What is behind the rise in Industrial Open Storage, and will it continue?

Industrial open storage (IOS) is not a new concept, but it is a broad category. By definition, IOS is an ‘open plot of land used for storage’, and so the number of sites associated with this asset class is vast. However, when narrowing the definition to prime sites, more discernible features become apparent. Typically, a prime site will hold B8 planning permission or have a clear pathway to achieve it. It will be fully paved and levelled, with integrated drainage infrastructure, alongside water and electrical facilities. To protect an occupier’s property, security features such as palisade fencing and CCTV will be installed. Like the wider industrial market, the most attractive sites are located near arterial motorways or ports.

Historically, IOS has largely been the domain of private investors and owner-occupiers. However, this broad asset class is now attracting the attention of institutional investors. Last year, Mileway acquired a 71.3 acre site at Ridham Dock in Sittingbourne, and NW1 Partners raised around £100m of equity to build a £200m UK portfolio. Tristan Capital Partners also purchased a 22-acre site in Ark Royal, Birkenhead, 11-acres of which will be used for open storage. This year, Roebuck has already announced plans to target an additional £100m of transport advantaged IOS sites. So, what is IOS and why is it gaining traction? 

Demand for IOS rose during the COVID-19 pandemic due to supply chain disruption and the growth of e-commerce, creating a race for space. While traditional warehouses were occupiers’ first choice, an increasingly tight market, particularly in strategic locations, led many to consider IOS. Since then, geopolitical events such as the war in Ukraine and the Houthi rebel attacks in the Red Sea, have continued to apply pressure on supply chains and contributed to the sustained demand for IOS. 

Traditionally, the greatest demand for IOS sites has come from the construction industry – utilising space for storing materials and equipment. However, in recent years there has been a noticeable trend to use these sites to support supply chain distribution networks. Outside of core distribution facilities, there has been a growing requirement for the storage of vehicle fleets. And given the industry’s focus on net zero targets, EV charging infrastructure is now often required. Another increasing requirement is providing welfare sites to drivers that offer safe resting stops along key supply chain routes. While in the past this asset class has been associated with shorter, less formal lease terms, this shift in occupier base (particularly for prime assets) has resulted in longer lease structures being agreed, creating true long-income product in some cases.

As well as strong demand, the supply of IOS sites is constrained. Investors often acquire sites with longer-term aspirations to redevelop, most commonly to traditional warehousing or residential. For these investors, an added benefit of IOS is that they can continue to generate income from the asset during the planning phase. For sites that continue to operate as IOS, rental growth prospects remain upwardly volatile due to supply constraints. Sites in the South East and Greater London currently achieve particularly strong rental growth. When vacant, IOS sites also benefit from 100% rating relief.

Aside from the supply and demand dynamics, another added benefit of IOS sites is their limited infrastructure. Although there may be an initial outlay of capital to create a prime site, given the limited infrastructure maintenance, CapEx requirements are low when compared to other real estate sectors. Limited infrastructure is also likely to translate to low energy consumption, which can be beneficial to investors considering their scope emissions.

The surge in demand and constrained supply of IOS has resulted in the asset class being considered by a broadening pool of investors. For more information on this emerging sector, and why it may be of interest for your portfolio, please contact us.