SPR Webinar: The rising star of Cold Storage, 23 Feb 2022

Cold storage is warming up

Cold storage facilities have clearly existed for a long time, but this webinar heard that they are now starting to be recognised as an institutional investment asset class, or at least a subset of logistics.

Answering one of many questions from the audience, Kevin Mofid of Savills suggested that around 70% of UK cold storage assets are now rented, with the remainder in owner occupation. However, the largest, most attractive investment cold storage assets, are mostly owner-occupied.

In a joint research project with the Cold Chain Federation, Savills identified 678 cold storage units of more than 50,000 sq ft in the UK, accounting for 134 million sq ft in total.  He noted that the geographic spread of these assets is somewhat different to the overall logistics sector, with higher weightings in Yorkshire, the North East and East Anglia.  This reflects the relatively high level of food production and processing in these areas. These locations do however contain more smaller units compared to the retail distribution facilities which are spread more widely across the country.  He highlighted that cold storage includes different types – for example, frozen and chilled facilities.

However, Mofid sees cold storage as a ‘buzz sector’ for investors with strong growth potential and long-term income. Tom Southall of the Cold Chain Federation, a trade association for the sector, agreed that our current ‘age of everything’, when speed of delivery and convenience are at a premium, means that its time has come.  The frozen food sector is growing rapidly in the UK, while in addition to food storage, pharmaceuticals and horticulture have also started to emerge as significant uses during the pandemic.

The demand for larger, automated facilities is expanding, he stressed, particularly due to their stronger sustainability credentials, which are becoming increasingly important for occupiers. Cold storage is very high-energy, accounting for more than 1% of UK consumption, placing a premium on reducing electricity usage.  A number of facilities now incorporate wind turbines or solar panelling, but government targets for energy use will only get tougher.

Another theme that emerged from the webinar was the increasing consolidation now being seen among specialist cold chain operators, with a number of foreign companies moving into the UK market.  Dominic Burke of CBRE noted this as a key market driver in his presentation focusing on the valuation of cold storage assets, along with the ‘mission critical’ role they play for occupiers.  Valuing these properties is often challenging as there tends to be little comparable evidence in a locality and facilities have often been ‘built to suit’. For this reason, valuations often adopt a profits-based method along similar lines to hotels.

Questioned about the pricing of cold storage properties during the audience Q&A, moderated by Florian Richter of PGIM Real Estate, Burke suggested that historically there had often been a discount compared to conventional logistics, sometimes because locations are close to production sources with little obvious alternative use. But more recently yields may have narrowed somewhat due to a realisation of these assets’ critical place in the supply chain.  Mofid concurred, noting that there is an education process taking place among investors – particularly for the more specialised production-related facilities, where there may be the compensation of a highly secure income stream.

The meeting closed with a brief discussion of cold storage for pharmaceuticals. Southall noted that the low temperatures required for the Pfizer vaccine had brought this function to the media’s attention – but the premises required are very different from food storage.  Mofid had heard anecdotal evidence of growing occupational demand, particularly in the Oxford-Cambridge corridor, but this was yet to translate into institutional investment.

Tim Horsey