Will Alexa herald a slowdown in logistics?

Ask any investment professional in the UK what the most in-demand property sector is and the majority will tell you logistics or industrial.

The growth of online retailing underpinning occupational demand, driving values and leading investors to build platforms is the industry’s most broadly acknowledged phenomenon.

But could that seemingly insatiable growth start to slow and values in each sector start to look toppy?

A note by JP Morgan Cazenove suggests the rate of growth in e-commerce sales that has transformed the sheds world over in the past decade may start to ease off.

This is tracked back to what is termed “device saturation”. The current wave of consumer technologies is being driven by AI and voice recognition and translated into sales of devices such as Amazon’s Echo Dot and Google Home.

JP Morgan warns these will not drive demand anything like the increase in online sales and uptake of space by online retailers that the emergence of tablets and smartphones have done in recent years.

From 2016 to 2020, cumulative global smart speaker unit shipment is estimated to be 186m, which sounds like a big number, but it is miniscule compared to the 1.6bn smartphones shipped last year alone and the 6.8bn shipped since 2013.

In its research, Storing up trouble: Does device saturation indicate lower UK logistics demand ahead? JP Morgan says: “We believe that historical growth in online retail sales has been driven by device innovation increasing internet accessibility.

“In our view, the next big device category, voice/AI, does not offer the same increase in internet access as previous hardware platform innovations.

“Thus, investors in logistics property stocks should be aware they may be erroneously extrapolating a historical trend whose driver has peaked.”

Voice device retail sales as a share of online retail sales currently stands at 0.1% and is predicted to get to 1.2% by 2020, which JP Morgan points out is “hardly a major disruptive force”.

It adds: “We don’t see ‘Siri/Alexa buy me a red sweater’ ever being a thing.’”

While UK online sales are continuing to grow, that growth is slowing (see graph), as is the growth of smartphones and tablets.

This is linked to a number of factors. According to Eurostat UK, households with internet access now stands at 94%, meaning there is less growth potential than there was and, similarly, the UK already has the highest percentage of individuals using a smartphone  (79%). This suggests the greatest growth opportunities in the logistics sector are more likely to be seen in mainland Europe.

Availability of UK logistics hit a low of 5.9% last year, according to research by Gerald Eve.

And JPM acknowledges that for now demand is outpacing supply but availability ticked up slightly to 6.3% by year-end. However, recent take-up has been driven by the manufacturing sector and take-up by internet retailers accounted for only 5% of take-up last year compared with 21% in 2016.

JP Morgan is not “down” on logistics altogether but it is highlighting that the market is pricing in rental growth expectations that are unrealistic.

“We like logistics – it is one of the sectors, along with student accommodation, flexible offices, self storage and inner-London retail, where we see structural support to rental growth.

“However, we think expectations of future rental growth are potentially getting too frothy,” says Tim Leckie, executive director and analyst. 

“The UK has low vacancy of especially prime logistics space, land is tightly held amongst the large developers and supply is constrained with little, although increasing speculative activity.

“The underlying fundamentals are attractive, but not at any price. We don’t have too many concerns about the sector other than what people are willing to pay for it.”

Richard Croft, chief executive of M7 Real Estate, which is building a multi-billion pound pan-European urban logistics portfolio alongside Blackstone is, however, entirely convinced that rental growth will continue, despite consumer technology trends.

“Rental growth is happening in leaps and bounds and we are seeing £30 per sq ft rents in London and near-record rents in almost every location in the UK,” he says.

The amount of industrial stock, particularly in the urban logistics market, was still pretty much what it has always been and all the traditional users such as trade counter users and light manufacturers, who bash metals and do MOTs, are all still there.

“What you have got is layered and continued demand and yet we don’t have any new supply with increasing demand.”

JP Morgan’s wary view of the logistics market may go against the grain of the overwhelmingly bullish feeling in the market but with investors continuing to pile into the sector despite the extreme price movements already seen, it may be worth prospective buyers considering whether they might have missed the boat and should instead seek out the next structural trend to back.

Is SEGRO overpriced?

The positive sentiment in the market place towards logistics is most clearly illustrated in the listed sector.

SEGRO, the only UK-listed pure play warehouse owner, is set to overtake British Land as the UK’s second largest firm and its share price has soared by almost a third over the past year and it now sits at 646p per share.

“We view SEGRO as expensive at 29.4x 2018 earnings and trading at a 16.1% premium to its last reported net asset value… and rate the stock as underweight on valuation. It’s a good company, well run with an excellent portfolio and to be fair we’ve thought it was expensive since the mid 550p level and been wrong,” Leckie adds.

Perhaps unsurprisingly, the JP Morgan proposition is not one shared entirely by David Sleath, chief executive of SEGRO.

“I think there are plenty of other reasons why online will continue to grab an ever larger share of retail spending.

“Big investments into improving the ease with which online purchases can be made via mobile devices such as improved mobile web page displays, faster loading times, plus investments in data centres and 5G all suggest to me that this online story has a long way to run.

“And, as JP Morgan points out, supply remains tight,” he says.

JP Morgan’s view on SEGRO is not universally shared either. Jefferies, for example, has a hold recommendation on the share despite its surge and last month reiterated its support for the sector. 

“Logistics is an area where retailers can make their greatest efficiency gains; it’s a long way from a warehouseman in a brown overcoat and a clipboard. The agile retailer with real-time data is developing a demand-driven supply chain, leading to leaner production processes and cutting surplus inventory,” says Jefferies managing director Mike Prew.

“The hidden bull market in logistics has seen building prices push yields for IPD grade industrial to 4.75% and below retail at 5.7% for the first time due to the long and strong income streams and dearth of supply.

“SEGRO, Tritax Big Box REIT and Hansteen play different strands of this 21st century property phenomenon, which may have only just started.”

To send feedback, e-mail david.hatcher@egi.co.uk or tweet @hatcherdavid or @estatesgazette

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