Why investors should think big when it comes to UK warehouses

As businesses in the UK adapt to the fast-paced digital economy many are seeking to streamline their supply chains, creating new opportunities for investors.

Large ‘big box’ warehouses – over 100,000 square feet – located near major transport hubs are becoming an increasingly important component of retailer strategy. The move is being driven by the rise of e-commerce – which now accounts for 18 percent of UK sales – but also a lack of supply around the country.

For investors, the security of long leases, modest supply and positive rental growth is boosting the sector’s attraction.

The UK’s e-commerce boom has seen online sales grow ten times faster than in-store purchases over the first half of the year, forcing retailers to change their strategies to meet demand with many looking to centralize their distribution, near arterial routes, to quickly move goods.

Geographically, the UK lends itself to the use of Big Box warehouses. As a small country, centralized distribution centers can be positioned up to 4.5 hours of 80 to 90 percent of a company’s catchment.

For investors, these warehouses are proving a good opportunity says Tessa English from JLL’s EMEA Logistics & Industrial Research team, pointing to the security of long leases, modest supply and positive rental growth.

“Time pressure is definitely an issue for businesses. Companies will need to think about where they are located and where they are delivering to – as a result, we’re seeing businesses restructure to ensure they have efficient distribution networks,” says English.

“As online companies look to expand or restructure, they are building to suit their individual requirements and as a result, in some cases, taking longer leases.”

In-demand warehouses are slick, high performance operations, incorporating the latest technology, with the potential to upscale. This long-term outlook is helping bolster returns, with rents in these distribution centers forecast to grow 3.4 percent this year.

Notable deals this year include the Royal Mail’s letting of a 346,153 square-foot parcel delivery center in Warrington from Mountpark Logistics.

At mid-2018, there was 20.2 million square feet of available Grade A Big Box warehouses – leaving a vacancy rate of seven percent. However, the level of new supply is 48 percent lower than the last pre-recession peak a decade ago.

Compared with the average level of take-up over the last five years, available Grade A supply at mid-2018 represented just over 12 months of demand.

“If this supply and demand balance remains then it suggests the market is still balanced in favor of investors and developers rather than occupiers, and consequently we anticipate further rental growth over the medium term,” says English.

While retail continues to be the biggest occupier market, in a world where an efficient supply chain is key, other sectors are restructuring and assessing their distribution networks – adding to the sector’s growth story.

Car maker Jaguar Land Rover, for example, is consolidating distribution to a specialist operation near its Solihull plant in a bid to reduce mileage and ensure it remains competitive in a global market.