The coronavirus pandemic has highlighted fragilities within certain corners of the real estate market, none more so than retail. Yet while the closure of stores on the high street, shopping centres and retail parks during lockdown has heaped further pressure on retail landlords, it looks set to further accelerate demand for industrial and logistics assets.
While the sector did not emerge unscathed from the second-quarter decline in real estate investment activity, investors ploughed a record level of capital into acquiring assets over the first six months of the year. Industrial investment accounted for a record 20 per cent of all global investment volumes in the first half of 2020, according to analysis of Real Capital Analytics data by Savills (SVS), making it the only sector, alongside residential, to record growth during that period.
The sector is attracting large-scale institutional investors, willing to look overseas for deals. Private equity firm Blackstone has been the biggest single player in the sector during the past 24 months, acquiring $40bn (£30.3m) of industrial and logistics assets globally, according to Real Capital Analytics. Investors have been attracted by the shift towards ecommerce, which has delivered growing rental income for landlords and increased property valuations. Forecasts from the Centre for Retail Research predict that online sales will grow by 31 per cent in Western Europe in 2020.
Asset valuations have also benefited from high barriers-to-entry associated with developing new logistics sites, says Kevin Mofid, director of industrial and logistics research at Savills. “Most of the last is controlled by a relatively small amount of companies,” he says. Given development often takes place on greenfield sites, that can also mean land takes years, if not more than a decade, to move through the planning process, he says.
In contrast to ever-shortening leases attached to retail properties, the long leases attached to industrial assets are also a particular attraction for investors. “But then along with that you do get long-term income to big companies,” says Mr Mofid.
While most real estate companies have sought to keep their powder dry in the face of great uncertainty over asset valuations, industrial and logistics specialists continued to drive more capital into the sector, even in the midst of lockdown. In June, sector stalwart Segro (SGRO) raised £680m to invest in development projects and acquire land and logistics assets.
At the other end of the spectrum, Aim-traded Urban Logistics (SHED) has become the latest in the sector seeking to tap the London market. The group, which focuses on ‘last mile delivery’ warehouses, hopes to raise £130m via a share placing and an open offer for retail and institutional investors, to take advantage of an already identified pipeline of 59 assets.
“What we are trying to do is leverage those assets where there’s an element of mispricing,” says chief executive Richard Moffitt. That includes assets that have been under-rented, for instance, in locations where major new roads are being built and where rents in that geography have been rising, he says.
Given the shortage in supply of good quality space, occupiers have been more proactive in engaging with the landlord around their needs than they were a year ago. “Companies have been caught out by Covid and therefore supply chains have been deemed inefficient,” he says.
Yet with investment values continuing to rise, the question is to what extent that can continue. Investment yields attached to logistics and industrial assets compressed further to 6.1 per cent during the second quarter of this year, according to Savills – just 10 basis points above global office yields. “The other issue you have is that there’s not a huge amount of stock to invest in,” says Mr Mofid. But while that means there is greater competition for assets, there is reason to believe that those valuations will continue to rise, he adds.
One potential source of fresh assets coming to the market has been occupiers selling and leasing back some of their freehold properties in order to free up cash. That is a trend that has, unsurprisingly, accelerated since the start of the pandemic. Urban Logistics has experienced a growing number of companies looking to agree a sale and leaseback this year, but management is mindful of the need to monitor the financial strength of these potential new tenants that may be feeling the pinch. “We do need to be cautious as you’d expect,” says Mr Mofitt.
A sharp rise in unemployment and a downturn in consumer confidence could weaken the ability of manufacturers and retailers' ability to meet rent payments. “The fly in the ointment is how the occupational market performs in 2021,” says Mr Mofid.
