Salient to Investors:

The growth of Internet shopping in Europe is luring investors to warehouses, where yields are beating showy storefronts and sleek offices amid a space shortage.

Jones Lang LaSalle say Europe needs 296 million square feet of new distribution and storage warehouses in the next 5 years, 11 percent of existing modern space, to keep up with Internet sales growth, while a lack of construction in the US has helped rents at “big box” assets above 250,000 square feet outperform the rest of the industrial market since 2009.

Remy Vertupier at the Logistis fund says warehouses generate annual income 2 percent higher than offices and shops in Europe relative to their value, and a lack of space will lift prices.

Axa Real Estate estimates that 90 percent of retail growth in the UK, France and Germany will come from online shopping in the next 4 years.

Forrester Research says internet retail sales in Europe will grow 50 percent through 2017.

Rental returns from warehouses are beating other types of real estate and outpacing assets that typically attract pension funds and insurers. Investment Property Databank says annual rental income from UK logistics centers equaled 6.8 percent of building values in 2012, versus 5.8 percent for stores and 5.5 percent for offices.

Prologis says warehouse tenants like typically want little more than four walls and a roof with loads of doors and a deep truck court. Davis Langdon says that means building warehouses costs an eighth as much as offices and a fifth of the price of shopping malls.

Tidjane Thiam at Prudential said investors such as life insurers and pension funds are looking to buy infrastructure such as warehouses because the income generated fits well with obligations like paying out pensions.

JPMorgan Chase says growing online sales may lead to mergers and acquisitions in the warehousing industry, and Europe’s retail-focused REITs should buy logistics property companies so they can offer tenants both stores and warehouse space to supply Internet sales.

However, Jones Lang says Europe’s income-producing warehouses sold at yields of 7.5 percent at the end of 2012 versus 7.4 percent a year earlier, indicating a decline in prices, while yields for office buildings fell to 5.2 percent from 5.3 percent and shops declined to 5 percent from 5.1 percent.

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