9 minute read
Industrial revolution
Sector specialists and businesses discuss the impact that changing consumer shopping habits and advances in data and digitisation are having on industrial property.
Consumer shopping habits have evolved, driven by advances in data and digitisation, and the surge in online shopping during the pandemic. We speak to the CEO of SEGRO about the effect on the industrial property sector, and hear from Kite Packaging on how shared ownership has been the bedrock of its sustained expansion.
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Ugly duckling to swan
SEGRO plc is a UK Real Estate Investment Trust (REIT), listed on the London Stock Exchange and Euronext Paris, and a leading pan-European developer, manager and owner of warehouses and industrial property.
It owns or manages 9.7 million square metres of space (104 million square feet) valued at £23.8 billion, serving customers from a wide range of industry sectors. Its properties are located in and around major cities and at key transportation hubs in the UK and in seven other European countries.
SEGRO has been creating the space that enables extraordinary things to happen for over 100 years - from modern big box warehouses, used primarily for regional, national and international distribution hubs, to urban warehousing located close to major population centres and business districts, it develops high-quality, sustainable assets that allow its customers businesses to thrive.
As the CEO of a business at the forefront of the industrial property sector, we asked David Sleath, OBE, about how the sector has performed:
“More capital was invested into European industrial property than into offices for the first time in 2021, marking quite a change for the asset class which one might describe as the ‘ugly duckling turned swan’,” he said. “European investment in the sector has surged since 2019, up by over 130%, with investors keen to gain exposure to the capital value and rental growth that has arisen from increased levels of demand for warehouse space and a limited amount of supply, particularly in urban markets where SEGRO has a heavy weighting. "Demand for warehousing, both ‘big box’ warehouses (typically 250,000 sq ft) and ‘last touch’ urban warehouses (smaller units of up to 100,000 sq ft), has been fueled by the emergence of new users of industrial space alongside increased demand from retailers taking additional space so that they can respond to higher levels of e-commerce across Europe.
“This occupier market strength has continued into 2022 with preliminary data (from Savills) showing the first six months of the year had the strongest H1 take-up on record despite the current, more uncertain macroeconomic environment.
“Industrial as an asset class has changed significantly since we last faced a similar market backdrop. Modern, generic warehouses like ours are being used for a huge variety of purposes, particularly urban warehouses which are used to provide often essential goods and services to towns and cities".
Vacancy is at historic low levels and with take-up continuing to be supported by long-term structural drivers – digitalisation, urbanisation, increased occupier focus on supply chain resilience and sustainability – the prospects for further rental growth look good.
For SEGRO, with its prime portfolio of modern, sustainable warehouses in key locations, the outlook remains positive.”
SEGRO plc W: www.SEGRO.com T: +44 20 7451 9100 @SEGROplc
On Amazon’s comments that it has taken too much space, David says: “The pandemic created exceptional circumstances which resulted in retailers having to rapidly scale-up their distribution capabilities to cater to the need for goods to be delivered to our homes. It is only natural that with life back to normal the growth of e-commerce penetration has slowed, but it is still much higher than prepandemic levels, and most European markets are expected to exceed 20% of sales online by 2026 (from CBRE).
“This means there is a significant opportunity for retailers in Europe - both online retailers and also traditional retailers who chose to adopt an omni-channel delivery model to retain their market share. Distribution networks are currently not setup to be able to respond to this and will need to be reconfigured, requiring more warehouse space and likely also investment in automation to make fulfilling orders (and handling returns) more efficient. Just as Amazon isn’t the only e-commerce provider, e-commerce isn’t the only source of demand of our space in setup. The European take-up data speaks for itself with the record levels of take up so far this year and e-commerce being a much smaller proportion of that take-up than over the past two years. We are seeing demand from a very broad range of businesses and industries and the increased focus on supply chain resilience and sustainability is also contributing to the strong occupier demand for warehouse space.
Viewpoint
Head of Lodders’ Real Estate Group Mark Miller, says market volatility means the industrial sector is unlikely to escape economic unpredictability.
“The sector has been susceptible to the same market volatility and head winds as other sectors, particularly in terms of supply of materials and labour.
“The future is all about resilience and innovation.
“There have been plenty of cash-rich and hungry buyers seeking opportunities to grow rents and values in the industrial sector, as well as owner occupiers looking for space. Arguably, interest and demand has never been greater with global capital competing with UK funds for limited available stock.
“In particular, modern distribution warehouses have become highly prized by investors because of strong tenant demand, and limited availability and supply, and this has been reflected in escalating land and deal prices and lower yields in the sector.
“Hybrid working is here to stay, and post pandemic office space needs to evolve. The focus now is on flexible, agile, high tech and high quality working areas that complement home working. Floor space take up and transactions are all rising for Grade A stock, with particularly rapid growth and investment in the tech, media and telecoms sectors. Occupancy levels are now up 25% on 2021 levels.
“Retail continues with its evolutionary change from traditional bricks to clicks. 83% of UK department stores have closed in the last five years, with a net decline in retail outlet closures generally in double figures. Physical stores are having to adapt and change at an exponential rate to the online competitors. “People have been stuck indoors long enough, and still very much want to go out and shop, but now, more than ever, it is about the quality of the experience for the customer.
“It will be shopping, but not as we previously knew it; now it is all about space as a service, and the pandemic has super-charged the need for change. The flexibility afforded by out-of-town retail may be well suited to this changing world, alongside increasing interest and activity in the shopping centre.”
Being a force for societal and environmental good is integral to SEGRO’s purpose and strategy, and the commercial property sector has its part to play in helping to combat climate change:
“The world is facing a climate crisis and businesses need to work alongside governments and consumers to help find a solution,” comments David. “Real Estate contributes a significant amount to global carbon emissions, so as developers, owners and managers of industrial space, we are committed to building our warehouses in a way that reduces their carbon footprint and also helps our customers to operate them more efficiently (for example adding SMART technology and features such as solar panels).
“We are also focusing on biodiversity within our estates, planting indigenous flora and fauna, adding beehives, insect homes etc, helping us to create spaces that support worker wellbeing, and also have a positive influence on the local community. Industrial estates really have undergone a revolution!”
Out-of-the-box
Kite Packaging was founded in 2001 with a unique vision: to be the premier packaging supplier in the UK with a philosophy of employee ownership, and the belief that ‘customer satisfaction matters so much more when you own the business’.
Since then, Kite has grown quickly, and today is one of the UK’s largest distributors of bespoke and standard packaging solutions. Last year, Kite turned over £141 million.
Its seven regional distribution centers – in Coventry in the Midlands, as well as in Portsmouth, Swindon, Sittingbourne, Letchworth, Rotherham and Gateshead - is each fully integrated into its national and international supply chain.
Kite has thousands of customers, from individuals placing a one-off order, to businesses buying large quantities of added value, engineered packaging solutions.
E-commerce
Kite caters to its small and medium sized business customers by supplying stock product and packaging equipment via its ecommerce website, which focuses on a fully stocked range of standard packing products available on next day delivery.
Shared ownership
The company’s Managing Partner Gavin Ashe says that alongside its flexible solutions, excellent customer service, and vast quality product range, much of Kite’s success lies in its employee shared-ownership structure, which means each of its current 400 staff share in the benefits that come from Kite’s great service:
“Kite’s unique strength and the ability to grow comes from its founding principle of being powered by employee share-ownership,” he says.
“Everyone who works at Kite is actively encouraged to become a shareholder in the business, and this has allowed us to let a great many people partake in the wealth creation process throughout the last 21 years.
“Kite’s vision is to do a great job for customers, a great job for suppliers, and a great job for our employee partners. It’s as simple as that. If we do these three things well, we will continue to grow.”
Puma Park
Earlier this year (2022), Kite moved its Coventry operation to a new site at Puma Park, which has been the location of its Midlands hub for the last 21 years.
“This is not a new location for Kite, it is where we have been based since day one. Around 200 people will work at the new site where we continue to provide packaging distribution,” Gavin explains. Gavin Ashe, Managing Partner Kite Packaging
“We simply needed more space for our people and our clients. The expansion into Puma Park gives us this, with around 400,000 square feet in Coventry.”
Time critical
Lodders’ Mark Miller and Donna Bates provided legal advice to Kite on the lease for the new warehouses.
“The transaction was time critical for Kite because of its pressing need for additional premises, together with the lead times for ordering plant and machinery,” says Donna.
“An agreement for a 15-year lease on each of the total three units Kite needed was entered into during the final construction phase in December 2020. The leases were completed in February 2022 after practical completion of the construction.”
