Look out for the rise of super-prime warehouses
Industrial property has firmly established itself as a successful and robust asset class over the last decade, but there are now growing distinctions between the best warehouses and the rest
Urban warehouses are the best performers across the sector due to scarcity and the demands of big cities, but we are also seeing the emergence of a `super prime’ class of urban warehouse.
It adds up to a complex picture for investors, who are faced with a growing choice of where to allocate their capital and how to balance risk and reward.
`Super-prime’ warehouses were one of the themes that at SEGRO we explored at our Investor & Analyst Day in London yesterday [Tuesday], supported by new research from JLL.
Today I want to explain how at SEGRO, with the help of JLL’s research, sees the industrial sector evolving, largely based on the changing habits of warehouse customers.
The new `super prime’ urban warehouses are located in prime geographies and incorporate best in class building specifications combined with first-rate ESG and technology features.
As this subset of prime warehouses develops over time, we believe it will support yields that are sharper than the 4.75% now commanded by prime warehouses, compared with 5.25%-5.5% for older assets in prime geographies and modern assets in non-prime geographies.
JLL has analysed official business population data to identify five `archetype’ sectors which have a fundamental need for their warehouses to be in close proximity to their customers.
Close proximity is important to these customers because they have short order lead times and an expectation from customers of easy accessibility for purchasing directly or by click and collect.
These archetype sectors are: food and drink manufacture, valued added logistics and warehousing, express and e-commerce, wholesale and building and construction supplies and film production and distribution.
These sectors will not accept substitution of their `super prime’ locations for others further away, due to the likely impact on their customers, and the subsequent increased transport journeys and road miles into and out of cities.
As well as the rise of `super prime’ warehousing, I want to emphasise these other key points, particularly focusing on London:
- Urban warehousing is a distinct segment of the industrial sector, mainly comprising standard industrial buildings on estates, and can also include ‘ultra-urban’ and `multi-level, multi-user’ buildings
- Prime industrial buildings are defined by having a strong macro and micro location and a building specification that meets current occupier demand. We estimate that 20% of London’s industrial stock, for example, is prime (40.5 million sq ft out of 203.9 million sq ft)
- Significant changes in the UK economy and society over the past 20 to 25 years have elevated the need for urban warehouse space. In the next 10 years London’s population is expected to rise by 1.07 million people, adding further demand
- Greater London is at the heart of a wider economic super-region extending into the wider south-east and eastern region and its agglomeration benefits lead to out performance
- London’s stock of industrial land is diminishing and having lost 1,483 hectares of industrial land between 2001 and 2020 further losses are in the pipeline
- For many occupiers labour and utilities costs and transport costs far exceed property costs
- JLL believe that long-term industrial rental growth will exceed the UK average rental growth rate due to competition for land in London
- London is the UK’s prime location for data centres and the `Golden Triangle’ of London, Oxford and Cambridge is the UK’s hub for life sciences, meaning even more demand for industrial space
Urban warehouse real estate is very different from big box logistics in terms of its spatial and building characteristics but also the functions which the properties perform.
Urban units ranging in size from 5,000 sq ft to 100,000 sq ft are often treated as part of one large asset class without delving deeper into their characteristics, which in London’s case ignores the fundamental link between the city’s economy and its warehouse real estate’s performance.
Long term demand and supply fundamentals underpinning the warehouse market in London mean this segment offers good growth opportunities for investors that we believe compare with `super prime’ real estate asset classes.