Open area: The growing subsector of industrial outdoor storage could be a smart addition to diversified real estate portfolios, as the United Kingdom is showing
by Marek Handzel with quotes from Charles Ferguson Davie
Open storage, or industrial outdoor storage (IOS) as it is also commonly referred to, is on the rise in Europe.
Essentially a niche segment of the industrial and logistics sector, IOS provides secure outdoor areas for businesses to store equipment, vehicles and goods that do not need to be sheltered indoors. The most attractive IOS facilities are typically positioned near good transport links and protected by robust security systems.
In the past, open storage would be used to house machinery and large vehicles, for example. Now, however, companies need more space to keep delivery vans or EV charging facilities, which is ideally positioned close to their current warehouses. This means IOS is being driven by many of the same fundamentals as traditional logistics, says Charles Ferguson-Davie, co-CEO and chief investment officer at UK-focused real estate fund manager Moorfield Group.
“There are many traditional occupiers of outdoor storage that do not necessarily need a building for storage, for example those storing building materials or cargo containers. Many of these occupiers have a structural requirement for the storage space and form a critical part of the manufacturing and ecommerce supply chain,” he says.
In addition, says Andrew Smith, a partner at consultancy Carter Jonas, battery energy storage systems (BESS) are becoming a major demand driver for out-of-town sites, while open storage sites also have lower environmental impacts compared to warehouses. This helps when considering sustainability regulations, as well as local urban policies, such as low-emission zones, that are creating a need for more designated vehicle storage areas.
At the same time, says Smith, companies are increasingly looking for flexible storage solutions to manage fluctuating inventory levels and supply chain disruptions. And IOS areas are generally less expensive to lease and maintain, compared with traditional warehousing.
Grant Lonsdale, senior director of market analytics at CoStar Group, sums up the appeal of the subsector by saying that open storage enjoys many of the same structural tailwinds as the wider industrial sector, but with “arguably fewer risks” than the former.
Longer leases
According to CBRE UK, the extension in use of IOS sites has enlarged the occupier base and also led to a need for more sites that slot into supply-chain routes.
This development has come about due to an increasing requirement for delivery drivers to have safe resting stops. This use of open storage to support distribution networks (see box on page 21) has meant lease structures for IOS are now longer and, therefore, attractive to investors as long-income sources. In the past, IOS was associated with shorter and less formal lease terms as it was predominantly used by the construction industry, whose demand for sites would always fluctuate. It is natural, therefore, says CBRE UK, for the subsector to be now attracting the attention of institutional investors, whereas previously it was owned by private investors and owner-occupiers.
Examples of significant deals in the United Kingdom in 2023 include NW1 Partners raising around £100 million (€120 million) of equity to build a £200 million (€240 million) UK portfolio and Tristan Capital Partners purchasing a 22-acre site in Ark Royal, Birkenhead, half of which is designated to be open storage. And in May of this year, Modal, a London-based investment and management firm, announced the formation of a joint venture with Centerbridge Partners, focused on acquiring IOS properties across the United Kingdom. In a statement at the time, the two firms stated that the limited supply of IOS sites had been further reduced during the past decade due to the development of many such sites into traditional warehouses or residential properties, resulting in low vacancy and rising rents.
Strong rental growth
Ferguson-Davie echoes CBRE’s assessment, adding that open storage has not kept pace with logistics rental growth.
“As such, the supply-and-demand fundamentals mean there is scope for strong growth growing forward,” he says. “By investing in open storage, investors can tap into the same mega-trends driving the growth of logistics, while also retaining optionality for future development potential.”
Lonsdale says some areas of the United Kingdom have already witnessed dramatic rent increases. “Anecdotally, rents have more than doubled in prime locations such as Enfield in north London during the past three years, which compares to 25 percent growth in warehouse rents, according to CoStar’s data,” he points out. “As well as offering reversionary potential and opportunities for rent growth through site upgrades, open storage land can be used to generate additional income, such as through the installation of charging infrastructure and mobile phone masts.”
Yields will vary based on site quality and location, says Smith, with prime sites trading at sharper yields than lower-quality sites. Strategic locations near urban centres and major transport hubs have the potential for significant appreciation in land value, he says, as well as positive future rental growth prospects.
Other attractions
A number of other factors underline the subsector’s good prospects. Firstly, says Smith, IOS has a diversified occupier base with many tenants operating in strongly growing sectors of the economy. Secondly, open storage is still maturing and investors have the opportunity to upgrade lower-quality sites, enhancing their value and rental potential — often for a lower capital cost than associated with refurbishing buildings.
In a note of caution, however, he adds: “A major challenge for the [subsector] is the lack of investment performance data that is readily available for the more traditional property sectors, as well as longer-established alternative sectors.”
Lonsdale cites three other advantages for investors considering allocating capital into IOS.
These include the subsector’s low obsolescence and therefore minimal capex requirements, as well as reduced void risks, as empty rates do not apply to land — in the United Kingdom, at any rate. Open storage sites may also be attractive for their sustainability credentials. “Given their limited energy consumption, and flexibility in terms of current use and future uses, a higher-value redevelopment opportunity [could] arise,” adds Lonsdale.
What’s more, says Smith, while still emerging as an institutional real estate sector, the increase in investment transactions in 2023 indicates growing maturity and transparency in the IOS market. This trend supports scalability as more investors recognise and tap into the sector. Carter Jonas estimates the UK market could be worth more than £16 billion (€19 billion).
The assembly of investment portfolios, however, remains a major challenge, given the diverse nature of ownership of existing sites, the need to upgrade many existing sites to attract high-quality tenants, and the difficulties associated with creating new sites. It should also be remembered, says Smith, that the need for specific site qualities, such as concrete surfaces for heavy goods vehicles (HGVs) or specific zoning for BESS, and the difficulty of getting planning permission, could limit the rapid scalability of high-quality sites.
UK leading the way
For now, across Europe, the IOS real estate market remains in its infancy.
“European countries are seeing nascent growth in this sector, with increasing interest from investors,” says Smith. “The United Kingdom is leading this with a number of the early-generation private equity and propcos being based here and with their teams also seeking opportunities across Europe. Whilst most markets are still fairly limited on the data [including the United States which leads this] — there are a number of players, including ourselves, who are openly sharing what is available.”
In its Spring 2024 Open Storage Update report on the UK market, Carter Jonas says the number of enquiries for open storage land it has experienced has continued to rise, totalling 537 in 2023 a near-quadrupling of demand since 2020. The total amount of land required in 2023 was 2,277 acres, taking an average of the minimum and maximum size requirement for each enquiry. “It is important to note that overall demand will be much higher than these figures suggest, as some enquirers will be considering multiple sites, and not all enquiries will be formally registered,” says the report.
As always, it may well be that the early movers in this market will be the ones who end up benefitting the most.
“The IOS sector has been a feature of the UK market forever, in the sense that land has always been used for storage, it just hasn’t been thought of a subsector for institutional investors to focus on and for specific IOS portfolios to be created,” says Ferguson Davie.
“Land was often historically let for short periods pending development, but there is now an opportunity to curate IOS portfolios of greater scale where some of the inefficiencies of granularity can be solved through professional investment and asset management,” he adds.
The subsector will likely remain relatively niche, he adds. But given its strong performance compared with traditional property types, it is now one of those specialist real sectors that will likely be in demand for years to come.
Marek Handzel is the editor of Institutional Real Estate Europe.