Our market

Demand for warehouse space in the UK comes from a diverse occupier base but the growth in e-commerce has been a particular feature of our market in recent years, as many businesses need warehouses to fulfil online orders. The acceleration of e-commerce, as consumers have turned to online shopping during Covid-19 lockdowns, has only fuelled this demand. Other types of businesses such as manufacturers also use warehouses for e-commerce, allowing them to sell directly to end customers, often increasing market share and gross margins.

Covid-19 has focused businesses on the resilience of their supply chains. To help insulate them from future shocks, some companies are holding higher stock levels and looking to source or manufacture products closer to home (onshoring), further boosting demand for warehouse space. For importers, increased trade friction with the EU is also a factor in the need to hold higher stock and source more domestically.

This demand means that with relatively little new space being developed, there is a shortage of available supply, so rents are rising for all types of occupier and they are signing longer leases to secure the space they need.

Strong occupier demand

Online vs instore sales growth

The UK is one of the world’s most advanced markets for online retail, one which has been growing rapidly for many years. Even so, e-commerce achieved step-change growth in 2020, rising 46.0% (source: ONS), spurred on by changes in shopping habits during Covid-19. John Lewis and Partners have seen a 33% increase in online sales for 2020 from 42% to 75% which now equates to 7 in every 10 being spent with John Lewis now coming via e-commerce. In October 2020, Knight Frank Research published analysis to suggest that every £1.0 billion of online expenditure requires 1.36 million sq ft of warehouse space (higher than previously thought) and forecasting demand for an additional 92 million sq ft of UK warehouse space by 2024, assuming that online sales will average a sustained level of 32.0% of UK retail market share.

How we are responding:

We acquire assets in economically buoyant areas, close to transport links and large conurbations. This is helping to further increase the proportion of the portfolio supporting online retail.

Constrained supply

UK availability by grade (m sq ft)1

While speculative development of warehouse space has increased in the last year, this is primarily in the Big Box market, reflecting economies of scale in constructing large assets. Except in certain areas, it continues to remain uneconomical to develop new space in our niche small box range. As a result, vacancy rates have fallen to their lowest point in three years at 5.7%, with large falls in the North West, East and West Midlands, South East and the East of England (source: Savills). Total take-up of warehouse space in 2020 was a record 59.7 million sq ft (source: LSH).

How we are responding:

With an increasingly diverse occupier base keen to secure space, we are continuing to acquire assets in areas of high demand, offering longer leases to occupiers. On a highly selective basis, we are also looking to complement our core focus on growing income, generating value by creating new space on underutilised land within the portfolio.

Rising rents

UK rental growth (%)

The imbalance between demand and supply means that rental growth has and is forecast to remain robust for logistics space. For the UK as a whole, prime rental growth in 2020 for 50,000 sq ft units averaged 4.2% (source: LSH). Realfor forecast that rental growth will continue, averaging 2.4% for the next five years. However, in recent years rents for secondary space of the type we own have grown faster than rents for prime space. This reflects growth from a lower base, the opportunity to enhance rents through refurbishing assets and the fact that prime stock comes to market at higher rental levels, historically giving less scope for increases.

How we are responding:

We use targeted capital expenditure to make vacant assets attractive to potential occupiers, enabling us to consistently capture rental growth ahead of ERV. The WAULT across the portfolio of 5.7 years also creates opportunities to achieve rental growth at lease renewal and at regular rent reviews in longer leases.

Attractive investment market

Investment volume (£bn)4

The attractions of the industrial sector (and Covid-19’s negative impact on retail and office occupiers) led to 6.9 billion of total UK investment real estate stock changing hands in 2020, the highest on record (source LSH).  The competition amongst buyers has led to prices hardening, with prime distribution yields down from 4.5% to 4.0% during the year (source: CBRE). Overseas investment increased markedly, with a 56% increase in 2020 versus 2019. International buyers also dominated the larger deals, accounting for six of the top ten transactions in the year. Further overseas new entrants are expected. Portfolios attract a premium over individual assets, with this premium increasing to 5-10%.

How we are responding:

The Investment Advisor’s knowledge of the market, built up over nearly a decade of investing in the sector, helps us to continue to source acquisitions at accretive prices, and we continue to target further additions to the portfolio. Our ability to develop the ‘lazy acres’ within the portfolio also gives us a potential source of new assets at attractive yields on cost. The Investment Advisor continues to source attractive investments above prime yields.