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The challenge and opportunity for UK REITs in the Covid-19 e-commerce boom

Much has been written about the challenges and opportunities arising as a result of market volatility sparked by the Covid-19 pandemic, but the impact stretches far beyond the stock falls of March. The outbreak of the virus and the subsequent widespread public lockdown will undoubtedly have far reaching and more long-lasting structural effects on society.

In the UK REIT sector, trends that were already in motion prior to the 2020 pandemic have only accelerated, and this has proven particularly beneficial for REITs in the logistics sub-sector – which has largely outperformed other REIT sub-sectors in recent years.

With restrictions on how often people can leave their home, online shopping has understandably boomed. In April, ONS data estimated monthly growth was a huge 15.8% for online retailers, and online sales share of the market spiked to 30.7% of retail sales.   

The magnitude of this sudden shift should not be underestimated. The previous trend growth rate suggested April’s 30% share was likely to occur many years into the future, likely nearer to 2028. This marks a significant acceleration in the changes that were already underway before Covid-19 hit. 

What does the growth in online sales mean for logistics REITs serving the warehousing needs of e-tailers? In part this depends on the lasting impact on consumer behaviours. Behavioural scientists note that while ingrained habits tend to change only slowly, those habits that were already in a process of change, that coincide with the consequences of lockdown, may be transformed more rapidly. The tendency towards online shopping could be one such habit. 

This explosion in online retailing is one major driver pushing the outperformance of logistics REITs. CBRE research estimates that warehouse based e-tailers require 2.5 times the square footage of logistics space compared to traditional retailers. Clearly, a greater volume of online orders naturally increases demand for logistics space for the stocking, picking, packing, and shipping of products direct to shoppers’ front doors. CBRE estimates that every extra £1bn of online sales requires an additional 868,000 square foot of space.  This is a substantial requirement especially when judged against the portfolio of Segro, the largest European logistics REIT, who currently manage 7.8million square feet of warehouse and logistics space

Those REITs specialising in the logistics sector have already begun to reap the benefits, and look set to continue to benefit from the large-scale change in shopping habits and distribution networks. For example, Tritax Big Box - the largest logistics REIT focused exclusively on large scale distribution and fulfilment centres in the UK - estimates that a sustained 30% e-commerce penetration could require an additional 65 million sq ft of new warehouses in Britain. Given that Tritax currently owns 58 assets covering 31 million  sq ft the potential growth in demand for logistics assets could be significant.

REITs such as Segro and Urban Logistics REIT have exposure to ‘urban warehouses’, buildings located in and around major cities, ideal for meeting the demands of fast supply chains. These smaller modern warehouses are located close to major population centres and business districts, where space is at a premium, and look set to benefit from the ‘last mile’ distribution networks that could become all the more vital for retailers. Often the most expensive part of the distribution chain, so-called ‘last mile’ distribution is likely to grow in importance as consumers come to expect quicker delivery times, measuring delivery by hours rather than days.