Warehouses: the latest boom in the UK real estate sector

A record-breaking area almost twice the size of Hyde Park is slated for construction this year

Last modified on Thu 12 Aug 2021 01.01 EDT

The UK is in the midst of a record-breaking boom in the construction of cavernous sheds to support the soaring growth of online shopping during the pandemic, with floorspace more than twice the size of Hyde Park, London, due to be built this year.

According to research by Knight Frank, nearly 37m sq ft (3.4m sq metres) of warehouse space is slated for construction in 2021, up from 23m sq ft last year and 21m in 2019.

A report by the property consultancy found investment in UK warehouses totalled a record £6bn in the first half of 2021, more than double the £2.7bn recorded in the same period last year, and 54% higher than the previous record in 2018. Overseas investors from the rest of Europe, the US, Korea and China accounted for more than half of the total.

On Tuesday, John Lewis announced it is to lease a 1m sq ft warehouse at Fenny Lock in Milton Keynes from Tesco that will employ 500 people and become the chain’s second-biggest distribution centre after nearby Magna Park.

This latest mega-shed will help the chain keep up with online purchases, which have risen to 60% of overall sales, from 40% before the pandemic. This shift is reflected across the sector as a whole, with online making up 32% of all retail spending in the first five months of 2021, compared with 19% in 2019.

All these sales need to be stored and shipped from somewhere, and some estimates suggest the UK must increase its warehouse space by 14% to meet demand, although for that to happen staff will be needed in an economy that is wrestling with labour shortages.

There are more than 1m open vacancies, according to the recruitment website Adzuna. Such shortages mean that much of the floorspace that Knight Frank identified as being under way will probably be delayed into 2022, meaning next year could be the one that breaks the annual construction record.

Unsurprisingly, Amazon is a major player in the warehouse boom. In July, data from estate agent Savills showed that the online retailer had signed 18 letting deals since the start of the year, compared with 19 for the whole of 2020. Last year’s total will soon be met, according to Property Week, by the signing of a 20-year lease on a 700,000 sq ft site at Magna Park in Lutterworth, Leicestershire, a deal worth a cool £97m.

James Seppala, the head of real estate for Europe at Blackstone, said: “Whilst historically, occupier demand in the logistics sector was closely correlated to GDP growth, the ongoing e-commerce revolution is driving meaningful increases in demand for warehouse space throughout Europe. That in turn is driving vacancy levels to historic lows, resulting in market rental growth.”

It isn’t just about cardboard box deliveries, though. Real estate developer and investor Goodman this week broke ground on a 117,500 sq ft warehouse just to store fine wines on behalf for Britain’s oldest wine and spirit merchant, Berry Bros & Rudd, according to Logistics Manager.

Data centres – which store digital information, process orders and handle shipping and supply chain logistics – are another component of the soaraway warehouse market. The UK has the second-biggest hub of them in the world, after Virginia in the US, based all around the M25.

On former industrial land on the easternmost edge of London, two huge, looming, shiny-grey sheds epitomise this rapidly spreading retail architecture trend.

These modern megaliths, just outside Rainham, were built over nine months by Segro, the UK’s biggest warehouse and data centre builder, with a market value of £14bn. They boast photovoltaic cells on the roof, interior “living walls” of plants to boost staff wellbeing and electric vehicle charging points in the carpark.

One is fully let, to Focus Logistics and the London ambulance service, while in the second, one unit is under offer. On the day the Guardian visits, yet another potential tenant is looking around the other. Nearby, at Segro’s Newham park, two similar structures were snapped up before completion by the logistics firms DHL and DPD.

Segro’s sheds in the east Midlands are even bigger, providing up to 500,000 sq ft of space to tenants ranging from retailers to distribution companies, while its inner city sites cater for “last mile” logistics, the final leg of goods deliveries, and start-ups such as Getir, Gorillas, Weezy and Zapp that supply groceries within 10-20 minutes of ordering.

Private equity groups, led by US firms Blackstone and KKR, are now piling into the UK warehouse market, attracted by rapid growth in rents. Blackstone recently clinched a £1.3bn deal to take over the UK property developer St Modwen, which includes a warehouse arm. Other investors include Cerberus in partnership with Australia’s Arrow Capital Partners, and Apollo.

Canadian real estate investor Oxford Properties has just teamed up with London-based Logistics Capital Partners to develop a 734-acre site near Birmingham into a £1bn logistics hub, with plans for giant sheds of up to 1m sq ft and heights of 30 metres (98 feet).

Meanwhile British Land, one of Britain’s biggest developers, has sold off a large chunk of offices, supermarkets and shopping malls and is buying up retail parks and warehouses around London instead.

Not everyone is so keen on the idea of a mega-shed springing up next door, and there have been several high-profile planning rows. Stockport council threw out a proposal in March by the developer Quorum to expand Bredbury industrial estate into the green belt, with critics arguing the giant warehouses would “ruin the Tame valley”.

Residents in Warrington condemned an 18-metre-high distribution centre built beside their cul-de-sac as an “eyesore” and a “monstrosity”. Meanwhile in Milton Keynes, calls are continuing for a fresh review of the council’s decision to allow a warehouse in Blakelands to double in height from nine to 18 metres, after the consultant whose investigation backed the move resigned.

Local opposition is unlikely to dampen the ardour of global investors for more shed space. Marcus de Minckwitz, the head of the Savills industrial and logistics team for Europe, says: “There doesn’t seem to be a single global investment house that doesn’t have sheds at the top of their shopping list at the moment. There has been a big, intense focus on last-mile and urban logistics, primarily because that is where some of the biggest rental growth will come.”

According to Charles Binks, the head of Knight Frank’s logistics and industrial arm, every billion of online sales requires about 1.4m sq ft of warehouse space, with rents rising alongside demand. In the logistics hotspot of Northampton, for example, they are now at between £7.50 and 7.75 per sq ft, up from £6.50 to £6.75 this time last year and £5.50 before the pandemic. “Deals are being done with no discount at all.”

Binks adds: “For the first time that I can remember we’ve had people that started looking in the north-west or the Midlands ending up taking space in South Yorkshire because they needed the space and couldn’t wait.

“They will compromise on location but not on specification. They want good yards, good height, plenty of doors.”

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