What do you see as the key drivers of investor demand for retail warehousing today?

As with many other investors we have strong conviction about the retail warehouse sector. It offers sustainable income, good rental growth prospects and attractive returns relative to other sectors.

From our perspective, the primary driver is really the depth of occupational demand. Vacancy levels are very low, demand is pretty broad and supply in many locations is now really tight. There has been very limited development and the sector has gone through a period of restructuring post COVID, which has left the more robust retailers. Rents have also largely been rebased, so for the most part you are working off rents that are affordable. All of that gives the sector some very good fundamentals.

Demand is spread across a number of robust sub-sectors, including discount and value retail, food, DIY, furniture and pets however we are not necessarily focused on one over another. For us, it is really about occupational demand within specific micro-markets and understanding why that retailer needs to be in that location.

We certainly favour the sorts of retailers that the internet cannot really replace. Take furniture as an example. People still want to go to a showroom, see the product and physically sit on a sofa before buying it. It is an omnichannel model, where people can buy online or in store, but the physical store still plays an important part in the process.

Another consideration is that retail warehousing tends to be in relatively strategic, well-connected locations that lend themselves to alternative uses over the longer term and is another factor when selecting the right opportunities.

With supply constrained and vacancy at historic lows, how sustainable is the rental growth story?

As a generality, the rental growth story is pretty good, but I think, like all sectors, it is increasingly asset and location specific. It does not necessarily mean all retail warehouses will see the same rental growth potential.

For us, it is about focusing on supply-constrained micro-markets. It is also about affordability over time, particularly important with more index linked leases.

As an example we recently acquired a DFS & Sofology investment in Swindon. The tenant had been there for around 30 years, and had rebased their rent in what we knew was a very profitable store. There was a break in the lease however the tenant had signed up to a two-year rent penalty it. Projected rental levels and store profitability gave us comfort to underwrite the break risk.

How important are foodstore and convenience-led occupiers in supporting retail warehousing performance?

We think foodstores are important, but they are by no means essential to a successful retail warehouse investment.

There are clearly benefits if you are buying a retail warehouse with a foodstore on or adjacent – you have the frequency of visits, relatively defensive spending and the cross-pollination between the foodstore and the other retailers.

But what is more important to us is: is there a sustainable reason for customers to visit that particular location and that particular store?

Is it a use that is difficult to replicate online? DIY is an obvious example. If somebody needs something they are more often than not going to want it immediately rather than wait for it to arrive in the post. There is a sustainable reason for that customer to visit the store.

So, a supermarket next door certainly cannot be a bad thing, and it can strengthen a location, but it is not critical from our perspective.

It comes back to understanding the underlying reason customers are visiting the location.

Will future development be driven by extensions of existing schemes rather than new retail parks?

I think that is an easy yes, for the most part. Planning, land availability and the cost of construction make development extremely difficult.

So, extensions, subdivisions and reconfigurations of existing schemes are probably going to account for most development in the near future.

Where we do see new development, it may be more in the form of smaller, convenience-led schemes. You can also see those working in smaller locations where there will be a relatively small immediate population but a much wider catchment because there is limited competing provision.

We often model on a ten-year hold and it is difficult to predict that far. Development economics could be very different and the potential for redevelopment could be a consideration for the next purchaser.

Therefore, site configuration and developability are still things we focus on, even when looking at long-income opportunities. Ideally, you want to buy something that works as an investment today but also ticks that box in terms of having wider potential over the longer term.

Which occupier categories are likely to drive the greatest demand for space over the next five years?

Demand is relatively broad at the moment and I think we would expect it to remain that way. Discount and value should continue to be important because there does not seem to be any lessening of customers’ appetite for value. Food and convenience operators such as Aldi are also continuing to look for representation and expansion opportunities.

It may not necessarily be about new stores, but rather about protecting market share. Our experience is that some retailers will protect their position fairly aggressively and actively seek renewals or extensions of their leases far from expiry. That is particularly relevant in Scotland, where retailers do not have the same security of tenure. With very limited new stock being built, losing a good location can mean losing market share without a re-site option.

Retail warehouses are now becoming quasi-distribution warehouses in a way. You have the public coming through the front door, but occupiers are also effectively selling out of the back door through click-and-collect. They can act as a fulfilment centre as well as a traditional retail store, which makes them increasingly useful to an omnichannel retailer.

Ultimately, though, our approach is “buy the asset, not the sector.” We have conviction about retail warehousing, but like any sector it is evidence-led and selective. It is about buying the right asset and tenant in the right location, with the right demographics, the right level of rent and ideally a site with flexible options.