Industrial real estate as a more profitable alternative to retail properties

Industrial real estate, which includes warehouses and distribution centres, is among the most profitable categories of investment properties. They have the highest yields, at 6.0–7.5% on average, compared to 4–5% for offices, and 5–6% retail. Furthermore, in this category, long-term agreements, often ranging from 5 to 15 years, are possible.

Technological advances have made the prospects of such properties even more interesting. With fully automated goods delivery, in the next 10–15 years, the demand for offline stores will begin to fall whilst that for warehouses will start to rise.

How 13-minute delivery will revolutionise logistics

Personnel costs make up to 50% of logistics costs. When self-driving trucks, drones and industrial robots replace people, delivering goods will become a lot cheaper. Such technologies are currently being tested.

  • In April 2016, the Dutch Ministry of Infrastructure and the Environment tested 12 self-driving trucks, which crossed four European borders and travelled over 2,000 miles.
  • Amazon made its first drone delivery on 7 December 2016 in 13 minutes. Its Prime Air program, currently under development, will deliver purchases of up to 2.3 kg in weight within 30 minutes of ordering.
  • According to the South China Morning Post, Shentong (STO) Express already has robots working around the clock, sorting up to 200,000 goods per day at its warehousing facilities in Hangzhou. This has enabled the company to halve its operational costs and improve efficiency by 30%.

According to Boston Consulting Group, robotic engagement in logistics will increase from 2–3% to 25% as soon as 2025. At the same time, personnel costs will shrink by 20–30% on average, in South Korea, China, Germany, Japan and the United States (US), above all.

Cheaper and quicker deliveries will in turn stimulate online retail. According to Savills, this will make up 20–30% of direct consumer sales by 2025–2030.

George Kachmazov 

Together with my counterparts who work in retail real estate, we tried to calculate how much of the price of a product in a shopping centre was from logistics costs, including rental, freight handling and marketing, and got a figure of 20–30%. In my opinion, nothing will make people leave the house to go shopping as soon as goods can be delivered autonomously.

 

According to Colliers, the volume of web-based B2C transactions in recent years has increased by 20% per annum on average. In 2016, it reached $2.6 trillion. If e-commerce continues growing at this rate, it could reach $5.4 trillion globally by 2020. At the same time, according to research by Prologis, for every additional €1 billion spent online, another 72,000 m² of warehouse space is required.

New requirements for industrial property

Technological advances and a shift towards electronic retailing will change how Industrial real estate, which includes warehouses and distribution centres, are traditionally used.

  1. Larger distribution centres

Self-driving trucks will enable the use of bigger warehouses, which will be constructed at greater distances from each other and from residential districts.

“If you look at the history of development, up until 5 to 10 years ago, a 500,000 ft² building used to be considered a ‘big box’ building. With all that’s going on in e-commerce, now it’s become a million square-foot mega-distribution centre,” Colliers national director of industrial services Dwight Hotchkiss said.

According to the company, one-third of Amazon warehouses in Europe are bigger than 1 million ft² in size, while the size of an average Chinese distribution centre is 1.6 million ft².

  1. Multilevel and multi-storey warehouses will increase in number

According to CBRE, if land costs comprise 50% of the warehouse construction cost, the developer should increase its height and make the building multilevel or multistorey for it to be economically viable. While it is difficult for people to use such warehouses, automation makes storage, unloading and packaging easier.

According to Colliers, the ceiling height at US distribution centres increased by 25% to 36–40 feet between 2006 and 2015. Multi-storey warehouses are common in places where land prices are high, such as Hong Kong, Singapore, Tokyo, South Korea and densely built European markets.

  1. Demand for “last mile” warehouses will grow

As large distribution centres proliferate, the demand for the “last mile” warehouses (from where goods are delivered directly to the buyers) will increase, and same-day delivery will become the new standard for the logistics market.

According to CBRE analysts, such warehouses, which will be up to 200,000 ft² in size, must be located within the limits of a densely populated city to ensure the delivery of goods to buyers within a few hours.

  1. New uses for warehouses

Experts predict a partial crossover between warehousing and retail property. For instance, shopping centres in large US and European cities often have parcel lockers – self-storage facilities equipped with credit/debit card terminals and/or enabled with contactless payments, where buyers take delivery of goods ordered online.

Savills analysts believe that new warehouses must have the possibility to be used differently. As a result, hybrids of industrial facilities, distribution centres and retail, with more space for data centres, photo studios and offices will emerge. Vacant spaces can be let or sublet just like in business centres. Under these circumstances, facilities that can be refurbished to accommodate market requirements will be in higher demand.

The opportunity for investors

According to estimates by Colliers, China, driven primarily by population growth, will have the highest demand for warehousing facilities globally over the next five years, which equates to a need for up to 527 million ft² of new facilities per annum. This is followed by the US (135 million ft²), India, the United Kingdom (UK), Ireland, Australia, Western Europe, Mexico and Turkey. In its Q1 2016 report, JLL recognised France, Croatia, Poland, Romania and Slovakia – countries where prices for such properties run at less than €70/m² – as promising European markets.

George Kachmazov

In the future, retail property will be exposed to serious risks as new technologies change the landscape of commerce. While warehouses are currently cheaper than retail sites, their value (cap rate) will be increase in the next 10 to 15 years and gradually approach that of shops and retail centres. We are already seeing warehousing property gaining ground in terms of potential yields and investment relevance.

 

Tranio recommends investing in warehousing properties that cost upwards of €2.5 million. Cheap properties often have high risks, including an unfavourable location, poor condition, or a small operator that will “eat up” the investor´s profits.

 

By George Kachmazov and Yulia Kozhevnikova, real estate expert at Tranio.com , overseas real estate broker

 

Top photo © PhonlamaiPhoto/GettyImages

About Author

George Kachmazov

George Kachmazov is the founder and managing partner of Tranio.com, an international real estate broker with a catalogue of 110,000 listings and a network of 700 partners in over 65 countries. He is a real estate and investment expert, as well as a keynote speaker at many national and international property conferences. George regularly contributes to print and online media with insight on real estate trends and advice for first-time investors.

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