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Warehouse property development undeterred by recession

David Thame talks to British Land, one of the UK’s largest shopping centre owners, about developing sheds, not shops, and why recession won’t throw them off course

You probably know British Land better than you think. From Meadowhall in Sheffield to Drake’s Circus in Plymouth via a £3.9bn portfolio of retail parks, British Land has for decades dominated mass-market retail in the UK. Now, having already begun to explore the office market, British Land is turning its fire-power on warehouse property development.

It is a smart move from a business with a history of smart moves. British Land chose to gamble of out-of-town retail parks at a time (a decade ago) when many investors thought their time was up. BL turned out to be right that consumers still liked to take the car some purchases, and the pandemic proved that spacious out-of-town locations were still more than needed.

BL is entering the warehouse property development market relatively late in the economic cycle – many of their rivals have been in the game for several years – but they are sure to have an impact. It has already amassed a 2.8m sq ft warehouse property development pipeline, worth perhaps £1.3bn, and recruited Logicor high-flyer Mike Best to head the logistics property team.

Lack of last mile warehousing 'isn't going away'

As Best explained, the reason British Land is confident that its warehouse property will survive a recession because it has chosen to focus on urban logistics, mainly in the London and South East. Demonstrable lack of supply of smaller last mile (or last few miles) warehousing faces continuing and growing demand from 3PLs, retailers and parcels firms. It is exactly the kind of market property developers like.

“The trends we are seeing in urban logistics, especially in London and the South East, aren’t going away,” Best explains.

“What British Land brings to this is the competitive advantage that we are used to intensive warehouse property development of urban sites, and to diversifying property to meet new needs. So, for instance, we can reposition retail space in Thurrock to be part warehousing, part retail – or take a site on the Old Kent Road in London and do the same.”

The hunt is on for sites around London which offer opportunities to intensify the amount of floorspace on site, and to create the kind of retail-meets-sheds-meets-life schemes that BL thinks it can handle best.

Best prefers not to say how much they have to spend, although we can be fairly certain it is appreciably north of £100m. But he points to warehouse property developments in Wembley and Sheffield, both of which total around 600,000 sq ft and are moving forward rapidly (the Sheffield scheme in September). BL will pick off opportunities where it can find them, he says.

“It’s all about the opportunities,” says Best. “The focus is on London, because that that is the market where we can create most value.

Retail parks are primed for redevelopment

Whilst he sees plenty of good bets outside London and the South East, for now Best's focus remains on warehouse property development in the capital. "We have a bit British Land portfolio of retail parks, and where the property values for retail parks and urban logistics converge, then there are opportunities to reposition those assets for logistics.”

Retail parks – the kind that boasts a Currys, a Next and a Home Bargains – often have ideal locations for urban logistics. With their main-road frontages and large open sites close to plenty of homes, they are almost perfect for parcels operators.

“We’re waiting for the point where the values cross over,” says Best. For now that moment is in the distance: retail parks are, post-pandemic, enjoying a surge in popularity with investors, meaning their capital values are keeping pace with those of urban logistics sites. But one day soon – if inflation and recession kick in – that relationship could flip. It already has in London and the South East, and the next most likely location is around Greater Manchester.

“In and around North West we are probably approaching the same kind of parity of values between retail parks and urban logistics that we have in London. But beyond that, it is not yet happening,” says Best.

“Manchester is definitely of interest to us, and if we found something that works for us we’d buy it – Manchester is clearly the next logistics step because it has many of the same economic characteristics in London, albeit in a less compelling way. But for now we still have plenty of opportunities to deploy capital to buy in London.”

How will a looming recession affect warehouse property development?

The big question hovering over the urban logistics sector is the extent to which a spiralling inflation and a looming two-year long recession will curb consumer spending. If it does, then the volume of warehouse space needed will grow more slowly – or perhaps shrink.

Early evidence suggests online retail is fairly resilient to economic shocks: some observers think it may even benefit as consumers shift purchasing from expensive shops to cheaper online stores.

But in the U.S. there is already concern that has been too much warehouse property development – Amazon’s expansion appears to be slowing – and the same trend may soon be apparent in the UK.

Best says he sees no sign of the urban logistics market cooling – yet.

“The occupational market shows no signs of a slow-down, and if if there were British Land is not investing for the short-term, but for the long-term, and the undersupply of urban logistics floorspace in London is long-term,” says Best.

“We believe in the urban logistics market – even if high street retail cools, we might see more consumers shifting online. Changes in demographics also support the urban logistics market – like the number of older people, many of whom now shop online. Nothing is recession proof, but we believe in our strategy.”

One outcome of a tighter more cost-focused retail supply chain may be speed-up the two decades long march towards multi-storey warehousing. Segro are now building at Park Royal, Industrious are on the job at Barking and Dagenham, and it is an area that British Land is exploring too.

Futureproofing is a key word for BL. By going multi-storey they hope to create warehouses than can outlast today’s market and serve in tomorrows. By keeping an eye on their retail parks  and carefully marking the moment when they will earn more as warehouses than as shops, they are futureproofing their property portfolio.

BL’s strategy is long-term – it will take years to reach the kind of eight- to nine-figure volumes of square feet that make it a dominant player. But they have the resources – the land – and the expertise to do it. Watch this (urban logistics) space.

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