Winners and losers: The investment opportunity powered by online shopping

As a consequence of the increasing headwinds facing the retail sector, investors in the bricks and mortar stores from which retailers trade – high street shops, shopping centres and retail parks – are also coming under pressure. The changing tastes of consumers, who increasingly prefer to shop online, coupled with high rents and the burden of business rates, have resulted in lower returns and increased instability for investors and companies which own property in this sector.  

However, where there are losers there are likely to be some winners too. In this case, the continued shift towards shopping online for everything from books to clothing and music to groceries has fuelled the expansion of a relatively new sub-sector in the property market, big box warehouses. 

Without a physical storefront and with the need to store, pick, pack and ship customer orders it is estimated that online retailers require three times more warehouse space than traditional bricks and mortar retailers.  Not only does the online business model require more warehouse space, the pace of growth in online retail sales is rapid. In January 2008 internet sales accounted for 4% of all retail sales made in the UK, by September 2019 the proportion of internet purchases was at nearly a fifth (19.1%). 

It is this boom in internet shopping that has powered the increased demand for strategically located logistics hubs, all supported by technological innovations such as improved connectivity and the growth of digital data and the cloud.  These modern and highly efficient distribution centres are used to house stock, organise and pack online orders for delivery and deal with rising numbers of refunds.  Such assets have been a huge success story for investors and have made SEGRO, a leading owner and developer of both big box and urban warehouses, the largest REIT in the UK with a market capitalisation of £9.0bn.

It is a sub-sector that did not exist in a meaningful way 20 years ago, but these key logistics warehouses are now very much in demand. Big sheds covering anything from 300k and 1m sq. ft (equivalent in area to 13 football pitches) are usually located next to major roads and transport links for quicker delivery and distribution.  Importantly for real estate investors the tenants of these big box assets are increasingly making significant investments inside the buildings they rent.  Typically installing sophisticated order fulfilment technologically to enable efficient pick and dispatch of customers’ orders.  Such a high level of tenant investment is good news for landlords as it tends to increase the stickiness of the tenant who are prepared to sign long term index-linked leases.

Retailers from Amazon to John Lewis to Marks & Spencer all have extremely large, 1m sq. ft customer fulfilment and distribution centres. Ocado, the largest dedicated online supermarket, is an example of the future direction for these logistic hubs.  The Gravis team recently visited one Ocado fulfilment centre, a vast operation with robots roaming freely around the building collecting and delivering items to fulfil customer orders within hours of ‘checkout’. It is this level of technological innovation which has propelled the growth of Ocado – it now accounts for 15% of all online grocery sales – as well as demand for fulfilment centres to service their customers.  This is great news for the likes of Tritax Big Box REIT which owns 58 assets around the UK including the Ocado asset that we visited.    

As well as the large out-of-town sites, the future for the logistics industry suggests that smaller urban warehouses will be increasingly in demand over the coming years. The increasing number of retailers willing to offer same day delivery of goods and services means that finding a solution to the ‘last mile’ of the ‘delivery puzzle’ will prove vital. This opens up yet another opportunity for developers to step in and provide the assets needed to coordinate goods on their way to delivery. 

At the opposite end of the size spectrum to big box warehouses are self-storage stores, REITs such as Big Yellow Group offer individual unit sizes as small as 10 sq. ft  The main driver of demand for self-storage is personal use, such as the need to store personal possessions when moving home.  However, self-storage assets are benefitting from demand beyond their individual customers with businesses also seeing the advantages of flexible storage space.  Attracted by shorter lease lengths and with no business rates to pay, some small and medium sized businesses are utilising these modern facilities as a flexible alternative to older traditional warehouse space.

When investing in the sector, it is REITs that can offer the best access to the robust and growing investment opportunity. REITs are managed by sector specialists who are experts in selecting the best assets to provide long-term, dependable cash flows. This specialism among managers in the REIT space is particularly beneficial when it comes to investment in a fast-growing but niche sub-sectors such as big box logistics and self-storage. 

Being aware of major trends such as urbanisation and the decline of UK retail is important when looking for REITs with the most promising potential for returns, as well as avoiding potential risks. With a broad universe that is growing far beyond the traditional retail and office space, REITs specialising in the logistics sector can offer investors a secure income where the contractual nature of assets means less volatility of dividends, as well as daily liquidity that may sometimes be restricted by funds which own property directly. REITs, by contrast are companies listed on a recognised exchange, like the London Stock Exchange, and therefore enjoy daily liquidity as only the shares change hands, rather than the underlying holdings.

As with most things in investment, with opportunity comes the spectre of risk and combining a portfolio of the best and most dependable companies takes considerable skill and experience.  The REIT regime continues to offer exciting entry into a specialist sector for investors, and with the issue of liquidity solved by funds such as VT Gravis UK Listed Property fund, property investments can prove a successful diversifier for a balanced portfolio. 

 Matthew Norris, CFA, Head of Real Estate Securities, Gravis

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