Industrial Talks discusses:
The influence of e-tailing on warehouse demand and the associated rise of
the data centre in association with SEGRO and Savills
James Williams, director, business space investment, Savills
Growing investor interest in distribution warehouses has driven yield compression and seen the sector outperform all other property subsectors, delivering total returns of 5.6% during the year so far (IPD total returns Jan-Jul 2013).
E-tailing growth has put sheds in the headlines as retailers consolidate or reconfigure their supply chains and delivery networks to accommodate changing consumer patterns. Research by Transport Intelligence, in association with Savills, forecasts retailer industrial take-up to total up to 50m sq ft over the next five years, of which 13m sq ft (26%), will be driven by online sales and the consequent expanding UK e-tailing operations.
Positive sentiment is delivering strong investor demand across the spectrum of quality and income length. Against an improving occupational story, the sector is seen as defensive, offering relatively high-income returns, low obsolescence and above-average leases without the rental volatility experienced by offices and retail.
While demand remains strong, a constrained supply of stock throughout Q1 2013 saw low trading volumes at approximately £320m. Volumes picked up in Q2 as premium market pricing encouraged some investors to “cash in”, contributing to a volume of £600m. The full year total is expected to reach circa £1.7bn.
Shorter let units (less than 10 years) with higher yields are increasingly sought after where there is potential for the tenant to remain beyond the term of the lease. These assets are considered relatively high-yielding, and confidence in the ability to be re-geared or re-let has risen because the costs of moving are substantial and the availability of alternative premises is dwindling.
Industrial yields have hardened by between 25 and 100 bps since December 2012 with the greatest movement shown by these short-income investments moving by around 100 bps from circa 8.5% to 7.5% for Grade-A properties in strong locations.
Distribution warehouses offering “middle dated” income of around 10 years have also experienced yield compression of circa 50 bps to 7%.
Long-dated income of 15 years-plus is extremely sought after by UK institutions, and private and overseas investors. Driven primarily by prelets, these assets attract yields of 5.5%-6.5% subject to the desirability of the tenant’s covenant and lease structure.
The sector is seeing increasing overseas interest as “logistics” becomes established as a global asset class driven by a growing awareness of its defensive characteristics and favourable risk-adjusted returns.
Blackstone remains the largest overseas investor into UK distribution property with new sources of capital emerging from the US via fund management houses, including Karlin Capital, Chambers Street and Heitman. There is continued interest from Middle East (Gatehouse, 90 North), Russia (Delin Capital) and Asia (EPF).
Overseas capital is also becoming indirectly exposed to the sector via investments in ProLogis (Norges) and Gazeley (Brookfield).
We expect investor demand to remain strong, buoyed by continuing improvement and confidence in the occupational markets. The ongoing woes of the UK’s high streets could cause sector weightings to shift to the industrial sector with retail-led logistics, cash and carry and trade counters representing an attractive alternative.
In the absence of a loosening supply of suitable investment stock, further yield compression of up to 50 bps is forecast for the rest of 2013 delivering sector-leading total returns.
Andy Gulliford, chief operating officer, SEGRO
In one minute on the internet 204m e-mails are sent, 20m photos are viewed, at least 6m Facebook pages are scrutinised and 1.3m videos are watched on YouTube.
Global storage is increasing rapidly, but the property industry is still only scratching the surface of what the digital revolution can bring. In the UK we have a data centre portfolio covering in excess of 1.6m sq ft spread across four locations and we have more experience than most other landlords. This is a sector that is changing and growing fast and SEGRO is well positioned to expand in Europe.
The majority of SEGRO’s data centres are new-build, high-specification warehouses that are leased to operators such as co-location companies. They, in turn, contract with customers such as banks or major corporates that need data storage and processing facilities in a secure and controlled environment.
We operate at a pure property level. We see the greatest demand coming from companies who want to lease the shell of new purpose-built properties and they are then responsible for fitting out with very technical and high-value equipment.
Data centre usage has the added benefit of being on longer leases – typically at least 15 years – with many on an index-linked basis because, having spent heavily on their fit-out, customers are in for the long haul.
The property basics look simple, but entering the data centre market is not. Customers now demand 99.999% service reliability, or uptime as it is called, from the co-location companies because speedy access to data is critical.
This places a pressure on the co-location provider to ensure power certainty and energy efficiency at all times.Location is key. Developments need to have enough power availability and be away from flood plains, hazardous
uses, flight paths and high crime areas.
For customers, from co-location providers to the major financial institutions, multiple fibre connections are critical because they rely totally on connectivity. The barrier to entry, given the low availability of sites with the right credentials, is high.
With Slough’s proximity to London, SEGRO is playing mainly in the “mission critical” market. A bank trader needs to have excellent connectivity, and speed is essential if they are to secure and back up their deals in a highly competitive market. This distance from the City of London is determined by latency – the time it takes data to travel close to the speed of light.
Yet there is also a view that data centres have an uncertain property future, and that the whole sector will disappear into “the cloud”.
But even the cloud has to store and process its information somewhere and it all goes back to the data centre. Smartphones are simply receivers of information and have no major storage capacity but, given the number of apps people use, this information needs to be stored somewhere. So with the internet forecast to be 30-50 times larger in 2020 than it is today, the prospects for data centres are very healthy indeed.
Data centres also deliver major benefits for the locations where they are built. The cluster of centres in Slough commands a significant part of the UK market overall. They can play an important part in urban renewal, providing quality, sustainable work for Generation Y. Above all, they constitute a growth industry – seeing average annual revenue growth of about 28% over the past five years.
As content travelling digitally becomes ever richer – from video, to music, to online games, Twitter feeds and status updates, the demand for data centres will only grow and those making the demands seem to be getting younger.
The digital age has arrived.
