Many investors are wondering if the UK warehouse market boom has run out of steam. Macro concerns are mounting: Ukraine, inflation, Amazon reportedly with too much warehouse space and the consumer-facing a cost-of-living crisis, not to mention Brexit.
The share-price fall of the listed UK logistics REIT sector suggests investors have taken fright, but market fundamentals suggest this concern is misplaced.
Early indicators are that H1 take-up this year exceeded H1 2021, which is driving a record-low vacancy rate of around 3%. Real estate forecaster Realfor predicts a further 25% of rental growth by 2026. The drivers of this growth are numerous and permanent: re-shoring, on-shoring, manufacturing demand, availability of start-up capital and ecommerce, to name a few.
Market research firm Forrester calculates that UK online sales will grow from 26% of total UK sales to 37% by 2025. This would represent an increase of 44%, which, according to the Office for National Statistics, amounts to an additional £158bn of sales. In 2020, Knight Frank analysis showed that every £1bn of online spending required 1.36m sq ft of warehouse space, suggesting a requirement for in excess of 200m sq ft of additional warehouse space over the next three years from ecommerce alone.
Savills estimates there is 18.6m sq ft of speculative warehouse development under construction, but difficulties securing land and planning permission will keep a lid on this number.
But will firms be able to afford to pay rents if they’re 25% higher in the future? Supply chain and logistics consultant Hatmill suggests that for a parcel delivery operator, a 12% rent rise would only add around 1% to total operating costs. It is the cost of transport that is key to their cost basis, with current fuel prices adding more pressure. As a result, location becomes imperative. Warehouses in the right areas, such as those close to conurbations and transport infrastructure, not only justify investment yield profiles but will also continue to do so even if the cost of capital rises.
But demand is not just being driven by ecommerce. Global supply chain disruption and cost escalation make the ‘just-in-case’ logistics approach ever more critical. Building resilience into business models requires a greater inventory and more warehouse space. While record inflation is undoubtedly unhelpful, portfolio average passing rents of just £5.60/sq ft will see occupiers remain competitive. The UK market is set fair for at least another three years.
Andrew Bird is managing director of Tilstone Partners, manager of Warehouse REIT