Logistics went from an unfashionable corner of the market to one of its most contested sectors in about a decade, driven by the growth of online retail and the reorganization of supply chains. That repricing is largely done, which makes the question of what actually drives value in a logistics asset more important than it was when the tide was lifting everything.
Location means access, not address
In logistics, location is a function of the road network, proximity to population and to ports, and the availability of labour. A building thirty minutes from a major motorway junction in a region with a shortage of warehouse workers is a different asset from one at the junction in a region with available labour, whatever the map suggests. Labour availability in particular has moved from a footnote to a primary consideration for occupiers, and therefore for investors.
The practical test is to look at the catchment rather than the postcode. Within forty five minutes of the building, how many people of working age are there, what else competes for them, and what does the competing employer pay. An occupier that cannot staff a night shift will not renew at any rent, and the investor discovers this at the break rather than at acquisition. The same reasoning applies to the road network in the hours that matter. A junction that is twelve minutes away at ten in the morning and forty at six in the evening is a forty minute junction for a distributor that loads in the evening.
Specification decides who can occupy it
Clear internal height, floor loading, the number and type of loading doors, yard depth, power supply and floor flatness together determine which occupiers can use the building at all. A warehouse with insufficient height or inadequate power is not a cheaper version of a modern one; it is a building that a substantial part of the market cannot use. Investors buying older stock on the basis of a yield gap should establish precisely which occupiers that stock excludes.
In logistics, the discount on an older building is not always a bargain. Sometimes it is the market pricing the tenants who cannot use it.
The covenant carries the value
Logistics assets are typically single-let on long leases, which means the value is unusually concentrated in one tenant’s ability to pay. A fifteen-year lease to a weak covenant is not obviously better than a seven-year lease to a strong one, and the yield should reflect that. The lease structure, indexation, break rights, repairing obligations, tenant fit-out, is where much of the negotiation and much of the risk sits.
Indexation deserves more attention than it usually gets, because it is the term that decides whether the income holds its value over a fifteen year hold. A lease indexed to a consumer price index behaves differently from one with fixed uplifts, and a cap on the annual increase transfers inflation risk back to the owner at precisely the moment the owner needs the protection. Where the tenant has invested heavily in its own fit-out, the economics of a break improve for the landlord, since a tenant that has paid for automation inside the building is a tenant that finds it expensive to leave. That is a better guarantee of renewal than the length of the lease on the cover.
Obsolescence and the energy transition
European buildings face tightening energy performance requirements, and logistics is not exempt. The framework is the recast directive on the energy performance of buildings, Directive (EU) 2024/1275 of 24 April 2024, which member states transpose into national standards on their own timetable, so the obligation that bites is always the local one rather than the directive itself. A building that cannot meet the standard that will apply during the hold period carries a capital expenditure liability that belongs in the underwriting, and it belongs there as a dated number rather than as a note in the risk section. The question to put to a vendor is not whether the building complies today. It is what the building has to do to comply in the year the business plan assumes a sale, and who is paying for it. The upside is that logistics roofs are unusually well suited to solar generation, and the treatment of that income and of the associated structures is its own analysis, connected to our note on structuring renewable energy platforms.
Where the sector meets the supply chain
Logistics real estate is the physical expression of a supply chain decision, and supply chains are being restructured for resilience rather than only for cost. That reorganization, and where goods are contracted, held and distributed, drives which locations gain and which lose, and it is a genuine advantage for an investor to understand the commercial logic behind the occupier’s decision. We deal with that logic in our note on Asia-Europe supply chain restructuring, and with the Canary Islands variant in our note on logistics and trading operations in the ZEC.
What the building costs before anything else
Underwriting that starts at the yield skips the first real number. A commercial property bought in the Netherlands attracts transfer tax at the general rate, and the law is specific about it: article 14 of the Wet op belastingen van rechtsverkeer sets the general rate at 10.4 per cent, with the reduced rate reserved for dwellings. On a twenty million euro shed that is more than two million euros of tax on day one, and it is not recoverable the way value added tax on a new building can be.
That is why the distinction between an asset that is still new for tax purposes and one that is not decides more than it appears to. A recently completed building can fall within the value added tax regime, which changes both the cash cost at completion and the recovery position afterwards. An older building normally does not, and the transfer tax is simply a cost. Two buildings with the same rent and the same tenant can therefore produce materially different net yields, and the difference has nothing to do with the property.
The second number that belongs at the front is the cost of the exit. A single asset held directly is sold as a property, with the same transfer tax falling on the buyer and depressing what the buyer will pay. A building held in a company can in principle be sold as shares, which is a different negotiation with a different tax outcome for both sides. That choice is made when the asset is bought, not when it is sold, and reversing it later is expensive.
Power is now part of the asset, not a utility
For most of the history of the sector the electricity connection was an administrative detail. It is now one of the constraints that decides whether a building can be let at all. Automated warehouses, cold storage and charging for electric fleets draw loads that the older stock was never wired for, and in several European markets the grid cannot deliver a new connection of that size on any timetable the occupier can plan around. A building with a secured connection of sufficient capacity is worth more than an identical building without one, and that gap does not appear anywhere in a rent comparison.
The other side of the same coin is that a logistics roof is a generating asset. Large unobstructed roofs suit solar generation better than almost any other building type, and in the Netherlands the production subsidy for it runs through the SDE++ scheme administered by the Netherlands Enterprise Agency. Whether that income improves the investment depends on who owns the installation, who takes the price risk and how the income is treated where the owner sits, which is a structuring question rather than a property one. It is worth resolving before the lease is signed, because the lease decides who has the right to the roof.
How the asset is held decides who bears what
A logistics portfolio assembled across three or four countries is rarely held the same way in each. Local law decides what a foreign owner may hold directly, lenders decide what they will lend against, and the tax treatment of rent, interest and gain differs in each jurisdiction. What a holding platform does is give the group one place where the equity sits, one place where the debt is arranged and one set of accounts that can be consolidated, without pretending that the local layers are interchangeable.
The questions that decide the structure are ordinary ones. Where does the rent land, and is it taxed twice on the way to the investor. Who is the borrower, and does the interest deduct where the income arises. If one asset fails, does the problem stay inside that asset or reach the rest. Those are answered by the same analysis that applies to any cross-border group, and the fact that the underlying asset is a warehouse changes the facts rather than the method.
What we look at before committing
A logistics asset is easy to describe and hard to price, because most of what decides the outcome sits outside the valuation. The order we work in is the order of what is hardest to change. The location and the connection come first, because neither can be fixed later. The specification comes next, since it decides the pool of occupiers and therefore what happens at the first break. Then the covenant and the lease, which decide how much of the income is real. Then the energy position and its dated cost. Only after that does the price mean anything.
Most of the disappointments we see in the sector came from an asset that was bought on the yield and sold into a market that had repriced the very thing the buyer had not examined. The discipline is unglamorous, and it is the whole job.
Montclare manages and structures European real assets for institutional and private investors, from acquisition through to exit. Our services are set out on our services page.
This article is informational and does not constitute investment, tax or legal advice. Asset management and investment advice are regulated activities and the treatment of any transaction depends on its facts. Each engagement is subject to scope and applicable regulation.