How equity partners and developers can mitigate some of the current and key issues affecting real estate

David Cunnington and Thomas Bland recently attended Property Week's Industrials and Logistics Conference in London.

This is an overview into the insight shared at the conference by leaders within the industry and Charles Irvine’s perspective on the impact these issues create for equity partners and developers.

Negligence of energy efficiency may lead to “Stranded Assets”

Investors risk holding “stranded assets” if landlords do not plan to target net zero goals in the very near future, explained Charlotte Booth of BE Design. UK govt. legislators are currently set to introduce laws stipulating net zero constructions by 2030 and all commercial buildings to be net zero by 2050. This will leave a significant number of assets completely worthless if they lack the required energy efficiency credentials by this date.

The panel also emphasised the importance of Energy Efficiency from the outset - investors should seek to reduce their own energy costs by investing early in suitable infrastructure that will futureproof their assets against changing legislative demands, instead of spending the ‘bare minimum’ in order to comply with the current standards at any one time.

Charles Irvine is working alongside its client base and equity partners to navigate the key drivers of what the changing carbon usage goals mean for both new developments and existing assets – and crucially, how additional value can be extracted from assets that possess premium energy attributes. We are now seeing a two-tiered market develop organically, brought about by revised specifications that command BREEAM Excellent ratings, which will attract the top dollar from institutional investors keen for exposure into this asset class.

Lack of supply creating “Intensification” of industrial assets through innovative designs

The UK Housing crisis has been well documented in the news and is a key political theme for the government. . An unintended, yet vastly understated, consequence from government policy has been the resulting squeeze on industrial property supply that is needed to service our society-wide consumer desires for instant gratification and an increasingly e-commerce led economy. This has flown almost completely under the radar as media and government focus has concentrated on the ever-present housing crisis.

As a result, the UK is facing a critical lack of industrial supply near major conurbations, even with the recent push to build increasing amounts of speculative industrial property. Nowhere is this more marked than in London, where since only 2000, the capital has lost more than 25% of its industrial space, overwhelmingly to residential, according to the Centre for London think tank.

The effect of this however has been to compress industrial yields to the point that, some residential schemes in London are actually now being shunned for industrial thanks to its increased value potential. Historically low yields are showing little sign of decompression. Occupier demand is driving this and will ultimately be the losers as rents were reported by Fitch ratings to potentially rise with another 5-10% growth expected in the South East in the coming year.

Thus, the suggestion has been to build upwards to create more stacking at industrial sites. Liz Pearce CBE of the think tank Centre for London cited successful Segro schemes in Paris where this has been achieved – but it is not without its complications. At Charles Irvine, we believe the resulting ‘intensification’ of industrial assets can unlock a new avenue for investors to explore innovative solutions to the supply crisis in collaboration with tenants, whilst simultaneously enhancing the value and saleability of projects. This can help retain tenants for longer and secure stronger lease covenants for landlords, leading to more predictable stable and steadily growing cash flows.

Has E-Commerce peaked? And, therefore, is the industrial and logistics story beginning to slow?

We say NO.

One panel participant at the conference stated that in the UK, e-commerce activity as a percentage of total retail reached 30% at the end of 2021 which also coincided with the end of the pandemic. Anecdotal evidence suggests that now the majority of the workforce has, at least partially, returned to the workplace, rather than WFH, that percentage has hollowed (possibly temporarily) to 26%. Coupled with the recent announcement from Amazon that its demand for new warehouse space has also now slowed we ask the question is this blip temporary or permanent. In our opinion, it is temporary. Other new e-commerce entrants to the market such as Getir, also an attendee at the conference, is taking up in slack that might be left by other online retailer who may be reaching capacity. Getir is seeking urban premises as well as space more traditional multi let industrial estates. The demand for warehouse space seems to continue. As demand from one e-commerce occupier slows, another new entrant takes up the supply.

For our clients and equity partners, this means that as the industrial and logistics real estate sector continues to evolve, opportunities for new projects abound and for capital to be deployed by investors in partnership with experienced operators who are at the forefront of sector initiatives and themes.