The case for prime UK logistics in a world of tariffs 

Within real estate, ‘wait and see mode’ has been a preferred term of the last few years. The geopolitical landscape and a lack of market visibility have meant investors have exercised caution - and been even more selective - when it comes to the allocation or reallocation of capital. Risk management is key, balancing pressure to deploy with macro challenges.

Charles Allen, head of European real estate at Fiera Real Estate

Wait and see can also be applied to the tariff context. It is too early for clear patterns of occupier and investor behaviour to emerge, and for the data reflect that, but investors still need to put their capital to work. 

Predicting the impact of tariffs – especially in the mid- to long-term, the default outlook for patient institutional capital – that combine experience in cyclical volatility with a long-term view of headwinds, tailwinds and real asset mega-trends must be considered to make an informed view on how the market will respond, and where capital will land by geography, sector and products.

The introduction of tariffs has strengthened what was already defining in this market cycle –  that resilience is paramount. With asset allocation and portfolio construction being guided by principles of defensive diversification, opportunities offering income stability, inflation-protection and rental growth will continue to underpin investments. Variation in the economic relationships between the US and different parts of the world is another factor investors will monitor continually in their pursuit of ‘safe-havens’.

With this is in mind, UK Grade A logistics will remain in favour. Underestimating its own challenges - namely inflation and global trade activity – would be naïve, if not reckless, but others factors are converging to suggest that resilience can be found in the niche of a stable UK market and the prime segment. 

Inflationary pressures are there to be grappled with. Market uncertainty and cost concerns are sharpening scrutiny of new development. But a relatively lower cost of capital in the UK, as well as reduced competition in the land market, mean a premium is available for investors allocating with managers that have a proven track-record in logistics development, such as Fiera.

The UK’s current standing in the investment community is also a far-cry from that of a few years ago. A stable government is showing intent to encourage institutional investment into an economy and built environment that is digitalised and decarbonised. This is a reassuring foundation to support the robust legal frameworks, market liquidity and depth of opportunity that have been long-standing features of the UK investment case.

In the logistics market, the new tariff environment has to some extent accelerated what was already a demand-driver: de-globalisation. The much talked-about on-shoring, near-shoring and friend-shoring have served as tailwinds in the UK, where the recalibration of supply chains – supported by e-commerce penetration - has translated into strong demand for modern, prime-located stock. 

Cost management pressures in response to tariffs will weigh heavily on occupier decisions around production lines and supply sources, placing an even greater requirement on facilities within the closest proximity to end users. The renewed focus on supply-chain resilience will also play into inventory management strategies, with stockpiling and the ‘just-in-case’ phenomenon given a new lease of life.

Reshaping supply chains, stockpiling and increasing space are reserved primarily for businesses with a healthy bottom line and the strongest covenants that typically occupy prime facilities. These are the same occupiers whose experience has taught them that competition for the best facilities is fierce, meaning a gut-response space reduction could hurt later down the line. 

The sustainability profile of grade A logistics is also key. Occupiers and investors are facing similar pressures to decarbonise, with institutional capital having the added pressure to future-proof, ensuring that portfolios are in keeping with the evolving regulatory environment to avoid the prospect of asset obsolescence. Tariffs or not, demand for assets with exemplary sustainability characteristics – including a sustainability-minded tenant base - will continue to drive the flight to quality we are seeing in real estate, including in logistics.

The new tariff environment has reminded the investment community – if it ever needed it – that the opportunity set in real estate is an uneven one, and the macro environment surrounding it is ever-changing. But it is often within this context that the best opportunities can be found.

Charles Allen is head of European real estate at Fiera Real Estate