While uncertainty around valuation and rent collection have been dominant themes across various real estate sectors, a substantial weight of capital chasing yields and secure income has been redirected towards industrial assets. Resilient near-term income, rental growth forecasts, e-commerce penetration driving warehouse demand and the current undersupply of well-located prime last-mile facilities have seen institutional investors both increase their exposure and enter the sector for the first time over the past year.
Total investment into the industrial and logistics sector surpassed £6.7 billion ($8.9 billion; €7.3 billion) in 2020, with the year seeing numerous big-ticket deals such as Blackstone’s £340 million acquisition of EPIC UK’s portfolio and their £473 million acquisition of Prologis UK portfolio. The prices investors have been willing to pay for industrial assets show their confidence in current trends accelerated by the pandemic continuing long-term.
The online shift in retail activity has fueled warehouse space requirements among pure-play and multi-channel retailers, as they seek to expand e-commerce networks and capture a larger share in a growing market. Amazon alone has accounted for more than one-third of all take-up in 2020, and physical retailers are aware that their business model without a robust online offering will be increasingly challenged.
Although e-commerce growth was already driving demand for warehouses and logistics networks over the past five years, there was 43.2 million square feet of space taken in 2020. This is a significant increase compared with 34.1 million square feet in 2019 and is expected to beat the record set in 2016, which saw 46.4 million square feet taken up.
In London and the south-east of England, the first three quarters of the year saw take-up already exceed the 2019 full-year total, with 8.2 million square feet of space taken compared with 8.1 million square feet in 2019.
We have every reason to believe this trend is only going to accelerate as consumer behavior continues to shift in favor of online purchasing, with e-commerce penetration in the UK exceeding 30 percent for the first time during the pandemic.
Future space requirements
Our analysis shows that every £1 billion of online sales requires approximately 1.36 million square feet of warehouse space. With UK online sales forecast to rise by up to £67 billion over the next five years, we could see e-commerce drive additional requirements of 92 million square feet by 2024.
However, supply is already constrained in and around London and major cities, and the availability of land continues to be major challenge for developers. Investors, recognizing this, will increasingly explore chances to purchase and repurpose well-connected retail parks close to cities for on-demand warehousing. We saw this recently with Prologis acquiring Ravenside Retail Park in North London, for industrial conversion and high-value last-mile logistics uses.
As retail park values continue to face downward pressures and owners seek exits, we can expect a rush of retail repurposing; particularly around London and the south-east where warehouse vacancies are under 4 percent.