Dramatic TV images of COVID-19 vaccines being air lifted to the UK from European factories mean the airfreight sector has never felt more significant. What was once just a boring ordinary supply chain is now a matter of life or death.
It is also a matter of politics. Exiting the European Union will impose red-tape and additional checks on inbound and outbound freight. Until April, those effects are muted by opt-outs, but soon they will tell.
The combined effect of pandemic and Brexit is to mute trade volumes: compare December 2020 with December 2019 and there is a dip, but by no means a cliff edge. Total tonnage carried to UK airports fell from 202,100 tonnes to 187,600 tonnes.
This resilience helps explain an airport logistics property market that continues to soar. High rents, high yields and high investor interest are the tell-time signs of a sector at cruising altitude. Around Heathrow and the East Midlands airport, air freight property has become a distinct and competitive sector. To a lesser extent some modest activity is visible around Glasgow, Manchester, Stanstead and Gatwick airports.
Aberdeen Standard Investments’ Airport Industrial Property Unit Trust (AIPUT) has an unwieldy name, but an enviable reputation for spotting opportunities for potential airport property investment. They have been patrolling the skies since 2005 and have amazed a £630m portfolio. Their portfolio reflects the locations with the most obvious appeal to tenants. Of the 2.3m sq ft in their ownership, no less than 2.1m sq ft is around Heathrow.
In a tight market – tight because airport-proximate sites are scarce and expensive – investors like AIPUT have often chosen to become developers. It is a measure of the sense of security airport property delivers that they are prepared to take on the additional risk this involved, and a measure of their canny approach that they can claim the developer’s share of the profits, as well as the investors’ income and capital growth. This kind of airport development offers investors a double whammy of air freight wins.
Last month AIPUT announced lift-off for the second phase of City East, the air cargo facility south of Heathrow. The 117,000 sq ft development will add to the 250,000 sq ft first phase, both of them pre-let to ground handling and cargo giant dnata.
Due for completion by early October 2021, the new building has been designed to meet the operations requirements of dnata as the largest off-airport cargo handling operation at the UK’s primary commercial aviation hub.
The City East deal followed a spate of airfreight-related activity at the former Nestle factory site at Hayes, on the airport’s perimeter. The 30-acre site secured a 97,600 sq ft pre-let which inspired developer Segro to set the wheels in motion for a further 141,000 sq ft speculative development.
Today £16 a sq ft would not be unreasonable or unusual rent for Heathrow-related logistics floorspace, and in some cases this could feel like as bargain. High and rising rents around Heathrow help to make some unusual developments viable. At least that is the theory. In 2017 planners granted permission for a 1.9m sq ft underground warehouse at Hounslow’s 110 acre site at Rectory Farm. Ground works began in November 2019.
The warehouse, on the A4 Bath Road/A312 Parkway near Heathrow, was expected to be marketed to a single user attracted to a large unit close to the airport and central London. The premises are expected to appeal to those with highly automated systems, food/cold store or those seeking additional security.
Meantime overseas investors are jostling with AIPUT for a slice of the market, a sure sign that more development will follow.
Canadian giant Oxford Properties, which presides over a £4.7 billion property portfolio, is among those claiming a share. They control a site immediately adjacent to the east of London Heathrow Airport perimeter, one of the world's busiest international passenger and cargo airports, and a prime location for logistics real estate with excellent connectivity to Central London and the rest of the UK via the nearby M25 and M4 motorways. It is part of a £3 billion (and counting) play in the European logistics property sector.
The air freight sector is likely to grow for some kinds of goods, and some destinations – and this will produce further demand for Heathrow logistics floorspace.
Research by Steer with support from Heathrow Airport Limited, Manchester Airports Group and the Freight Transport Association shows some of the directions of travel which in this case, is not a metaphor: the direction of travel is across the Atlantic.
In the days before the pandemic more than 30% of air freight was carried on routes to and from the US. Generally, this is high-value trade: non-EU international air freight accounts for just 1% of UK trade volumes, but as much as 40% of volumes amounting to nearly £90 billion. A lot of this value is accounted for by the export of pharmaceuticals, which amount by value to approaching £14 billion.
And so the air freight story ends where it began: with vaccines and the pandemic. For airport logistics property, this adds up to more demand and rising prices in a sector which, far from being damaged by the pandemic, has proved its value and its future.
Could the air freight logistics sector grow in other UK regions? The answer is a hesitant maybe.
Airfreight volumes outside the London Airports and East Midlands are small. For instance, East Midlands handled more than 40,000 tonnes of freight in December 2020. Manchester, the UK’s third largest airport by passenger numbers, handled just 5,000 tonnes, and Birmingham barely 2,000 tonnes.
Even East Midlands’ large freight volumes do not necessarily translate into a large air freight warehouse requirements. This is because freight is quickly moved on to other Golden Triangle hubs, or direct to more distant customers.
This is not to say regional air freight warehouse markets do not exist. In the first few days of March one specialist last-mile and e-commerce logistics investor, Warehouse REIT, bought a modern multi-let warehouse estate on Glasgow Airport Business Park, Glasgow, totalling 55,600 sq ft. The purchase price of £5.3 million reflects a net initial yield of 6.3%.
Glasgow Airport Business Park is a runway’s length from Glasgow Airport, approximately 9 miles west of the city centre. Importantly, the business park is located within one minute’s drive of the M8 motorway, Scotland’s busiest arterial route.
The appeal for investors is, however, not limited to air freight. Deals like this happen because the airport adds to a site’s range of attractions, not because it dominates them.
Andrew Bird, Managing Director of Tilstone Partners who advised on the deal, explains: “Glasgow is one of the UK’s most dynamic cities, with a growing workforce. Given ongoing e-commerce demands and a vibrant occupational market, it is forecast to see strong levels of warehouse investment activity and rental growth.”
This is the pattern around most regional airports where proximity to the airport is more often a plus, than an essential must-have.
Being close to the airport is part of the calculation for many logistics-related business: the The Hut Group’s 168,000 sq ft warehouse in Manchester is a case in point. The site next door is being developed by Icon Industrial and is in turn next to Manchester’s World Freight Terminal. Their latest scheme involved 138,375 sq ft warehouse on the 45-acre global logistics area, part of the airport’s enterprise zone. The entire project has outline planning consent for 1 million sq ft in units up to 434,000 sq ft.
Gatwick also attracts developer interest, although here build-to-suit predominates. Among those schemes clustering around the airport and along the M23 corridor is St Modwen’s 100,000 sq ft development let to Gatwick airport itself.
Regional airport logistics space can command premium rents compared to others in the neighbourhood, but the premium is by no means as great as that around Heathrow.
Developers agree. Tritax Symmetry managing director Andrew Dickman explains: “There is a real premium for floorspace within the airport’s red line, for bonded warehousing and fast-moving transit space. For floorspace closer to the airport you might be looking at a 10-15% increase on the rentals. But the market does not move seriously out of step with the rest of the local logistics property scene.”
Turbulence in the air
The coronavirus pandemic has slashed international travel to a minimum, and in the process wiped billions off the profits of the major airlines. With flights limited, and freight capacity therefore down, how can the air freight sector survive?
The answer seems to be, by adapting. Before the pandemic the majority of non-EU international freight reaching the UK arrived in the belly of passenger flights: roughly 137,000 tonnes on scheduled passenger flights out of total freight of 202,000 tonnes in December 2019.
Turn the clock forward to December 2020 and with passenger flights now severely reduced, and the comparable volume on scheduled passenger flights is just 55,000 tonnes. The volume of scheduled and charter cargo flights has increased appreciably. For instance, chartered cargo accounted for just 1,213 tonnes in December 2019, but had soared to 29,469 by December 2020.
Meanwhile, freight volumes have increased at some regional airports. East Midlands’ freight volume is up from 26,000 tonnes to 41,000 tonnes if you compared December 2019 with December 2020.