Managing Director United Kingdom of GARBE Industrial Real Estate UK Ltd and responsible for the comapany’s expansion in United Kingdom.
The British logistics real estate market is considered to be highly competitive with a large number of market participants. Why does GARBE nevertheless devote so much attention to this market?
The UK logistics market continues to be extremely attractive to both investors and developers from across the globe, even when considering the current market and geo-political turmoil. The market has a number of proven short and long term “pulls” to developers and investors alike and GARBE fully intends to take advantage of these.
Historically, the market has proved attractive for its transparency along with a stable political and financial framework. It’s important to dive deeper and highlight the key factors impacting the market today and which we at GARBE see driving the market over the short and long term.
At the moment, the market finds itself in a unique position, often referred to as “bottom of the market.” In comparison to the rest of Europe and other global regions, the UK has experienced a more rapid and pronounced pricing correction. This situation suggests that the UK is currently at the lowest point in terms of pricing. Looking ahead, we anticipate that in the next 12 to 18 months, there will be enticing investment opportunities available, encompassing both development projects and existing standing investments.
When it comes to financing options, the UK offers a favourable landscape. In contrast to many other European countries, bank debt for logistics development remains accessible.
The availability of debt finance for speculative development projects is still viable, provided that the sponsor is reputable and boasts a strong track record. In fact, numerous well-established lenders are still willing to provide such financing, making it an attractive prospect for those considering investment in the logistics sector.
The market boasts a diverse tenant base, encompassing a broad spectrum of businesses. This includes e-commerce companies, third-party logistics providers, manufacturers, and wholesalers. The presence of such diversity in tenants is a strategic advantage as it helps in reducing risks associated with overdependence on a single industry. The occupier landscape continues to evolve with data centres now becoming critical pieces of national infrastructure adding further pressure on limited supply.
The potential for rental growth in the market is quite promising. Projections indicate an estimated 5.0% average growth rate over the five-year period from 2023 to 2027 (Colliers). However, it’s worth noting that these figures are considered conservative in light of the ongoing expansion of the e-commerce sector and the constraints in supply.
The UK offers a favourable investment environment, including transparent property laws, tax incentives in specific regions, and established real estate financing options.
Additionally, the UK has demonstrated resilience in its logistics sector, despite economic challenges such as Brexit. Companies are adapting to new trade realities and supply chain disruptions, ensuring the continued need for logistics properties.
What are the special features that distinguish the British logistics market from GARBE’s German home market?
Both the UK and German logistics markets are established markets in their own rights and any true pan-European investor will be targeting a diversified portfolio with logistics assets in both the UK and Germany. Notwithstanding this, they are different markets with their own specific nuances which emphasises the importance of GARBE having ‘boots on the ground’ across Europe.
The foundations of global commercial real estate are shifting – a dramatic shift in how we use buildings, dramatic increase in interest rates and significant shift in pricing. This may appear daunting for some investors but it could also be one of the best periods to deploy capital in decades. In the UK there are a number of dynamics specific to these shores.
The UK logistics market is moving towards a new norm in terms of speed of delivery as consumers increasingly require shorter delivery times and immediacy or bespoke delivery slots when purchasing online. Therefore, the UK e-commerce penetration is expected to increase from today’s level of 19% to 35% by 2027. This compares with 13% to 23% in Germany (CBRE Forecasting). In the UK, this demand will translate to the creation of more than 45m sq. ft. of warehouse space in the same period.
Leases in the UK are signed on a FRI basis (Full repairing and insuring) which means the tenant is responsible for the repair and maintenance of the entire building. In Germany, it is common for the landlord to repair and maintain the roof and shell and as such it is important to ensure the net initial yield is a true reflection of all the costs associated in holding a property when comparing assets.
Additionally, in the UK, rents are considerably higher which is driven by the scarcity of land. If we compare London against Munich, rents in London are now up to €30 sqm p.m. at Park Royal, London vs €10 sqm p.m. in Munich.
Sentiment on the long-term performance of the UK industrial sector remains positive, but we are seeing a continued price dislocation between vendors’ aspirations and buyers’ expectations.
What are currently the most important demand factors on the British market?
There are basically two different demand factors, one of which is e-commerce. As already mentioned, the online retail penetration will rise to 35% in the UK compared to 19% as a European average by 2027. Online retail is expected to grow by 29% in the next 5 years.
The other one is the strategic location. The UK serves as a gateway to both European and global markets. Its proximity to major European economies makes it an attractive location for logistics and distribution centres. The efficient transportation network and access to major ports, like London Gateway and Felixstowe, further enhance its appeal.
In recent quarters, far fewer transactions have been listed on the European and British investment markets than in previous years. When do you expect the British investment market to reawaken?
This is the million dollar question. In truth, it’s impossible to answer because there are so many factors which influence the market including economic conditions, geopolitical events and global trends. In the UK, industrial investment volumes reached €5.8bn over the first 6 months of 2023, which hits the headlines as it’s down 56% year-on-year but often overlooked is that this level is relatively in line with the five-year pre-Covid H1 average of €4.9bn.
Sentiment on the long-term performance of the UK industrial sector remains positive, but we are seeing a continued price dislocation between vendors’ aspirations and buyers’ expectations.
There is a huge wall of capital waiting for market stability and over the past 6 months we have witnessed strong demand for value-add stock where performance can be driven through active asset management. We are seeing the opportunistic buyers hoping to jump on pockets of distress but to date the market remains well-capitalised. Notwithstanding this, we do expect to see some interesting opportunities come from situations where borrowers have not been able to refinance and forced sales will appear on the market during 2024.
It is our belief that with inflation continuing to fall in the UK and no further increases of the base rate, we see the possibility of mild yield compression materialising next year which will lead to greater market activity in H1 2024.
Which regions have the potential to become the rising stars of the British logistics landscape? And how do they stand out from established logistics regions London or Birmingham?
The market exhibits regional variations in terms of infrastructure, industry clusters, and transportation networks. Understanding regional dynamics is crucial for investors and developers as new centres emerge following patterns set by users optimising their network planning, forming strategic partnerships and catering to specific industry requirements.
The Birmingham ‘golden logistics triangle’ in the West Midlands have been a traditional hot spot due to its connectivity with the rest of the UK. Within a 4 hour drive 90% of population can be reached. Looking to the future, London and Birmingham still remain in great demand but there are new markets emerging due to changing dynamics and operators looking for cheaper options.
In the north of England, the emergence of centres in and around Manchester including Warrington are now firmly established and more recently those in Yorkshire and The Humber are growing rapidly.
Avonmouth (Bristol) in the south-west is another emerging centre and has seen major logistics big box development over the past 10 years and is now the location for UK’s largest-ever speculatively built warehouse of 882,000 sq. ft.
And then there are the ports where increased demand from 3PL’s and also good availability of power will in our opinion see these locations come to prominence in the coming years. We see land in and around the ports of Felixstowe, Southampton, Liverpool and Hull growing in popularity.
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