Big boxes are the next growth story

    1 October 2016

    Some time ago my eye was caught by the story of a boy who had taken his father’s credit card and gone on an internet spending spree. It was easy to imagine what was going to come next: he had spent thousands of pounds buying characters for some-computer game, or a new racing bike, or a vast supply of Coca-Cola.

    It turned out he hadn’t gone for any of those things. He had bought a health-centre in Florida. Perhaps he had worked out that with an ageing population of-retirees, the sunshine state was going to need more healthcare facilities. If he managed to avoid being thrown out of the family home-forever, he may actually have made his old man some money.

    Presuming that now he is grown up he has his own credit card, I can guess what he’s busy buying: ‘big box’ distribution centres. As amateur property investors-continue to pile into posh new flats — defying George Osborne’s 3 per cent extra stamp duty levy — I wonder whether they are missing the next big growth story.

    How many times have you heard people whingeing about the decline of the high street? The corollary to this is growth in demand for property assets which serve the new model of online retailing,-namely warehouses and distribution centres. According to commercial property agents JLL the demand for big boxes — those huge tin sheds you see alongside motorways — increased by 18 per cent in the first half of this year, with businesses taking an extra 10.2 million square feet of space.

    ‘There’s a saying in retail that the M1 has become the new high street,’ says Joel Duncan of JLL. ‘Ten years ago commercial property investors weren’t much interested in logistics assets; they were more interested in the glamorous end of market, such as central London office blocks. But there’s been a huge change.’

    As supply struggles to keep up with demand, rents in some areas have increased sharply: more than 12 per cent in Birmingham over the past couple of years. But big-box fans argue that the online retail market is not even close to saturation. In spite of strong growth since the false dawn of the dotcom bubble, only 14 per cent of UK retail sales in 2014 occurred online,-according to the ONS. In food retailing, it was just 4 per cent.

    The upside is that the market for big boxes, unlike posh flats, hasn’t been artificially inflated by Asian investors buying blind at Hong Kong roadshows. It’s a sector that is largely the preserve of-institutional investors. For private investors, gaining exposure to big boxes is likely to involve buying shares in a real-estate investment trust (REIT) such as Segro or London-metric, in which I declare a small shareholding, or in funds run by M&G, Standard Life or Legal & General. Then there’s Tritax Big Box, an REIT floated two years ago and now ranked in the FTSE 250, which invests in nothing but distribution centres. Tritax, in which I also declare a small stake, is the proud owner of 31 big boxes, one of the latest an Amazon distribution centre at Peterborough, and produced a total return of 5.8 per cent in the first half of this year, while the average REIT slumped by 11.7 per cent.

    There are, as always, risks. Distribution and warehousing, or ‘logistics’ as it likes to be called, is a fast-moving industry in which it’s easy to be wrong-footed. A-central-London flat can always be let: you would have to have a still-warm murder victim sprawled on the sofabed not to find a tenant for your Chelsea pied-a-terre. But if your big box doesn’t offer the dimensions or transport connections required by today’s online retailer, you may struggle.

    What will you do with a football-pitch-sized shed if its tenant has decided to move two junctions down the motorway? Big boxes may be booming, but that didn’t stop 6 per cent of floorspace lying vacant in the first half of this year. And commercial-property is less kind to investors than-residential property when it’s empty: for warehouses, full business rates become payable after six months.

    If you want prime national tenants, your shed is best sited in Big Box Land. This is a, well, box-shaped slab of England enclosed by the M4, the M5/M6, the M62 and the A1. In ‘Monopoly’ terms, the Mayfair of Big Box Land lies between Northampton,-Birmingham and Leicester, while its Park Lane is between Hemel Hempstead and Milton Keynes. Enjoy the scenic views along the M1 while you can, before it becomes one long canyon of corrugated steel. Big boxes don’t improve the landscape, but they might just boost your pension.