheter with the first positive year-on-year
growth in rents since 2011, has moved yields to levels not seen in six years. Nevertheless, there
is still a long way to go before we begin to see levels comparable to early 2007.
The weight of money targeting the sector, increased investor activity and the record low cost of
finance will continue to equate to downward yield movements this year. Yield compression has
not benn confined to one sub-region, as both Western Europe and CEE have experienced yields
contracting.

Take-up across the region growing alongside an evolving market

Take-up continues to maintain the highs we have witnessed over the last few years. 15 million sq
m was taken-up in 2014, which is just short of the record seen in 2011 (15.3 million sq m). These
‘highs’ can be explained by the growing need for modern logistics services, which has required
3PLs, distributors, retail companies and their e-commerce counterparts to stay ahead of the curve
and seek out new space. More units and goods are being shipped each and every year and, with
increasing activity, there is a corresponding need for space. Retailers are widely anticipated to
further embrace the concept of omni-channel retailing in 2015 and beyond, and this will drive the
demand for up-to-date logistics networks to better serve their businesses. The high take-up levels
of the last five years are starting to become the norm, and we expect to witness similar strong
occupational activity in the coming years. As long as the growing need for logistics continues, so
too will the demand for an expanding industrial real estate market.

Development is still expanding across Europe but mostly as build-to-suit

opportunities with ‘speculative’ remaining relatively low

Development activity in Europe in 2014 saw five-year highs in completions and new
construction; levels in both are now starting to approach those seen prior to 2009. That said,
market conditions are still very different when compared to the last cycle as activity remains
firmly focused on non-speculative development. In 2014, there were far more build-to-suit (BTS)
starts than speculative starts, with an increase of about 1.8 million sq m in BTS and owner-
occupier starts year-onyear. Notably, Russia saw a 40% decrease in speculative development in
2014. Russia has been the principal market for speculative development over the last few
quarters, but changing market conditions have altered the perspective. However, speculative
development did grow across the region outside of Russia in 2014, amounting to 370,000 sq m, a
67% year-on-year increase. Even so, it remains a
small percentage of overall development activity. While the development of new space in
Western Europe has been largely unchanged over the last few years, a recent increase in
development in CEE markets has contributed to the surge in overall activity. In 2014, nearly 4
million sq m of new stock was delivered to CEE markets – 2.5 times the five-year average; in
addition, there is some 3.4 million sq m under construction in Central and Eastern Europe.
At the end of 2014 there was still nearly 9 million sq m under construction across Europe which
will continue to result in high levels of completions over the next few quarters. Given that the
majority of construction is BTS, which leaves little immediate impact on available supply, rental
growth should continue in a positive direction for the foreseeable future. If 2015 does deliver two
consecutive years of positive rental growth, as has been forecasted by JLL, we expect to see a
strong expansion in speculative development over the medium term.

The logistics portfolio market

Portfolio and platform transactions have been in vogue over the last few years as many investors
have entered the market with the intention to rapidly build scale within the sector. As a result, the
number and volume of portfolios transacted has significantly risen in the past two years.
Overall, 2014 marked a record year not only for total European logistics and industrial
investment volumes but also for portfolio transactions. Over 120 portfolios changed hands,
equating to over €10 billion. This is up almost one-third in numbers and 25% on volumes when
compared to 2013. Most notably, portfolio transactions by volume have risen 125% over their
10-year average. Total transaction levels were fuelled by a growing number of deals exceeding
€100 million, with 35 portfolios changing hands within this size category.

The UK once again took the top spot in the 2014 portfolio market with over €3 billion of assets
traded that were part of a portfolio,
up 41% on 2013. The total UK volume was pushed up by eight transactions exceeding €100
million each. At close to €320 million, the Ocean portfolio comprising 12 industrial assets
marked the largest of these.

Germany with almost 1.9 billion euros (up 118% y-o-y) and France at 840 million euros (+29%
y-o-y) followed with the second and third biggest volumes of portfolio transactions. Examples of
large-scale portfolio deals in these markets include the Foncière des Régions portfolio sold for
€360 million in France and the Moorea portfolio
in Germany changing hands for more than €300 million.

Although the leading markets took a huge share of large portfolio deals, it was the Czech
Republic that witnessed the largest portfolio deal of 2014 with TPG/P3’s purchase of
VGP/Tristan’s assets for over 520 million euros; as a result, overall portfolio investment across
Central Europe mushroomed to €1.4 billion last year, up from a relatively miniscule €25 million
in 2013. Meanwhile, the Southern periphery also saw portfolio volumes expand to €510 million
with
transactions evident in Italy, Spain and Portugal.
Strong overall portfolio volumes driven by growing large-size transactions, as well as a widening
geographic remit, signals that
investors are becoming increasingly comfortable with the key characteristics of logistics and
industrial assets. As the trend towards agglomeration continues, we still see high demand for
portfolio and platform opportunities. We therefore expect sustained robust portfolio transaction
activity throughout 2015, and evidence in the first few weeks of the year already supports this.
Nevertheless, the overall volume of portfolio transactions is likely to level off in 2015 as limited
new opportunities in the market hamper potential growth.