Stockholm (Ekonamik) – The massive growth in e-commerce has impacted the real estate industry in many different ways. As discussed before, retail property such as shopping centres, retail parks, and high streets do not appear to have a bright future ahead as online shopping becomes more mainstream. With the boom of e-commerce, real estate investments went into logistics facilities dedicated to the storage and movement of goods – crucial to online retailing.
Logistics Real Assets in Demand
“Changing shopping habits have corresponded with increases in trade and changes in supply chains, which have resulted in the demand for logistics facilities to grow significantly,” wrote Craig Wright, Senior Real Estate Investment Analyst – Europe at Aberdeen Standard Investments, in February this year. According to the same article by Wright, “Citigroup estimates that approximately 900 million square feet of new warehousing space will be required in Europe by 2035.” Much of this growth is expected to come from fast-increasing online sales, which are relatively lower in Europe compared to the United States and the United Kingdom.
With the United Kingdom having the highest penetration of online retailing in Europe, and with spend on online retail expected to reach £75 billion by 2023 from £55.9 billion in 2018, property agent Savills estimates that this increase in online retail spending will require an extra 20 million square feet of distribution space by 2023.
According to Justin Curlow, Global Head of Research & Strategy at AXA Investment Managers, and Senior Research Analyst Kerry Shaw, the fundamental shift of retailers embracing the omnichannel model, which combines physical and online commerce, has resulted in a surge in demand for logistics space. “With e-commerce penetration expected to continue to rise, we believe there is pent-up demand for logistics stock that supports the omnichannel retail model,” wrote the duo in July.
Justin Curlow and Kerry Shaw argue that “one reason for the increase in demand for logistics space is that pure-play e-commerce retailers typically require more distribution centre space than bricks-and-mortar retailers to support the same volume of retail sales.” It is estimated that pure-play e-commerce retailers require two-and-a-half to three times the amount of logistics space as the average traditional bricks-and-mortar retailer. The duo expects retailers to “respond to growth in e-commerce sales by expanding and modernising their logistics property portfolios,” further arguing that “markets that are expected to see higher e-commerce penetration rates and faster growth in e-commerce should see stronger demand for logistics property.”
Lack of Logistics Property
Andrew Quade, Head of Logistics – Investment and Development Management, Office & Logistics – Real Estate at AMP Capital, argues that “there are opportunities for investors to develop and own a new breed of industrial assets that are fit-for-purpose for the likes of Amazon, Alibaba and others,” thanks to “rising e-commerce sales and increasingly affluent millennial spenders.” As demand for industrial real estate assets is growing at a rapid rate, Quade claims that “there’s a huge undersupply of the modern, high-spec assets that tenants are demanding.” This increasing demand for industrial assets is reflected in returns, and assets closer to town can attract higher returns. “Rents in logistics real estate are a function of consumer demand and supply of assets. The size of the consumer market, affluence levels, barriers to creating new assets and the cost of replacing assets are also factors,” writes Quade.
Morgan Stanley’s Global Listed Real Assets team agrees with Andrew Quade, saying that “in the industrial sector, on-line sales growth continues to significantly outpace broad-based retail sales growth, contributing to strong demand for logistics, while there continues to be a shortage of modern industrial stock suggesting development is required to meet modern logistics needs.” Whereas industrial rent growth has been around zero in the past five years, growth has accelerated above 2% last year and “is expected to remain strong over the next several years.” However, “industrial yields remain higher than office and investor allocations to the sector are accelerating, which is likely to lead to more yield compression.”
Vera Krückel, trend researcher in the Trend Investing Equity team at Robeco, reckons that e-commerce growth and the increased demand for logistics real estate present interesting investment opportunities for investors. According to Krückel, because “warehouse rental costs are only a small portion of the overall logistics bill, warehouse owners are often able to enjoy substantial rent increases.” As a result, Krückel and her team “see owners of prime industrial real estate assets as major beneficiaries of e-commerce growth.”