Forget retail property — it's all about investing in logistics space

Warehouses are money earners as UK reels under Brexit uncertainty. Photo: Getty

There has been a visible decline in the health of Britain’s high streets over the past few years. Fewer shoppers are spending money at shops, instead using the internet to buy goods.

Online sales count for around a fifth of all retail sales in the UK, according to the Office for National Statistics, a proportion that is growing every year. Ten years ago, online made up just one-twentieth of all retail sales.

The success of digital businesses such as Amazon, ASOS, and Ocado are testaments to this fundamental shift in the retail market. As a result, demand for retail store space is dwindling.

Retailers are pulling out of high streets and town centres, limiting their physical presence to all-encompassing destination hubs, such as the Westfield retail and leisure complexes.

As Deloitte said in a recent report on retail sector trends, there will be “fewer, better stores” in the future. But that does not mean you should ignore the retail sector of commercial property. You might just need to rethink and look forward instead.

With the advent and rapid growth of internet shopping has come an explosion in demand for logistics space.

READ MORE: Self-build revolution: The pros and cons of building your own home from scratch

These businesses need vast warehouses and distribution centres to handle all the retail sales coming from online. To deliver everywhere, and deliver fast, these logistics centres are required all over Britain.

As online shopping demand grows, so will the need for this logistics space, creating opportunity for investors.

One advantage for investors is that e-commerce firms are increasingly reliant on high-tech warehousing and distribution centres to manage the retail demand. Because of all this investment-heavy complex state-of-the-art machinery and technology, logistics tenants now tend to take longer leases.

“They need modern, functional, and efficient buildings and that is very capital intensive,” Andrew Allen, global head of investment research, real estate, at Aberdeen Standard Investments, told What Investment last year.

“It means that the occupiers are much more wedded to their warehouses for a longer period of time,” Allen said.

“In Europe, it means we are seeing leases lengthening from three, five, or six years to much longer duration, more in line with how things have been seen in the UK.”

Moreover, the logistics market has held up well despite the recent political turmoil in Britain over Brexit, and the ongoing uncertainty for business over if and when the country will leave the European Union.

READ MORE: 5 reasons why renting is better than buying a property

The property firm Savills said in a recent report that investment volumes for distribution warehouses came in at £3.55bn for 2018, a "marginal" decline over the year — a figure it described as “encouraging.”

"The three-year rolling average has now reached a new height of £3.32bn, the highest level ever recorded and up from £2.1bn just five years ago,” Savills said.

"Relative to other sectors, which saw significantly reduced transaction levels, volumes, and notably pricing, logistics proved stubbornly resilient despite growing geopolitical and economic uncertainty."

Mike Gibson, head of UK research at property firm CBRE, is optimistic about the market's future.

"The e-commerce revolution will continue to drive sustained demand for industrial and logistics space in 2019, with demand for bigger 'big boxes' increasing fastest," Gibson wrote in his outlook for the year.

"'No deal' Brexit concerns have not yet been a major force in driving demand, and speculative development is starting to address supply-side concerns.

"Investment demand remains very strong, but investors will need to keep an eye on innovations in logistics technology."