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The Savills Blog

UK retail warehousing may not stay cheap for long

The UK commercial property market continued to be a magnet for international investors in 2018, with comparatively high yields and strong occupational markets supporting a continued in-flow of capital. However, one segment of the market that has remained below many non-domestic investors’ radars is retail warehousing.

Last year only £413 million was invested into the sector by non-domestic investors (21 per cent of the total), the lowest level since 2011. However, we believe that 2019 could see this trend change, as opportunistic and income-focused investors in particular are attracted to a sector that has seen prime yields soften by 100 basis points over the last 12 months alone.

The most commonly cited reasons for not investing in retail warehousing are that "it's a specialist sector and we are generally nervous about retail". However, in the wider context of the structural changes that are sweeping global retail, the niche aspects of retail warehousing may actually be its strength.  

We believe that bulky goods retail warehousing in particular is the most defensive element of the market, against the rise of online shopping. The large and comparatively low-rented units, combined with very high car parking provision, means that retail warehousing is ideal for servicing click-and-collect orders, customer returns and home deliveries. Strong evidence for this was seen in the US where store pick-ups accounted for nearly a third of online sales last November and December (the UK figure is approximately 12 per cent).

Furthermore, the low occupational costs in comparison to the high street, support retailers’ margins.  We have seen evidence that the type of goods that are sold from these parks have proved to be less affected by internet retailers than more mainstream sectors such as clothing and books – see chart below. 


UK: online penetration by sector, 2018 vs 2023

Additionally, we have seen the inclusion of leisure amenities such as restaurants, cinemas, and gyms on larger parks, which increases dwell time and improves the shopper experience.

The prospects for the sector are also supported by a very restrained development pipeline, as well as planning policies that discourage the development of new out-of-town retail schemes. This generally will limit the likelihood of increased competition being delivered in the same catchment area.

The combination of tight supply, internet defensiveness, low rents and substantial repricing should be of interest to investors. It is also a sector of the market that delivers a comparatively high income return, with average yields currently at six per cent for prime open A1 units with income secured against long leases. Investors should focus on parks that dominate their catchments.



Further information

Read more: UK Commercial Market in Minutes 


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