It felt like every conversation in Q4 2020 referenced the unstoppable march of logistics as the darling of real estate.
With yields reaching historic lows in the UK and Europe and the weight of new capital lined up to enter the sector, it is not surprising that we are seeing more investors looking at areas of the market that may deliver higher returns. Common sense tells us that higher returns come with greater risk and complexity and certainly that is the case in the temperature-controlled sector – but it is not without opportunity either.
There are global mega trends that make a compelling case for growth in cold storage, not least climate change. At a consumer level, we see growth in the ready meal market and changes to food supply chains as the core drivers, overlaid with increased e-commerce penetration into the grocery sector, which doubled in 2020.
We saw considerable press in 2020 around the cold chain needed to support pharmaceutical distribution. Globally, we see around 12% of demand coming from the pharma sector.
Temperature is critical here – we’re not talking about ‘chilled’ space (which typically operates between +5 and +2C) but rather ‘cold’, which operates between -10 and -20C.
The investor profile for cold stores is a cocktail of real estate investors and infrastructure funds, which means deep pools of capital are theoretically available.
However, the sector is operationally complex and building technologies differ markedly from those used for standard ambient and chilled logistics warehouses.
The first question we get from investors is: do we see a premium for cold storage? Notionally, the answer is yes, but it is difficult to provide evidence. Historically, these facilities were built as a ‘box in a box’ – something that is no longer a prerequisite with modern solutions for air tightness and panel construction.
This has led occupiers to take space on a variety of terms: an ambient warehouse with some base build enhancements to fit the ‘box’ and plant themselves; others take the ‘box in a box’ from the developer; and some look at a turnkey solution.
Many also opt to own. Capital expenditure depreciation of cold store fit-outs can make lease terms challenging and it is partly for this reason that we see above average levels of owner occupation in the sector. This high level of ownership is also seen as a target by investors for sale and leasebacks.
I am upbeat about the sector’s prospects, but the buildings’ operation and technology elements need careful consideration by those looking to invest in cold storage.
Tim Crighton is retail, logistics & e-commerce sector lead, EMEA, at Cushman & Wakefield