Many market participants have been ringing the death knell for the UK property sector over the past two years, with fears Brexit and the return of robust inflation will signal the end of the property boom. However, we believe there remains life in UK real estate, powered by sectors displaying solid fundamentals.
One such sector is e-commerce, where the UK is among the world leaders. The UK’s e-commerce market was the third largest globally in absolute terms in 2017, with annual sales of more than $81bn.
E-commerce is taking market share from traditional retail, with online sales growth continuing to outstrip physical store growth. This secular trend has momentum for several years to come and we believe it will be somewhat immune from the impact of Brexit. Below are the property segments that we believe will take advantage of the changing face of retail:
London an e-commerce leader
London is the epicentre of the UK’s e-commerce boom. With a population of almost nine million and a strong local economy, we believe that the demand for internet shopping in the region is poised to continue rising. To capture this demand, retailers are promising increasingly ambitious delivery times to their customers, which require significant logistics support.
However, the sustained prioritisation of housing in Greater London area over the last 15 years means there has been little land dedicated for commercial use and the supply of warehousing for last-stage local delivery is limited. This has been aggravated by property developers’ reluctance to speculate on demand for industrial property since the financial crisis. As a result, we believe the supply dynamics in this segment are compelling.
We have exposure to the ‘urban logistics’ segment through Slough Trading Estates and Park Royal, with the latter achieving estimated rental value growth of around 7.1 per cent last year alone.
Thinking inside the box
The second area of UK e-commerce we are tapping into is big box logistics. These facilities have increasingly entered supply chains as companies juggle efficiently servicing both direct to consumer and store network sales. Jones Lang La Salle has forecast 4.3 per cent growth in distribution rents over the course of this year. Retailers currently make up 37 per cent of demand and national vacancy rates sit at only 6 per cent.
While there is less of a supply premium in this part of the market, we are confident about the supply/demand picture over at least a two-year horizon. This is largely due to the technical requirements of the tenants of this type of warehousing, as it takes much longer to fit out these sites. Further, rising inflation is generally supportive of existing assets in this space, as it drives rental growth and simultaneously increases building costs, reducing the scope for competition.
We currently have exposure to big box logistics through sites in the midlands and the south east, servicing companies in a range of sectors including Amazon, Mars and Yoox Net-a-Porter.
Rogier Quirijns is portfolio manager of the Cohen & Steers European Real Estate Securities Fund.
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