Market overview

The urban warehouse market has a number of characteristics that make it highly attractive for asset owners, such as Warehouse REIT.

Our market 

Warehouse REIT primarily owns and manages urban warehouse assets. Our warehouses are simple buildings, with a steel or concrete frame, metal or similar cladding and a minimum eaves height of five metres. The buildings have outdoor servicing and yard space and typically cover less than 50% of the total site area. These features make the space highly flexible, allowing it to meet the needs of a wide range of occupiers. 

Our warehouses often sit together on estates let to multiple tenants. This reduces tenant risk for us, while increasing opportunities for asset management. Higher rents on new lettings also provide evidence at rent reviews across the estate, raising the rental tone of all the units. 

While demand continues to come from a diverse occupier base, the growth in e-commerce has been a particular feature of our market in recent years. Many businesses, and in particular retailers and third-party logistics companies, need warehouse space to fulfill online orders, increasing demand for urban warehouse space. This means that with little new space being developed, rents are rising for all types of occupier and tenants are signing longer leases to secure the space they need.

Strong occupier demand  

Source:ONS

The relentless growth in e-commerce continues, with a corresponding impact on demand for urban warehouse space. The UK online retail sector grew by 12.4% in the year to March 2019 and this strong growth is expected to continue, with e-commerce sales set to rise by 38.1% between 2018 and 2022 (source: eMarketer). Online sales accounted for 18.6% of UK retail sales in March 2019 and are predicted to reach 26.8% by 2022.

How we are responding

We acquire assets in economically buoyant areas, close to transport links and large conurbations, which provide both the customers and labour supply our tenants need.

Constrained supply 

Source: Lambert Smith Hampton 

UK-wide supply for small units (<10,000 sq ft) and medium units (10,000 to 49,999 sq ft) fell for the sixth consecutive year in 2018, to a new low of 77.7 million sq ft (source: Lambert Smith Hampton). Available second hand space fell by 14% during the year. The small to medium segment has the most acute supply shortage of all size bands, particularly in key logistics locations such as the East and West Midlands. 

How we are responding

With tenants keen to secure space, we are offering longer leases, with 10 years (with or without breaks) becoming common, compared with the previous five-year leases (with or without three-year breaks). Incentives are also reducing, from a previous 12-18 months rent-free period for a 10-year lease to 6-12 months now.

Rising rents

Source: Lambert Smith Hampton, MSCISource: Lambert Smith Hampton, MSCI 

With strong demand and constrained supply, rental growth across the industrial market remains robust. Rents are increasing more quickly for secondary space, of the type we own. 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, giving less scope for growth. 

How we are responding

We use targeted capital expenditure to make vacant assets attractive to potential tenants, enabling us to consistently capture rental growth ahead of ERV. The WAULT across the portfolio of 4.6 years also creates regular opportunities to achieve rental increases at lease renewal.

Attractive investment market 

 

Source: Lambert Smith Hampton.  Property Data, Property Archive

2018 saw record investment in industrial and logistics assets. However, Brexit-related uncertainty has made many investors cautious in the first few months of 2019, particularly towards shorter-leased assets. This has created a buying opportunity for us. While the overall number of assets for sale has declined, a greater proportion now meet our pricing criteria, so the range of potential purchases has increased. 

How we are responding

We look to time our investments so that they are accretive to shareholders. The capital raise we completed in April 2019, along with a suitable level of additional debt, will enable us to take advantage of current market conditions.