When the pandemic struck, an already growing e-commerce market suddenly boomed, as lockdown forced consumers to turn to online shopping for everything from clothing to miscellaneous household items like plugs and screwdrivers.
Covid-19’s impact on online spending was remarkable, with giants like Amazon in prime position to capitalise on a locked down world. In May, the online marketplace reported $108.5bn in sales for the first three months of the year – up 44% from the same period last year, before the impact of the pandemic was so keenly felt in the UK and the US. The booming sales saw Amazon land a profit of $8.1bn – an increase of 220% on January, February, and March 2020.
As online sales soared, the space to store items to be later sold online became more in demand.
Research by real estate company CBRE Group estimates that in Europe, nearly 300 million square feet’s worth of warehouse space will need to be found in the coming years to accommodate the e-commerce boom.
Globally, e-commerce sales are expected to increase by $1.5trn in the next five years, which CBRE says will require an additional 1.5 billion square feet of e-commerce related logistics space worldwide.
Logistics Reits trading at lofty premiums
The growing need for more warehouses and logistics space in the coming years suggests the sector could become hot property for investors, as rents rise as online stores fight to find storage for their products. In reflection of the increasing popularity of the growing asset class, in March 2021 the Association of Investment Companies (AIC) created a new sector, Property – UK Logistics.
AJ Bell head of investment analysis Laith Khalaf says logistical properties like warehouses and distribution units had become big business thanks to the pandemic-led rise in online shopping, where more traditional property like retail outlets and office space had performed less favourably.
However, he says valuations on logistical property are elevated, meaning investors need to be confident in the sector’s prospects to accept such high prices and low yields.
“Investors can get access to a diversified portfolio of logistical property assets through Reits like Tritax Big Box and Warehouse Reit,” says Khalaf, “[but] the strong secular growth experienced by this area of the market, combined with the extra fuel poured on the fire by shifts in consumer behaviour in the last 18 months, means that valuations for this kind of property are currently elevated, with logistics Reits trading at lofty premiums.”
Figures from the AIC showed the UK logistics property sector had climbed more than 19% in the last three months, with total returns of nearly 52.4% in the last year.
Tritax Big Box Reit, the priciest in the three-strong sector, currently trades at a 26.1% premium, while Warehouse Reit and Urban Logistics Reit shares are 20% and 17.6% higher compared to their net asset value.
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Sector to continue to outperform in the medium term
Although prices in the sector are elevated, Ryan Lightfoot-Aminoff, senior research analyst at Chelsea Financial Services, says the warehouse and distribution sector still offer investors the chance to make money.
“Given the remarkable changes that have taken place across the globe due to the Covid-19 pandemic, it’s understandable there is a question mark over some areas of property,” he says. “The past 18 months have seen offices standing empty as people worked from home, and the nation’s pubs closed to comply with strict social distancing laws. It remains to be seen whether people will return to either of these locations with the same enthusiasm.
“But investors can still make the most of other, more positive structural themes at play in the sector. There are rising rents for logistics and light industrials across all of Europe, for example, as there has been an increase in demand for storage space due to a combination of more online shopping, shortened supply chains and less reliance on ‘just in time’ delivery. And you can add the likes of logistics, residential, hotel & hospitality, care homes and digital infrastructure into the mix.”
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Echoing Khalaf’s thoughts, Lightfoot-Aminoff says the “really good” discounts on some property Reits had substantially narrowed, however he says there are still opportunities in the sector.
“A good example would be the AEW UK Reit, which has done extremely well for us on the performance front and, although the discount has narrowed markedly, it still yields 7.7%, which is excellent in this climate,” he continues.
“For me, it is all about selectivity. There will be opportunities, but the easy money has been made. However, the past 12 months has reinforced the view that real estate as an asset class still plays a fundamental part in a diversified portfolio.”
Andrew Bird, managing director of Tilstone Partners, investment adviser to Warehouse Reit, adds: “Knight Frank Research estimated that the continuing online market penetration will generate demand for an additional 92 million square feet of warehouse space in the UK before the end of 2024. However, supply remains very constrained, with the report estimating there is currently only 10 months of available stock.
“This acute shortage of supply will continue to drive rents from their history low base, ensuring the sector continues to outperform throughout the medium term.”
