Real assets

Logistics: retailers’ new front office

Executive Summary

  • The consumer has taken power in the retail industry which has put retailers on the backfoot and caused a structural rethink of the traditional business model. Omni-channel retail1 has emerged as the likely winning model. It requires a seamless supply chain that integrates warehouse and store stock through advanced inventory management software to deliver goods as and when consumers want, which is what they have come to expect.
  • This fundamental shift in the retailer model has required a structural shift in the way goods are transported and managed so that retailers can respond effectively to the modern consumer’s demands. Omni-channel retailer models have resulted in a surge in demand for logistics space. With e-commerce penetration expected to continue to rise, we believe there is pent-up demand for logistics stock that supports the omni-channel retail model.
  • With some warehouses as young as a few decades old not necessarily capable of catering to the demands of the omni-channel retail model, there is increasing concern regarding the obsolescence of logistics assets. However, we argue that the quantum of users requiring the absolute latest in supply chain solutions remains rather small, and that obsolescence risk may be mitigated by investing in a large, diversified portfolio of modern logistics assets in land-constrained locations close to key population centres.
  • There have been differing trends in rental value growth in the US, the UK and Continental Europe, with growth weaker in the latter. However, with further yield compression likely to be limited, we think the pressure on rents will increase as the supply of land for industrial use is becoming scarce and prices have started to increase significantly. As real estate costs account for a limited proportion of the overall cost of supply chains, we think above-inflation rental growth will be achievable in Continental Europe.
  • Ultimately, we see this as an attractive late-cycle investment strategy, underpinned by strong income growth prospects driven by the structural shift in demand that should result in a level of resilience even if a wider economic slowdown materialises. That said, the amount of capital targeting the asset class is significant and stock selection will remain critical to long-term performance, with assets proximate to key population centres and in land-constrained areas expected to have the strongest return prospects.

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