Investors targeting the red-hot shed property scene have been warned to diversify to mitigate risks of overpricing and to lever the full depth of the industrial and logistics market landscape. According to Savills IM, that is going to mean putting the market into cold storage — literally.

Savills IM’s report, Thinking Outside Big Boxes, concludes that 8% annual growth in the European cold storage sector could see it grow to $113B by 2025, up from $75B in 2019.

Many global markets are acutely short of cold-store floorspace. Australia has roughly half the cold-store capacity it needs, and U.S. facilities are operating at full capacity, according to JLL.

In the UK there are believed to be around 650 cold-store facilities amounting to around 120M SF, according to data published by Lambert Smith Hampton. Take-up doubled to 7.2M SF in 2020, of which 4.7M SF was new build.

The context is that demand for additional logistics space grew by more than 10M SF in Europe in 2020 and another 21M SF could be added by 2025, the Savills IM document said.

But Savills IM urges caution because surging demand has forced yields down for ‘big box’ assets. Prime net initial yields are currently at historically low levels of 3.5% to 4% and sometimes even lower in core European markets.

The report said urban and last-mile logistics, light industrial estates and cold storage subsectors now offer investors diversification opportunities. The firm also warns that the gas-guzzling logistics and warehousing sector is highly exposed to environmental concerns, meaning investors must prioritise sustainability concerns.

“Industrial and logistics is considered among the most exposed real estate sectors for environmental, social and governance credentials," Savills IM head of research Andreas Trumpp said. "We argue that, by prioritising ESG, institutional investors also have the potential to improve the underlying asset fundamentals and leap on significant commercial benefits.

“Aside from the ‘big box’ sector, emerging subsectors offer higher-yielding alternatives and provide yield-enhancing and risk diversification for investors willing to take higher risks and engaging earlier in the product cycle.”

The cold storage subsector has the potential to become a strong long-term opportunity underpinned by solid fundamentals and steady inter-cyclical demand, Savills IM said. In addition to traditional grocery retailers ramping up their online activities, new online grocery platforms have emerged while the public health emergency has led to a global surge in demand for medical supplies that require refrigeration.

Investors can't get enough of the logistics market at the moment. With an unprecedented amount of capital in the sector, investment into European logistics reached €22.5B during H1 2021, according to data just released by Savills. This investment volume is 64% of the record volume of deals registered for all of 2020, and it represents a 60% increase on the five-year first-half average.

The UK is the most popular investment destination, accounting for 37% of the overall H1 deal volumes. Ireland, Spain and the Netherlands were other markets that performed above their five-year averages.