Nevermind West End shopfronts and Mayfair offices. The big money in London real estate is chasing small warehouses.
Rents for the dwindling amount of industrial space inside cities are soaring as online retailers like Amazon.com Inc. seek local hubs to cut delivery times. That, in turn, is luring some of the world's largest investors, from Blackstone Group LP to Singapore's GIC Pte.
The Amazon effect first reached big-box warehouses, those located outside of town that can span the size of 15 soccer fields. Now urban warehouse space is succumbing, upending the commercial property market's long-standing hierarchy.
"We bought an industrial estate recently," said Andrew Jones, chief executive officer at LondonMetric Property Plc, a real estate investment trust that made an early bet on smaller warehouses. "I was thinking, wow that's expensive. But then again, we think we can get the rent up 50 percent or maybe more."
In Burlington Arcade, the covered gallery of upscale stores that emerges from Mayfair onto London's Piccadilly, a hand-carved Monopoly set is on sale for 3,500 pounds ($4,604) alongside gentleman's brogues at 640 pounds a pair. Five miles south, in the Balham district, builders driving white Ford vans idle outside the Plumb and Parts Centre on Zennor Road, a 40-minute drive and a world away from the luxury stores of the West End.
Yet when the brick sheds with corrugated metal roofs at the Zennor Tradepark went up for sale, the buyer paid a higher multiple of the rents the property was generating than the investor who purchased the stores of Burlington Arcade.
DTZ Investors, which bought the warehouses for the Strathclyde pension fund, is betting it can jack up rents as leases come due, portfolio manager Sarah Bell said in an interview. Amazon leased two warehouses at Zennor Road at rents about 60 percent higher than those paid by tenants on existing contracts.
The online retailing giant is testing the Amazon Flex service, where local people are paid to make deliveries as self-employed drivers. Amazon alone accounted for a tenth of all of the space in U.K. warehouses leased last year, according to data compiled by Savills Plc.
Blackstone, the world's largest real estate investor, rode the big-box wave, taking just six years to build a business housing large European warehouses before selling it to China Investment Corp. for 12.25 billion euros ($14.3 billion). That success lured other investors, encouraging more development and raising the risk of oversupply given the relative ease with which such structures can be built in out-of-town locations.
Fresh from that sale, Blackstone is betting on smaller warehouses in big European cities, a segment less at risk of over-development. It's already invested about 4 billion euros. Singapore’s sovereign wealth fund is also muscling into the market. GIC's European warehouse unit announced plans to start buying urban industrial properties late last year.
"As consumers increasingly expect same-day delivery of goods, logistics and retail occupiers are shifting their distribution strategies to focus on urban, last mile-relevant locations," said James Seppala, Blackstone's head of European real estate.
"Now that Blackstone has confirmed that light industrial really is the sexiest sector in the world, it may become self-fulfilling"
As in many of the world's biggest cities, politicians in London are under pressure to build more homes to alleviate a shortage of affordable housing. In recent years, that's encouraged local governments to accelerate the sale of urban industrial land for housing development. A report published by property company Segro Plc last year found those policies risked a severe shortage of space for commercial use, particularly given the rise of online retail.
Take the Nine Elms district on the south bank of the River Thames. More than a million square feet of warehouses are being replaced by dozens of luxury apartment towers, the new U.S. embassy, upscale restaurants and stores. London Mayor Sadiq Khan responded to concerns about a loss of commercial employment space with a new draft London Plan that seeks greater protection for industrial land, making it harder to covert to other uses.
Shrinking land and increasing values are spawning new approaches to warehouse development. At Peruvian Wharf, about 2.5 miles east of London's financial district, GLP Pte Ltd.'s Gazeley unit is planning London's first three-story last-mile logistics center. Each floor will have about 140,000 square feet of space, more than double the size of the average soccer field, and be accessible to trucks via a series of platforms.
Gazeley bought the site from a residential developer that abandoned plans to build apartment towers after the city's shift in planning policy. But there are signs that industrial values are rising so fast that in some parts of London land may be more valuable for warehouses than homes, even without government intervention, said Alex Verbeek, Gazeley's U.K. managing director.
"There is a re-weighting" by pension and sovereign wealth funds who have been cutting the number of stores and malls in their property portfolios and buying warehouses, Verbeek said.
That's partly a reflection of Blackstone's record of profitable real estate bets and the fact that urban warehouses are typically small enough that even modestly sized pension funds can compete for them.
"Now that Blackstone has confirmed that light industrial really is the sexiest sector in the world, it may become self-fulfilling," said Richard Croft, chief executive officer of M7 Real Estate LLP, which is partnering with Blackstone in its last-mile logistics strategy.
