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Internet retailing increases demand for warehouses

Over the past two decades, the retail sector has evolved considerably to keep up with the pace of digital technology growth, which has changed the way consumers shop.  According to Ofcom, UK consumers spend more online for goods than any other developed country, and retailers are recognising the need to react to the rapid growth in e-commerce, which, in turn, is increasing demand for distribution and storage space.  Following strong output growth of 77.5% in 2014, we forecast warehouses to be the largest and fastest-growing industrial sub-sector in 2015, with output set to rise by 15.0%.

With favourable economic conditions for consumers such as low inflation and real wage growth, retail sales rose by 4.2% year-on-year in July, the 28th consecutive month of growth and the longest period of sustained annual increases since May 2008.  Underscoring the strength of e-commerce, internet sales rose 13.0% year-on-year in July and represented 12.6% of all retail spending.

Unsurprisingly, retailers are lacking space in traditional high street stores to cater for the additional stock storage and distribution space required for internet operations. According to Savills, take-up of logistics space in 2015 H1 reached 12.7 million sq. ft., higher than the long-term average of 9.7 million sq. ft.  Even with this, the first increase in nationwide supply since 2010, supply still remains 77% below levels seen in 2009.  The combination of low supply and surging e-commerce growth has put upward pressure on rents for existing warehouses across all regions, in turn boosting speculative investment.  As retailers continue to expand their internet-based operations and speculative developments play a bigger role, this is likely to increase warehouses construction over the horizon.  This continued strengthening in demand, complemented by an increasing appetite for new build, underpins our forecasts for the sub-sector.

Looking ahead, we foresee output in the warehouses sub-sector growing at a modest rate of 8.0% in 2016, followed by growth of 6.0% in 2017.

By Amandeep Bahra at 16 Sep 2015, 09:46 AM

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