Is open storage the new asset class in the industrial sector?

Drivers of demand and rental growth

With the rapid increase in demand in recent years, there is a significant shortage of supply, most notably in London and the inner south east, but also in many other major urban locations. It is becoming increasingly challenging to meet clients’ requirements, particularly for Class 1 sites, and for longer lease terms (three years plus).

Long-term structural change will continue to drive open storage demand. Currently, the main source of requirements is to support urban logistics, particularly for HGV and van storage. This area will continue to see strong growth over the coming years as home delivery rises further as a proportion of retail sales, and as retailers and suppliers seek ever more efficiency and reliability in their urban delivery models. 

Over the next five to 10 years, a key change will be an explosion in the number of electric vehicles used for last mile delivery, driven by both the market and by legislation. These electric fleets will require charging points (with much of the fleet potentially charging overnight). We believe this will create significant additional demand for sites. 

The market is clearly very dynamic, and we expect the recent strong rates of rental growth in London and the inner south east to continue, with growth potential in other key urban locations.

The current investment market

Open storage is sparking the attention of investors looking for low risk returns. As we have discussed, the demand for sites has increased drastically as ‘last mile’ deliveries have boosted the demand for lorry parking and storage yards. We have also identified a desire among many occupiers for longer leases, often underpinned by a strong covenant.  

Recent investment deals include the 121 British Car Auctions (BCA) site located in Corby. The site, which is surfaced with tarmacadam, has a long lease with a rent passing of £3,241,000 per annum. It was sold to DTZ Investors for £67.65 million, achieving a yield of 4.8%. Another example is Royal London who acquired from Stoford a 35-acre site in Stoke-on-Trent at 4.5%. The tenant of the tarmacked site is Jaguar Land Rover, for use as a car park with 6,500 spaces. 

Deals within the M25 have achieved lower yields at 4% - 4.25% for hybrid (i.e high mix of open storage with some buildings) as well as pure open storage, and a variety of long let sites have achieved the same. Recent deals include Childerditch Industrial Park, Brentwood, which was acquired by the local council at a yield of circa 4.25%. The site included a blend of about 60%-70% open storage.

Open storage has many potential advantages for investors:

• A diverse occupier base – demand from a wide range of business sectors, for a wide range of site sizes, and focussed towards the leasehold market. 
• Long-term structural drivers - structural economic change supports the long-term outlook for occupier demand whilst pressures on urban land use will ensure supply remains constrained. Emerging sources of demand are mainly from companies with strong covenants in sectors with healthy long-term growth prospects. 
• Highly favourable demand/supply balance - with strong occupier fundamentals, rising demand and a very constrained supply, we believe there is plenty of further scope for market rental growth.
• Low void risks - there are minimal void costs as empty rates are not chargeable on open storage land. Any void periods for well-located sites are likely to be short due to the lack of supply.
• Rental uplift potential – achievable rental values can be increased if the land is surfaced, tarmacked, or concreted, and through other improvements such as upgraded fencing. Although this can be expensive to undertake, it can often be justified through higher rents, longer leases and improved occupier covenants. 
• Potential for additional income streams – for example the provision of electric vehicle charging points, 5G/6G masts, and advertising hoardings. 
• Strong sustainability attributes - there is low energy usage (minimal heating, although lighting may be required). Some uses are helpful in meeting broader societal sustainability objectives (for example recycling and vehicle charging points).
• Low management and maintenance costs - as well as minimal obsolescence.
• Flexibility – open storage use generates income prior to the development of a site. It is also a productive use for sites that are not suitable or viable for development, or are heavily constrained.
• Future value uplift potential through change of use - depending on the nature of the site, existing use class, and potential to gain planning consent for a higher-value alternative use. 

The sector’s main weaknesses focus on its (sometimes) poor perception and its lack of transparency around demand, supply and pricing. However, we think this represents an opportunity, with significant potential for open storage to transition to a more mature and distinct property sector. Indeed, the sector is often seen by the property industry as a pure ancillary use, rather than one of fundamental importance to many occupiers.

Demand is increasingly focussed towards high quality, Class 1 sites that are available on leases of two years or more. We think that investment to bring sites up to this standard with a view to longer-term lettings is a key opportunity that can significantly increase rental income. In a world where most occupational types are trending towards ever shorter leases and more flexibility, the ability to achieve higher rents for longer leases stands out as a key differentiator.

Given the significant opportunities, we believe it is only a matter of time before we see the emergence of dedicated open storage property companies that can deliver this product on a more ubiquitous basis.  

All this is not to exclude the opportunistic transient use of development land as open storage. Indeed, this should certainly be considered if a site is suitable and a development start is likely to be more than 12 months away.

Ultimately, we think that open storage should be increasingly recognised a distinct sector within the broader industrial market.