Investors plumping for warehouses

By Liza Helps Property Editor Logistics Matters 

THIS SURGE in popularity from investors reflects the increased levels of online shopping which were boosted in the Pandemic and, while, definitely hit by a return to ‘normal’ and the ‘cost of living crisis’, continues to grow albeit  less quickly than  at the height of the Covid-19 restrictions. 

The subsequent  boost in demand for warehousing stock from ecommerce coupled with  manufacturing reshoring due to geopolitical events such as the Israeli-Gaza conflict and Russia’s incursion to Ukraine has led to sustained demand and increasing rent levels in the sector as quality stock gets snapped up. 

Despite an occupier slow down due to inflation and interest rate rises there is still a shortage of quality Grade A stock mainly due to developers  pulling the plug on speculative development. This means that  for the foreseeable future rent levels are unlikely to fall and vacancy rates are expected to tighten.

For these reasons it is widely  thought that industrial and logistics space as well as retail warehouses are predicted to be the best-performing asset types between 2024 and 2028.

With inflation back to  more normal levels and the Bank of England continuing to cut base rates, investor confidence is likely to strengthen. Lower debt costs will make commercial investments more viable, leading to increased activity and stabilising yields across sectors. 

Various industrial and logistics REITs and property companies are reporting significant  uplifts.  Earlier this summer Warehouse REIT noted that its operating profit rose from £32.2 million to £35 million, with occupancy rates at 96.4 %. SEGRO  noted in its half year report that adjusted pre-tax profit was up 14.6 % to stand at £227 million thanks in part to a 7% increase in net rental income. In a recent trading update the company  said it was positioned for another year of strong rental growth. It reported £58 million of new headline rents signed so far in 2024, ahead of the equivalent period last year; this includes £21 million of uplifts from rent reviews, renewals and indexation, reflecting a 30 per cent average increase at lease events, and £17 million of pre-let signings.

The operating profit for Tritax jumped 29.6% from £95m to £123.8m from June 2023 to June 2024 following the acquisition of UK Commercial Property REIT Limited (UKCM), which completed on 16 May 2024. The company now has a gross asset value of some £6.4 billion.

In its half year report the Tritax noted that take up has increased through the first half of the year and market activity remains broad-based across both building size and occupier type. “Occupier demand is diverse with retailers (both online and omnichannel) and 3PLs active in the market. Manufacturing demand remains prominent, accounting for 25% of activity in the last 12-months.

“Alongside the increase in take up, both space-under-offer and requirements (which reflect potential near-term demand) remain healthy. CBRE reported 12.1 million sq ft under offer at Q2 2024, up from 11.1 million at Q4 2023. Savills’ requirements index has increased with an uptick in enquiries for large units.

“Meanwhile, our own occupier enquiry hub remains close to record levels with a mix of interest by size, sector, and location. Companies continue to look to evolve their supply chain networks. In doing so, they are generating new and additional demand for logistics buildings. 

In addition to the structural drivers (growth of ecommerce, supply chain resilience and optimisation, and ESG) that continue to support our sector, the improving macroeconomic backdrop is expected to lead to increased levels of take up going forward.

“The new government’s ambition is to kickstart economic growth and focus on housebuilding. This has the potential to positively impact us as firstly, logistics will be an important enabler of UKs economic growth and secondly, with Savills research suggesting new housing creates additional demand for logistics space, and the UK government aiming to deliver 1.5 million new homes over the next five years, we believe this could further support demand in the sector.”

What does this mean for occupiers? Simply put securing space will be easier – the funding of large industrial and logistics projects  will attract  more interest making build to suit appraisal easier to stack up, developers will be more willing to  speculatively develop, those occupiers looking to release capital through  sale and leasebacks will find more buyers in the market.

Recently frozen food grocer Farmfoods secured a sale and leaseback for a 182,000 ft2 regional distribution facility in Avonmouth with LondonMetric for £26.4 million. And only last week a fund manager agreed to finance the 1.3 million ft2 Nike logistics campus at GLP’s Magna Park Corby scheme in the East Midlands to the tune of £200 million on the back of a 20-year lease.