‘Logistics is the new retail,’ claims Andrew Jones, chief executive of real estate investor LondonMetric Property (LMP).

The significant growth in consumers shopping via the internet has led to the rise in specialist real estate, namely large warehouses that act as distribution centres for online orders.

That in turn has created a growing number of property companies, investment trusts and funds offering exposure to a vibrant industry.

We look at three London-listed products in this article, being LondonMetric, Tritax Big Box REIT (BBOX) and Pacific Industrial Logistics REIT (PILR:AIM).

NEED FOR EFFICIENT DISTRIBUTION CENTRES

The amount spent online accounted for 15.9% of all retail spending in May 2017 against just 5.8% in May 2009, according to the Office for National Statistics.

As a result, retailers face challenges associated with orders being placed via smartphones, tablets and computers as well as physical stores.

The consumer can choose to pick up the online-ordered goods in store (known as Click and Collect) or have them sent in the post, which means retailers need to be good at moving goods around different locations.

Further complicating matters is increasing expectation by consumers that the retailer will offer an efficient returns systems, should they not want to keep the ordered goods.

All this means having plenty of warehouse space from which to sort and distribute products.

Warehouse assets tend to be leased, not owned by retailers. That’s good news for investors who can put money into a range of funds or investment trusts which own the warehouses.

These assets are particularly appealing from an income perspective as tenants tend to strike long-term rental agreements which are often linked to inflation.

THE IMPORTANCE OF LAST MILE HUBS

The growing complexity of online retail and the demand for ever-faster deliveries have led to the establishment of huge central facilities and so-called ‘last mile’ hubs which serve the last line of the supply chain. Locations tend to be close to road and rail infrastructure.

LondonMetric’s Jones breaks down his company’s interests
in this burgeoning space into three categories: big box or
mega distribution facilities which are upwards of 500,000 square feet; regional distribution units which are between 100,000 to 500,000 square feet; and last mile or urban logistics which tend to be 100,000 square feet and below.

Fellow real estate investment trust Tritax Big Box REIT specialises in investing in the very large big box logistics facilities in the UK.

Tritax launched in December 2013, raising £200m and promising a 6% yield and total returns of 9% a year. Its market value is now nearly £2bn. It has raised money on several occasions since joining the stock market including £350m in an oversubscribed placing at 136p in May 2017. This takes the total raised since it listed to £1.4bn.

Proceeds from the latest fundraise are expected to be used within six months to acquire further logistics centres to diversify its tenant base and geographical exposure.

RISING DEMAND, CONSTRAINED SUPPLY

Tritax focuses on big boxes because in its own words: ‘Demand from tenants is strong because big boxes offer them significant economies of scale and cost savings not available from smaller, older buildings.’ It also notes supply of this type of facility is constrained.

As of 31 December 2016 Tritax had 16.5m square foot of built logistics and a further 1.8m square foot under construction. At the last count it had 38 facilities on the books and tenants include Tesco (TSCO), Sainsbury’s (SBRY), Argos, Amazon and Dixons Carphone (DC.).

Its most recent acquisition (8 Jun) was the £92.3m purchase of a WM Morrison Supermarkets (MRW) and Ocado (OCDO) distribution facility near Birmingham. The deal offers a net initial yield of 5.25%.

At 147.4p and up nearly 50% on its IPO (initial public offering) price of 100p, the shares now yield 4.5% and trade at a premium to the net asset value (NAV) per share of 130.57p.

THE LESSER KNOWN INVESTMENT TRUST

At the other end of the spectrum is micro-cap Pacific Industrial Logistics REIT (PILR:AIM) which is focused on ‘smaller single let industrial and logistics properties in key geographical locations’.

Its stock market flotation on April 2016 raised £12.2m at 100p and it raised a further £11.1m in November 2016.

The shares yield 6.3% based on the current share price of 122p and a forecast March 2018 dividend per share of 7.5p. They trade at a slight premium to a NAV per share of 118.26p.

Only one of its properties, The National Distribution Centre in Chesterfield occupied by Butterkist popcorn supplier Tangerine Confectionery, is larger than 100,000 square feet. To date the company has acquired 13 sites for a combined purchase price of £39.5m.

CHANGE IN FOCUS

LondonMetric Property, which has shifted its focus so that around two thirds of its portfolio is in logistics, provides broader exposure to the space than Tritax or Pacific.

It offers a yield of 4.5% and trades at more than a 15% premium to its NAV per share of 146.4p.

Around 45% of its logistics rental income derives from mega distribution assets, 32% from regional distribution assets and the remainder from urban logistics.

The plan is for logistics as a whole to make up 70% of the portfolio in the future. On 30 May, the company announced the acquisition of a 51,000 square foot warehouse near Gatwick in Crawley, a 90,000 square foot warehouse adjacent to Coventry Airport and a 120,000 square foot facility in Huyton on the M62/M57 intersection for a combined £23.9m.

LondonMetric revealed the sale of its last remaining office asset in Marlow for £68.5m on 27 June.

GETTING MORE EXPENSIVE

Jones at LondonMetric says the logistics market is getting more expensive. ‘When we were first looking in 2013 this sector was unloved and there was a lot less competition,’ he explains.

In its financial year ending 31 March 2017, LondonMetric acquired its distribution investments at an average yield of 6.2%.

In the March 2014 year, its acquisitions in this area had an average yield of 7.2% and one of the assets, a Travis Perkins (TPK) distribution centre, had a net initial yield of 8.8%.

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