To say the global coronavirus pandemic has shocked the global economy would be an understatement.
The International Monetary Fund (IMF) has forecast a slump in output to rival the Great Depression, and we are mindful of how an economy characterised by uncertainty is likely to affect investor’s short to medium-term outlook.
As the day-to-day impact of Covid-19 shrinks, some investment classes will emerge stronger than others and we anticipate one of them will be industrial property. Here’s why:
Investors remain hungry for income
We are living in an increasingly low yield investment environment. Corporates are postponing dividend payments, interest rates are the lowest they have ever been and yet investors are hungrier than ever for income. The income component of the return offered by real estate has always been very attractive to investors but even that is now under threat with an increasing amount of tenant default anticipated over the coming months.
The industrial sector, in our opinion, provides the most attractive risk-adjusted return across real estate due to the diversity of its tenant base and a healthy supply-demand dynamic, which means vacancies are unlikely to be sustained for long.
Online retail is growing faster than ever
The online retail sector has benefited from a captive market of stay at home consumers. Dixons Carphone has reported growth in online sales of 166 per cent, while grocery sales were said to be £524m higher in April this year than they were 12 months previously.
It seems likely that the growth of online retail will continue to accelerate over and above what it would have done had we not been faced with a global pandemic. Our reliance on online retail is growing at a rapid rate and we have seen several years’ growth of online shopping condensed into the last month or so. We also expect some retailers which have typically relied on brick and mortar alone to initiate an online presence.
The ease and reliability of online shopping will mean many shoppers will not return to physical retail once the lockdown is lifted. This will boost demand significantly in the industrial sector, bringing with it long-term requirements for varying types of warehousing and industrial units.
Diversity of demand can insulate the market
There are many sectors of the economy that have been negatively affected by the challenge posed by Covid-19, however, others have fared reasonably well aside from online retail. The diversity of demand across the industrial sector insulates the market at challenging times.
We have seen an encouraging level of enquiries in the past few weeks from sectors as diverse as marketing and printing companies to food wholesalers and building supply companies. Certainly, there are also occupiers which are struggling but, at this point, it feels that demand is strong enough to absorb any vacancies driven by tenant failure.
Supply chains are shortening
Even before the word coronavirus had entered our vocabularies, British industry had already begun to grapple with the likely impact of Brexit on its supply chains.
Many businesses, particularly those in engineering and manufacturing, have very complex supply chains. Their heavy reliance on ‘just in time’ (JIT) deliveries from overseas before the pandemic will have almost certainly caused them issues over recent weeks.
Consequently, we believe that manufacturers may look to bring some of their end-of-line processes onshore. The concept of ‘reshoring’ certainly isn’t new but the current climate is likely to accelerate that vision as companies look to reduce the risks associated with keeping their full process overseas.
Logically, businesses which have felt the strain over recent weeks will be keen to increase their stock levels to minimise risk from similar situations in the future. This will further increase demand for warehouses.
The supply-demand balance is favourable
The robust nature of demand outlined above is only one side of the equation when it comes to industrial property investment. Supply of available industrial units is limited and development of new accommodation is likely to be constrained by the Covid 19 crisis. Yes, tenant failure may lead to some vacancies, but we do not think that this will significantly increase supply as the new sources of demand outlined above counterbalance this possibility.
The resilience of the income from the industrial sector is very attractive to investors. It is protected – not without risk – but protected by the market dynamics. There are few other real estate sectors or asset classes which offer this more than industrial property.
Chancerygate offers freehold industrial and warehousing units for sale in strategic locations across the UK. Our asset management team currently manages £220m of assets across 4.9m sq ft of commercial space in more than 350 units. To view our latest developments, click here.