The return and rise of retail warehousing

Retail warehousing rarely conjures up the kind of emotions that we see with some hotter asset classes. And, indeed prior to and during Covid as a retail warehousing specialist, I’ve been asked as many times about the possibility of converting retail warehousing into classes such as build to rent and logistics as I have been about their investment potential on their own merits.

Since Covid, we have seen the tides turn. Retail warehousing is demonstrating its resilience and is drawing further attention among institutional investors. Over the past 24 months, that’s become much more apparent.

Headwinds behind, tailwinds ahead

To understand why retail warehousing has picked up and looks likely to continue to do so, it’s important to consider the state of the market over the past few years.

Retail real estate has rarely been in the headlines for good reasons, albeit with a few exceptions and with the sector now experiencing some tailwinds. The rise of ecommerce over the past decade, turbocharged during the pandemic, has had major implications for a range of retail destinations.

Ecommerce’s rise, however, has plateaued. Contrary to predictions, while the pandemic proved an accelerant of existing changes, some of its impact was short term. From a high of 37.8% in January 2021, according to data from the Office for National Statistics, to 25.2% in February 2023, online sales as a proportion of total retail sales are likely to continue to hover around the 20-30% mark.

Retail warehousing, although less exposed by its nature to the headwinds of ecommerce, has been caught up in association. Until the past few years, retail property – including high street stores, shopping centres, retail warehousing and beyond – has been lumped rather unfairly together in the eyes of certain investors which has made some less willing to take a chance on retail warehousing, and lending terms being more onerous because of this.

We saw during national lockdowns that retail warehousing was able to show just how resilient it is, despite difficult circumstances. Income was stable as many retailers were deemed as essential and big-ticket sales increased due to consumers investing in their homes and an increase in disposable income with the nation staying at home. 

However, with limited hits from ecommerce, the impacts of the pandemic behind us, and the waves of CVAs affecting retail having retreated, the overall picture is looking much rosier.

The occupier picture

The occupier market is strong in retail warehousing. Vacancy rates are at c. 5% (compared to c.13% in in town retail)  with discount retailers and food stores increasing their portfolio. While a lot of fashion and other types of retail sales have gone online, retail warehousing is much less vulnerable to this – and, in some ways, benefits from it.

The likes of B&M Bargains aren’t likely to struggle in the face of competition from online shopping – in much a similar way to Primark’s resilience on the high street – particularly amid a cost-of-living crisis. In fact, after a short trial period, B&M has decided to terminate its online home delivery service.

And even the likes of fashion retailers M&S and Next have been closing high street stores to head out-of-town, where they can source flexible/efficient floor space at a cheaper rent on a £psf basis, excellent transport links with the convenience of parking to the front on their store. The growth of Click-and-Collect has been exceeding the growth of ecommerce sales, with retailers investing in dedicated Click-and-Collect services in store as it is more cost effective to operate with the increase in logistical costs of deliver and return.

We’re also seeing an emergence of new types of retail warehousing occupiers. The likes of Lidl and Aldi have accelerated their expansion into retail warehousing schemes. Meanwhile, we’re seeing PureGym bouncing back from the pandemic and expanding their retail warehousing premises rapidly and even an increasing number of F&B outlets, such as drive-thru restaurants and coffee units, open in out-of-town destinations. Even the likes of services such as dentists and vets are increasingly recognising that retail warehousing can suit their business needs.

This is all adding up to making retail parks much more day-to-day spending destinations, rather than one-off discretionary spending ones. Retail warehousing is proving it is the best route to market for many retailers.

The investor interest

Retail warehousing is a resilient, income producing asset class which offers investor strong annualised income returns and some capital value growth.

With investor confidence now picking up after the quiet second half of last year, we’re seeing the three main players – Threadneedle, Realty and British Land – increasingly gear themselves up. Institutional capital is particularly attracted to what retail warehousing has to offer and is well placed to move on it, given these investors’ access to capital with low costs, significant equity to invest, and the higher yields on offer, particularly compared to industrial property.

Yields today have moved in from Qs 3&4 2022 with more transactional evidence coming though. A key example of this was Purley Cross Retail Park, Croydon which was under offer at 5.50%+ NIY prior to Christmas but in ended up completing in March for 5.35% NIY.

We’re now increasingly seeing other institutional capital returning to the market. These fund managers are focusing their attentions on the south east of England and key national cities, where we’re seeing the green shoots of rental growth as a result of retailers’ commitment to their store portfolios.

It all adds up to a case of retail warehousing on the rise. A sturdy investment in a time of economic uncertainty.