Real Estate Investment:Today

Warehouse demand rages on despite Amazon pullback

The UK’s booming warehouse market can withstand a pullback from Amazon, the boss of a leading logistics property developer has said, as ecommerce fuels demand for space.

The ecommerce giant took a quarter of all UK warehouse space leased in 2020 and 2021, but said earlier this month that it had overextended during the pandemic. That announcement wiped about 10 per cent off the value of the largest shed developers in the US and UK.

But Andrew Jones, chief executive of urban logistics developer LondonMetric Property, said that demand was likely to continue to outstrip supply, thanks to a rush to onshore supply chains and the growth of smaller ecommerce businesses.

“Amazon is so good, they are the high priest. But there are lots of smaller retailers playing catch-up,” Jones said. “That’s supplemented by more onshoring, driven by geopolitical events but also black swan events . . . nobody expected a tanker running aground in the Suez to disrupt supply chains.”

LondonMetric on Thursday reported a big jump in the value of its assets, which are mostly warehouses close to city centres. The value of the company’s portfolio grew almost 40 per cent in the year to the end of March, from £2.6bn to £3.6bn.

Shares in the company rose almost 5 per cent to 259 pence following the announcement.

“I’d rather own [warehouse hub] Park Royal than Bond Street right now,” Jones said.

Analysts at Peel Hunt said there was potential for further growth and “the company is extremely well placed to navigate and take advantage of macro changes”.

Companies are already scrambling to find warehouse space closer to their home markets to protect themselves from supply chain disruptions such as those caused by the pandemic, the war in Ukraine or the blockage of the Suez Canal in 2021, Jones said.

Vacancy rates in UK warehouses are about 1.5 per cent, a “critically low” level, according to estate agent CBRE. The supply of new stock is likely to remain constrained because planning approval takes time and sites are hard to come by.

That has pushed rents in the warehouse sector up rapidly in the past year, and put pressure on the supply of available space. LondonMetric’s net rental income increased 8 per cent to £133mn in the year to the end of March. 

A typical warehouse lease lasts about five years, and Jones said that renegotiations taking place now were for rents almost 50 per cent above their 2016 levels.

He predicted rent rises would accelerate in the coming year and that they would probably force out some light industrial businesses that could not afford rents paid by new economy companies.

“Metal-bashers and MOT [test] centres might get pushed out by dark kitchens and q-commerce,” he said, referring to so-called “quick commerce” grocery delivery groups.

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