Market overview

We expect the urban warehouse market to remain highly attractive in the long term for asset owners, such as Warehouse REIT.

Our market 

We primarily own and manage assets in tier 3 of the UK logistics delivery chain (see box below). Demand for this space 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. This is shown by the take-up of industrial space, with third-party logistics companies and online retailers responsible for 44% of take-up in 2019, up from 18% in 2010 (source: Savills). Other types of businesses such as manufacturers also use warehouses for e-commerce, allowing them to sell directly to end customers. This demand 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 tier 3 space. The UK online retail sector grew by 10.9% in 2019 and, pre‐COVID‐19, this was expected to grow by a further 30.8% by 2023 (source: eMarketer). Online sales accounted for 22.3% of UK retail sales in 2019 and, pre-COVID-19, were predicted to reach 27.9% by 2023, although this reached a record high of 30.7% in April 2020 (source: eMarketer). It is estimated that every €1 billion of additional online sales requires 775,000 sq ft of warehouse space, so the online retail sector alone will need a further 42.5 million sq ft of warehouse space by 2024 (source: Savills).

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 - 1. Units less than 50,000 sq ft

Supply of small and medium-sized warehouses fell for the seventh year in a row in 2019, reaching a new low of 71.2 million sq ft. This is a decline of two-thirds over the last decade. Available second-hand space fell by 6% in the year, with ‘Grade A’ availability down 17%. While there is some smaller unit development in parts of the UK, most development is in the mid box and Big Box sectors, leading to acute shortages of supply of smaller units in key logistics locations.

How we are responding

With tenants keen to secure space, we are offering longer leases, with ten years (with or without breaks) becoming common, compared with the previous five-year leases (with or without three-year breaks). This is reflected in the Group’s WAULT continuing to increase. We are also looking to generate value from underutilised land within the portfolio, such as at Queenslie, Glasgow.

Rising rents

Source: Lambert Smith Hampton, MSCI, 2. Units less than 20,000 sq ft, 3. All industrial

The imbalance between demand and supply means that rental growth remains robust for logistics space. 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, giving less scope for increases. 

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 5.2 years also creates opportunities to achieve rental increases at lease renewal and at regular rent reviews in longer leases.

Attractive investment market 

Source: Lambert Smith Hampton, Property Data, PMA, 4. All industrial

Following a record year in 2018, investment demand for industrial and logistics assets in the first half of 2019 was affected by Brexit-related uncertainty. However, investment levels bounced back strongly in the second half, with some record prices achieved for larger estates. Overall, during 2019, yields were stable or tightening. Market forecasts show that the industrial property sector is likely to outperform other property asset classes over the next few years.

How we are responding

Having raised new capital in April 2019, we invested the funds during a ‘quiet period’, buying quality assets at what we determined to be competitive prices. We continue to target further acquisitions and intend to raise equity when market conditions allow. We have reduced our target NIY from 7%+ to 6%+, reflecting the clear levels of rental growth we can see for these assets.