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Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

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Skyscrapers pave way for sheds as UK real estate changes

UK real estate

Consumers have shifted online due to the pandemic and warehouse builders and operators have reaped the benefit

On a building site about 20 miles east of London, workers are busy putting up the largest warehouse in Europe. Just leased to Amazon.com Inc, it can’t go up fast enough.

When it’s done next summer, the four-story “mega-box” will encompass 2.3 million sq. ft., the size of 40 American football fields. Developer Tritax Big Box REIT Plc had plenty of interest from retailers in the site on the River Thames, but when Amazon came knocking, the rest were pushed aside.

A development on this scale during the United Kingdom’s first recession since 2009 highlights how the growth of e-commerce has helped make warehouses one of the hottest assets in real estate. Demand for these properties hit a record in the second quarter as online shopping spiked during lockdown. The value of the rent they’re bringing in is surging at more than twice the rate of offices.

The pandemic has accelerated the shift in consumer habits to online, which means online retailers’ demand for warehouse space in the UK is increasing at unprecedented levels, says Jonathan Compton, senior director for UK industrial and logistics intelligence at broker CBRE Group Inc. This sector is undoubtedly a key area of growth for real estate investment.

The UK has led the e-commerce boom in Europe, and warehouse builders and operators have reaped the benefit. Landlord Segro Plc has seen its shares soar over the past five years; it’s now worth £11.5bil (US$15.2bil), making it the country’s most valuable listed property firm.

The market has also attracted global giants including Blackstone Group Inc and Prologis Inc, which runs a logistics park next door to the Tritax site in Dartford.

By contrast, the rise of online shopping has battered traditional retailers and their landlords, most dramatically in the case of Intu Properties Plc. The owner of nine of the UK’s top 20 shopping centres collapsed into administration in June after failing to reach a deal with its creditors. Other firms are also struggling, such as Hammerson Plc, which is raising money to help it through the pandemic.

Covid-19 threw this trend into overdrive. Internet sales accounted for 20% of all retail purchases in February, before the UK government shut down much of the economy to slow the outbreak, according to Office for National Statistics data. In June, the number was 31.8%, with average weekly sales of £2.5bil.

Urban warehouses are “a huge area where we obviously need a lot more capacity”, according to Bloomberg Intelligence analyst Sue Munden. Demand there is still very strong, and I think rents will continue pushing up.

For Tritax, this means Amazon will pay a rent premium for its Dartford warehouse, which is located inside London’s M25 ring road, says Bjorn Hobart, a partner at the developer. With this one deal, Tritax locked in the profit expected from the entire site, which has planning permission for another 450,000 sq. ft. shed and space left over.

A representative of Amazon declined to comment on the deal.

The site’s location and the demand for warehouses also afford Tritax a luxury that few UK landlords have these days: the ability to be choosy about its next tenant. The developer has turned down “many offers” for the smaller plot in Dartford, and is holding out for “high-quality” tenants.

We feel we can achieve better, says Hobart.

Important:

This article is for information purposes only.

Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.