Supermarket warehouses worth more than stores

Some supermarket warehouses are now worth more than their stores as customers switch from visiting shops to online deliveries.

Yields on so-called “big boxes” have dipped below those of the shops for the first time, according to Savills, the property agent.

While high streets and out-of-town shopping centres put up “to let” signs, there is an unlikely property boom along England’s key motorways as huge sheds spring up.

Yield reflects the income generated by an asset on an annual basis, expressed as a percentage of the purchase or market price, so a lower yield denotes a more expensive asset.

Savills research shows yields on prime food shops hit 5.25 per cent in June, against 4.75 per cent for grocery warehouses. At the end of 2009, food stores had 5 per cent yield against 7.5 per cent for warehouses. The statistics track all deals involving three of the four biggest retailers, Tesco, J Sainsbury and Wm Morrison.

Kevin Mofid, research director of Savills, said: “Investors want exposure to retailers through their warehouses rather than their stores.”

Online retail sales are growing at 12 per cent a year and account for more than 12 per cent of all spending, according to the ONS.

The prices of warehouses serving growing ecommerce retailers such as Ao.com and The Hut are also rising as they expand.

Peter Mallinder, investment director for the north at Savills, said he had never known a time when warehouses were as prized as shops. “Yields have been tumbling for sheds. They have traditionally been unglamorous assets.”

The building drought after the recession is partly to blame, but so is the shift by consumers online and towards discount retailers that rely on just in time delivery.

“There are not enough good quality buildings in good locations,” Mr Mallinder said.

From a peak of 94m sq ft in 2009, the amount of logistics space available is at its lowest level since records began, at 22m sq ft.

Now sites such as Omega in Warrington near the M62 are filling up fast. “International investors want to be in Omega and other prime destinations,” Mr Mallinder said. Empty two years ago, the former US Air Force base is now home to five huge warehouses totalling 2.5m sq ft. The Jaguar Land Rover supplier Plastic Omnium is the latest to start building.

According to CBRE, the property consultants, 2014 set a new record with £4bn of “big box” assets (those bigger than 500,000 sq ft) changing hands. The UK logistics take-up as a whole was more than 25m sq ft, a 28 per cent increase year on year and the highest annual figure for a decade.

Discounters are increasingly building their own warehouses to control costs and take advantage of their rising value. Aldi is building a 500,000 sq ft unit in Cardiff, and Lidl has just bought 22 acres in Wednesbury in the West Midlands to construct its own warehouse.

Property companies specialising in warehouses have sprung up as real estate investment trusts, which have tax advantages.

LondonMetric, formed by a merger in 2013, has a mixed portfolio. Its distribution assets have a yield of 5.4 per cent while its retail assets have a yield of 6 per cent, according to Cantor Fitzgerald, the stockbroker.

Tritax Big Box, which listed in December 2013 and is already a FTSE 250 business, buys only big warehouses. It says they are “one of the most exciting sectors in the UK property market”.

Richard Jewson, chairman of Tritax, told the City when presenting his company’s interim results in August that yields had further to fall.

“Big boxes are becoming increasingly central to retail fulfilment, suggesting that yields have the potential to move towards the levels historically applied to prime retail assets.”

Investors are seeking a long-term income — big box leases are typically 25 years — with the scope to gain from price rises. Tritax has raised almost £700m to date and should return 9 per cent a year to investors, says Charles Tan, an analyst at Cantor Fitzgerald.

However, Mr Tan said yields were not likely to fall much further since more warehouses would be built. But given their cost and size there was unlikely to be a “speculative bubble” that would cause a collapse in values either, he said. “Both LondonMetric and Tritax are on to something. If we are stuck in a low growth, low inflation world then it is a solid return from an investment point of view.”