Digitalisation and European Debt Investing

Major European economies such as France, Germany, the Netherlands and the UK have long had high outward foreign direct investment (FDI), but are now recognising the urgent need to build the domestic physical backbone that will support this digital revolution. Nearshoring - where Governments incentivise, and companies move - production closer to key markets has become a critical solution to the vulnerabilities exposed by global supply chains, particularly during the COVID-19 pandemic. On average, 52% of companies have planned to nearshore in the last four years. As major European economies have invested more abroad than has been received, nearshoring will help retain investment at home. Between 2021 and 2023, average net FDI outflows across Germany, France, Netherlands and the UK reduced by €90 billion. As European businesses relocate production and distribution facilities closer to home, the demand for warehousing and logistics infrastructure within the region has the potential to surge.

In order to meet the current demand, institutional sponsors are considering two primary options to deliver modern supply - developing new, green projects; and repositioning older or redundant assets, either through conversion or renovation, into high quality industrial stock. In a challenged environment where banking liquidity is sometimes constrained, the debt capital requirements for this transitional finance will be largely served by the alternative lender community.

Beyond these macro trends, there is also a cyclical opportunity for alternative lenders, as most European logistics markets are still showing very positive signals and robust occupational demand. Low vacancy rates in most markets are driving rental growth, yields are stabilising at acceptable levels and transactional activity remains strong. European industrial and logistics investment volume hit its lowest point in 2023, however the market has picked up gradually throughout 2024. This, combined with the structural drivers of the logistics and industrial market performance (limited land availability, restrictive planning regimes, complex legal frameworks), should support property income yields and capital values.

Alternative debt providers have a unique opportunity to capitalise on Europe’s evolving infrastructure and asset financing needs, and to be at the forefront of this capex supercycle. Between 2024 and 2026 alone, $3.4 trillion of cumulative investment in reindustrialisation (nearshoring, supply chain optimisation) is expected globally, $2 trillion of which pertains to Europe including the UK. The rewards for alternative lenders who position themselves effectively will be significant and enduring.

(1) ECDB, July 2024

(2) EY, May 2023

(3) OECD

(4) Capgemini