The steady transformation of distribution warehouses into one of Europe’s hottest asset classes is the Cinderella story of investment in the property sector.
The once unglamorous industrial “shed” has been catapulted by e-commerce into a must-have item on property portfolios. Now, as traditional retail and office landlords look on jealously, investors want to know if the shoe will continue to fit.
As motorways choke up with delivery trucks, however, data from last year indicate that demand could moderate. “At the moment [the] economic growth we have in Europe is consumer-led,” says Neil Blake, head of European research and forecasting for CBRE, the property advisers. “Logistics space is eating up industrial space and if we have a recession things might look quite different.”Between 2009 and 2015, the capital value of distribution warehouses grew at almost double the rate of retail property — at 34.6 per cent over the period, compared with 18.8 per cent, according to MSCI Global. Investors such as Logicor, Tritax Big Box and LondonMetric have flocked to capitalise on the trend by buying up swaths of land for large warehouses.
Growth in the capital value of UK warehouses slowed to 25.3 per cent last year according to MSCI, though was still ahead of retail property which grew by 12 per cent.
Guy Gueirard, director of logistics at property advisers JLL, says take-up from warehouse tenants also fell 12 per cent in 2015 to 19.5m sq ft after exceptionally strong demand in 2014.
He says certain sites such as smaller warehouses on the edges of cities continue to benefit from high demand from retailers determined to improve the distributive efficiency of their online and bricks-and-mortar retailing operations. “If there is one thing that we are spending a lot of time on it is city logistics,” says Mr Gueirard.
Data from Gerald Eve, the property consultants, show that the average size of sheds built speculatively across Britain — namely, without particular tenants in mind — fell to 155,396 sq ft in 2015. That compares with 197,000 sq ft in 2007 ahead of the global financial crash. The company predicts that the gap between supply and demand for lower quality warehouses will continue to attract institutional investors. It warns, however, that the lower end of the market could soften.
George Underwood, partner at Gerald Eve, adds that warehouses with existing tenancy arrangements will be more attractive to investors than unoccupied, speculative developments.
“Online retail is driving demand for high-quality space to ever-higher levels and, put simply, there’s not enough supply to go around,” he says.
“There’s also anecdotal evidence that the investment committees of institutional buyers are increasingly comfortable with — indeed, have a growing preference for — occupiers who are taking space to service e-commerce operations specifically . . . and are targeting assets with such occupiers in place.”
Last year Tritax, the most acquisitive investor logistics property in the UK of 2015, let properties to such online stalwarts as Ocado, the grocery group which took a 30 year lease on a warehouse in Erith, and B&Q which took a 16.5 year lease in Worksop.
The sector is also attracting the attention of equity investors. When Tritax issued shares last month, demand exceeded expectations and its board of directors expanded the issue from £100m to £200m.
James Dunlop, partner at Tritax, says the profile of investors in the largest warehousing units differs from those that buy smaller out-of-town warehouses because of the high valuations involved. “You need quite deep pockets to invest in big boxes so they’re mostly owned by the institutions. Big box costs everything from £30m to £130m . . . a lot of foreign investors find that type of investment attractive.”
Mr Dunlop adds that institutional investors from Malaysia, Singapore, South Korea and Norway have shown particular interest in large UK warehouses, which allow retailers to make distribution more efficient.
This asset class generates predictable cash flows without recurring capital expenditure
- Mo Barzegar
In 2013, Tritax Big Box Reit bought Marks and Spencer’s Castle Donnington distribution centre for £82.7m, but Mr Dunlop says the landscape is changing as pure-play online retailers enter the scene.
Last year, Amazon rented more than 5 per cent of all new logistics space in the UK, according to estimates from Gerald Eve. For every £1bn spent online, retailers require 930,000 sq ft of warehouse space. With Britons estimated to spend more than £18bn online by 2019, this could mean almost 17m sq ft of warehouse space will spring up around the country.
Andrew Jones, chief executive of LondonMetric, which buys both retail and warehouse property, says Amazon’s arrival was very significant for online delivery. He says retailers have realised they have to rebalance their real estate portfolios to take account of the shift to e-commerce, which will mean “less shops and more sheds” and enhance the appeal of assets in the logistics sector.
Mo Barzegar, chief executive of rival Logicor, which has been backed by private equity group Blackstone, agrees. Amazon’s speed of delivery has put pressure on other retailers to rent warehouses on the fringes of cities in order to reach customers more quickly. “People have realised that this asset class generates predictable, recurring cash flows without recurring capital expenditure,” Mr Barzegar says. “With retail [property] you have to gut and refit the space but with warehouses you just clean the floor and rent it out.”
However, with leases that usually last more than a decade, investments have to be made carefully so that properties are still able to be let in the distant future. “There is a lot of opportunity for us to grow but it has to be very careful and strategic and accretive to our current portfolio,” Mr Barzegar says.
About 20 per cent of Logicor’s portfolio last year was occupied for e-commerce reasons, compared with a portfolio average of 12 per cent, according to Gerald Eve.
Logicor is looking further afield to mainland Europe, where online shopping is growing in large economies such as France and Germany. Logicor estimates, however, that Europe still only has 9bn sq ft of warehouse space, compared with 13bn sq ft in the US. “We are undersupplied for the customers we provide,” Mr Barzegar says.