Real Estate

The rise of Amazon and other online giants is creating a new sweet spot in UK real estate

Key Points
  • Appetite for industrials and logistics spaces is on the rise
  • London offices aren't proving as interesting for investors
  • Regional offices "offer more upside with higher yields and rents which still look affordable"
Groceries are prepared for distribution at Tesco's distribution plant in Reading, England.
Dan Kitwood | Getty Images

Money managers are flocking to a new spot in the U.K. real estate market.

Traditional office spaces are losing their attractiveness to investors, but the appetite for industrials and logistics spaces is on the rise.

Industrials and logistics are offering the highest returns "due to the shift from physical stores to online shopping, as retailers are looking for more space," James Carswell, analyst at the stock broker Peel Hunt, told CNBC on the phone Monday. "There are more people buying online and there's a growing need for quicker delivery times."

The rise of Amazon, eBay and other online shopping services like Ocado is creating the need for large warehouses and storage units. Alongside growing customer demand to receive purchased items as quickly as possible, this is requiring an increasing number of storage spaces – both big boxes in the countryside and smaller units closer to biggest cities, mainly London.

Parcels are prepared for dispatch at Amazon's warehouse in Hemel Hempstead, England.
Peter Macdiarmid | Getty Images

Miles Gibson, head of U.K. research at commercial real estate services and investment firm CBRE, told CNBC last week that industrials and logistics are performing "very strongly… and investors are seeing double-digit returns."

The other side of commercial property, offices, aren't proving as interesting for investors.

"Offices, for example, are affected by the fact the we have full employment, nearly full employment, in the U.K. so employment growth is slowing, which means demand for offices is slowing, so we are expecting rent growth in office sector for example to slow as well," Gibson told CNBC.

Another issue for office spaces is Brexit and the uncertainty as to how trade between the U.K. and European companies will work after 2019.

"Most of the office space is concentrated in London. Because of Brexit and the uncertainty surrounding it, we expect companies to delay big decisions and thus are generally less likely to sign a new 20-year lease," Carswell said.

He added that relatively high rents and low yields in the office space mean that there is not much room to make returns in investments in this part of the sector. However, he noted that there are a few exceptions, including regional offices, which "offer more upside with higher yields and rents which still look affordable."