UK Real Estate: Focus Is Shifting

Amid the pandemic and a significant shift in consumer activity to the online environment, the UK online retailers' need for warehouse space has grown, and owners have opted to manage flexible office space themselves.
The 2020 boom in e-commerce not only provided economic support to UK retailers and manufacturers, but also helped construction businesses, warehouse operators and brokers.

Investment Inflow

Global giants such as Blackstone Group Inc. and Prologis Inc. have entered the UK market and are building logistics parks across the country. National developers have also stepped up their game: The British real estate investment trust Tritax Big Box REIT is building Europe's largest four-storey Big Box-type warehouse in Dartford (32 km away from London), which is scheduled to go into operation in the summer of 2021. All 213,700 square meters of the warehouse has already been leased by Amazon.com Inc. for its upcoming expansion.
Construction site of the future warehouse. Dartford, UK
CBRE estimates that £1bn (USD 1.27 bn) spent online require 88,300 square meters of warehouse space.

Increased Demand for Warehouses

The increase in rents for warehouses in the country has outpaced that for office and retail premises since 2016 (see Dynamics of rents for warehouses, office and retail premises).

In Q2 2020, demand for warehouses increased from 727,400 sq.m to 1,187,300 sq.m. 50% of spaces are rented by online stores. However, they are not the only ones interested in warehousing: traditional retailers are ramping up online businesses to adapt to the post-pandemic consumer economy. Some retailers have announced partial closures of department stores and job cuts.
Konstantin Fomichenko
Director of Industrial and Warehousing Property Department, Knight Frank
"In Russia, the demand for warehouse spaces initially fell down, but after the lifting of quarantine measures it began to recover and returned to 2019 levels - primarily due to two segments: e-commerce and grocery chain retailing. The COVID-19 pandemic and the resulting self-isolation measures have pushed the online commerce segment forward. Increased retail sales are in their turn forcing investments in logistics infrastructure. In the first three quarters of this year, investment in warehouse assets reached RUB 26.6 bn - this is six times more than in the same period last year. Such dynamics is explained by the specifics of the warehousing segment which survived the pandemic best of all and the demand of core investors for high quality warehouses."

Owners of Premises Take Control

They tend to be more involved in the management and development of office space and therefore are more likely to enter into co-management agreements with operating companies. While these agreements impose more responsibilities on the owners such as equipping the office space, they also allow them to increase their share of rental income.
25%
of all contracts in London with major UK office space operator Knotel are co-management agreements.
It should be reminded that previously the relations between the property owner and operating company were mainly regulated by the rental agreement, under which the operating companies acquired the rights to manage the premises and to sub-rent them as a flexible office space. In this case, owners often made small profits while maintaining high risks, as the market for flexible office space does not easily adapt to economic shocks (see How rental and co-management agreements work).

It is worth noting that in recent years, there are also owners of premises who seek to create and to manage flexible office space on their own, without engaging intermediaries. They mainly target employees of small and medium-sized businesses or freelancers. Thus, they create competition for large operators, and customers have more opportunities to choose comfortable office space.
42%
of UK shoppers preferred online shopping vs. traditional stores even before the pandemic making the country a leader in e-commerce in Europe
Olesya Dzyuba
Head of Workspace Management, JLL
"In Moscow, there are no partnerships between property owners and flexible space operators yet. Nevertheless, there are cases when large owners set up their own flex operator. For example, Space 1 by O1 Properties and Business Club by Capital Group are opening flexible spaces not only in the buildings of their portfolios, but also on third-party sites."
E-mail: pressprom@mos.ru
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