Yield in logistics

What is the yield in logistics real estate?

Yield is the most fundamental key figure for assessing a real estate investment in the logistics sector. It describes the percentage ratio between the annual rental income that a property generates and its purchase price. In simple terms, the yield shows the annual return on the capital invested in a warehouse or distribution center. For investors, developers, owners and valuers, yield is the primary tool to quickly grasp the attractiveness and value for money of a property and make it comparable to other investment opportunities. A low yield usually signals a high purchase price in relation to rent, which is often accompanied by low risk and high property quality. Conversely, a high yield indicates a higher risk, but also a potentially higher current return.

Calculating Yield: Gross vs. Net Initial Return (NIY)

In professional practice, the Net Initial Yield (NIY) is used almost exclusively, as it provides a much more accurate picture of earning power. Nevertheless, it is important to know the difference to the gross return.

• Gross yield: This simple calculation puts the annual gross rent (annual cold rent) in relation to the pure purchase price. However, it ignores all costs and is therefore not very meaningful.

Formula:Annual cold rent / purchase price * 100

• Net Initial Yield (NIY): This metric is the market standard. It takes into account important details on both the revenue and expenditure sides. The meter shows the annual net rental income. This is the basic rent minus the management costs that cannot be passed on to the tenant (e.g. administrative costs, maintenance reserves). The denominator is the gross purchase price, i.e. the purchase price plus the incidental acquisition costs incurred (real estate transfer tax, notary and land register costs, brokerage fees).

Practical formula:

NIY (%) = Annual Net Rental Income / {Purchase Price + Ancillary Acquisition Costs} * 100

The NIY enables a true "apples-to-apples" comparison of different investment properties, as it reflects the actual initial return on the total investment.

What factors influence the yield of a logistics hall?

The yield is not a static value, but the result of a complex interplay of various factors. The main drivers that determine the price and therefore the return are:

1. The location (macro & micro level): The connection to motorways, ports or freight transport centres is essential. Top logistics regions (A-locations) with high demand and low vacancy rates achieve the lowest yields, as the security of rental income is highest here.
2. Tenant creditworthiness: A long-term lease agreement with a financially strong, renowned company (e.g. a large car manufacturer, a food company or an international 3PL service provider) drastically minimizes the risk of loss of rent. This is rewarded by the market with a lower yield (i.e. a higher purchase price factor).
3. The Lease Term (WALT): The WALT (Weighted Average Lease Term) indicates the average remaining term of all leases. The longer the WALT, the more predictable and secure the future cash flows are for the investor. Long lease terms of 10 years or more lead to significantly lower yields.
4. The property quality and third-party usability: Modern, well-equipped halls (sufficient ceiling height, high floor load, sufficient ramp gates, flexible room layout) are easier to re-let. This so-called third-party usability reduces the risk of vacancy after the expiry of a lease and has a positive (i.e. lowering) effect on the yield.
5. ESG compliance: Sustainability criteria (environmental, social, governance) are becoming increasingly important. A certified, energy-efficient property (e.g. with a photovoltaic system, good insulation) is not only more future-proof, but often also a prerequisite for institutional investors, which increases demand and thus the price (and lowers the yield).

The reverse relationship: Yield as an indicator of risk and value

The central concept to understand is the inverse correlation between yield, risk and value.

• Low yield: Signals high market confidence, low risk and consequently a high value (purchase price factor). A logistics property in a prime location, leased to Amazon on a long-term basis, will have a very low yield of 3.5%, for example. The investor "buys" maximum security here.
• High yield: Signals a higher risk, but also the chance of a higher return. An older property in a B location with a medium-sized tenant and a remaining term of only three years could have a yield of 6.5%. The investor is demanding a "risk premium" in the form of a higher current interest rate.

The yield is therefore not only a return indicator, but above all an indicator of the capital market's confidence in the future viability of the rental income of a specific property.

Practical significance of yield for investors and owners

In day-to-day business, the yield serves as a multifunctional tool:

• For investors: It is the primary basis for decision-making when buying. Does the yield offered fit the risk profile of the fund or the investor? How does the property compare to other properties or asset classes (e.g. bonds)?
• For owners: The current market yield helps to determine the value of your own property. If the general market yield falls, the value of one's own hall increases while the rent remains the same. This is crucial for accounting and sales considerations.
• For financing: Banks use the yield and the cash flows derived from it to assess the loan collateral and to determine the financing conditions. A stable, low yield profile facilitates access to debt capital.

Future development: trends that influence yield in logistics

The market for logistics real estate is dynamic. Currently, several trends are influencing yields. The rise in interest rates since 2022 has put pressure on real estate values, leading to an increase in initial yields as investors expect a larger premium over safe government bonds. At the same time, the continued high demand for logistics space, driven by e-commerce and more resilient supply chains, is supporting rental prices and thus stabilising values. In the future, the ESG performance of a property will determine its value and the yield that can be achieved even more strongly. Properties that do not meet the requirements for sustainability and energy efficiency will have to contend with risk discounts, i.e. higher yields.