Rise in e-commerce driving growth in warehouse real estate
As more Kenyans embrace online shopping as a convenient way to buy essential household goods, retailers as well as logistics companies are finding themselves in need of extra space to store and manage goods ordered online.
As more Kenyans embrace online shopping as a convenient way to buy essential household goods, retailers as well as logistics companies are finding themselves in need of extra space to store and manage goods ordered online.
These spaces, commonly referred to as warehouses, depots or distribution centres, are not only enabling companies to effectively track and manage their inventory, therefore reducing errors likely to be made during the order fulfilment process, but also to distribute and deliver their products in a timely manner.
As a result of the rapid growth in their demand, these facilities, once viewed as large plain buildings located in industrial zones and other remote areas, are now being viewed as valuable real estate assets by industry stakeholders.
In more advanced economies such as America and parts of Asia where digital penetration has been high, warehousing real estate has long been one of the best-performing segments in the commercial real estate space, with e-commerce giants such as Amazon and Alibaba driving this performance.
However, with e-commerce quickly gaining market share in rapidly growing African economies such as Kenya, Nigeria and Ghana, warehousing is now becoming a lucrative real estate asset in Africa as well.
Investors are staking their money on these assets, which cost less to develop and maintain, making them economically viable. The monetisation cycle from the time of construction of these structures until an investor begins to collect rental income is much faster, which also makes them ideal investments. Meanwhile, developers are incorporating unique features into the warehouses to meet clients’ needs and encourage quick uptake.
These include temperature control systems that make the warehouses temperature-sensitive, thus making it possible to store items that require refrigeration, such as laboratory or pharmaceutical products and products that may degrade if exposed to too much heat. Temperature-controlled warehouses also prevent unwanted changes in the colour or texture of the goods.
Inventory control software
They are also incorporating inventory control software in these outlets. Having this software in the structures helps to inform the product owner about the location of specific units in the system, at all times. Further, they are designing shelving and rack systems in a way that maximises storage capacity and facilitates easy monitoring of inventory as well as easy product access.
They are also considering space management in their designs, by developing warehouses that either allow for easy movement of internal transfer equipment that moves products from one point to another, or that are fitted with robotic forklifts, conveyor belts and pallet jacks that operate automatically.
In more advanced economies such as America and parts of Asia where digital penetration has been high, warehousing real estate has long been one of the best-performing segments in the commercial real estate space, with e-commerce giants such as Amazon and Alibaba driving this performance.
Investment in well-thought-out automation and robotics helps to retain revenues and profit and is an answer to the scarcity of space and labour. Developers are also leveraging on advanced technologies to install item-picking robots, which can be used in places where there is a lack of space.
These facilities are also being designed in a way that makes them easily accessible to transportation be it road networks, rail lines or airports, so that it is easy to bring in or move the goods out as orders are fulfilled. A warehouse at an upfront location also reduces transportation costs.
With all these features that increase the value of a warehouse being incorporated, companies, both local and international, are all in a race to acquire massive warehouses that will facilitate the growth of their online business. Recently, for instance, a global distribution company, Copia, opened a 7,800 square feet warehouse in Kericho to reach key customer segments at a more localised level.
The warehouse, which will serve as its distribution centre for Bomet, Kisii, Nakuru and Kericho counties, brings the total number of distribution centres the company has in the country to 12. The company also announced that it has opened a 24,000 square feet facility in Kampala, covering 14 districts in Uganda.
According to Copia, each additional facility will enable the firm to keep up with increasing customer demand for speed and convenience, allowing them to fulfil orders within shorter lead times. The idea behind placing more small distribution centres around the country is to bring the product to the consumer.
Indeed, the pressure on retailers and wholesalers to reach more and more consumers is driving warehousing growth like never before. As retailers continue to add more inventory to meet the e-commerce growth, they are finding themselves in need of more distribution centre footprints across the country. Companies which previously operated using single large fulfilment centres are now looking for smaller distribution centres that are located close to major urban centres, where large populations of tech-savvy individuals are residing.
Small businesses
A recent study by real estate firm, Knight Frank, on the performance of industrial real estate assets in Africa shows that it is not just the large retailers or logistics companies that are rushing to acquire more warehouse space.
Other stakeholders such as clothing makers, furniture dealers, manufacturers, wholesalers, import and export companies, customs and other small businesses are also driving the demand for warehouse space, as they seek to boost effective management of their inventory, as well as reach more customers.
Small firms dealing with Fast-Moving Consumer Goods (FMCG) such as food and beverages, groceries, personal care, cleaning products, and stationery, for instance, are contributing to demand, especially in the form of strategically located storage facilities to store substantial inventories, returned goods and to also manage last-mile deliveries.
A recent study by real estate firm, Knight Frank, on the performance of industrial real estate assets in Africa shows that it is not just the large retailers or logistics companies that are rushing to acquire more warehouse space.
“This demand has been spurred by the growth in online shopping, with retailers rushing to bolster their online presence. Most e-retailers are on the hunt for large and centrally located warehouses. This rush to expand or establish an online presence is driving a surge in storage requirements, which is underpinning demand for warehouses,” notes Knight Frank.
In manufacturing, external factors such as the war in Ukraine as well as the Covid-19 pandemic have resulted in sharp increases in the prices of key inputs. This rampant inflation has necessitated the adoption of locally manufactured goods. Growth in local manufacturing has called for the development of more warehouses to boost storage capacity.
“Manufacturing is fast becoming a central pillar of demand for many of the continent’s industrial markets. Kenya, for instance, is encouraging the consumption of locally produced goods through initiatives such as 'Buy Kenya, Build Kenya', which is creating new demand,” notes Knight Frank.
Realising that not all manufacturers or retailers have the capacity to develop their own warehouses for storage, some entrepreneurs have gone the extra mile to set up warehouses, which organisations can lease on demand.
Meanwhile, some third-party logistics companies have come up with innovative models where they are leveraging their technology not only to connect customers to transport but also to connect small retailers and manufacturers to available warehouse spaces which they can lease on demand, via mobile applications.
That said, the demand for warehouses and industrial spaces is expected to remain robust across the country, well into the future, with rents expected to see continued growth and higher prices per square foot.
“The outlook for the industrial or warehouse sector continues to brighten, including expected decreases in vacancy rates and projected gains in rental rates,” notes Knight Frank.
Maintenance costs
Compared to other real estate assets, logistics and warehouse spaces are also increasingly gaining traction as more attractive investment assets. That is because there is a minimal retrofit cost when one tenant leaves and another takes over the space.
Maintenance also tends to be lower than with other kinds of real estate, and occupancy rates are often higher than with offices or retail space. This means that there is a relatively steady return with fewer maintenance headaches.
“In a changing world today, the definition of what constitutes mainstream property has blurred. Hotels, offices and retail, seen until recently as income-producing asset classes, are no longer as attractive to investors. The office market is faced with an uncertain future, with work-from-home models likely to remain a predominant reality for the next few years,” notes Knight Frank.
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The real estate agency however notes that there are still a number of factors inhibiting the full potential of this sector. Transport and energy infrastructure, for instance, remains a key demand dampener in the country.
“Having a strong infrastructure base is critical for uniform and sustainable economic development in the country, as lack of it has proven to be a bottleneck for growth. Good quality mobility, roads, rail network, electricity, connectivity with larger metros and development of adequate social infrastructure, will go a long way in establishing these industrial hubs within smaller cities,” notes Knight Frank.
However, the lack of infrastructure issue is quickly being addressed, with governments recognising the importance of upgrading existing infrastructure to support local economies and sectors such as industrial and logistics.
“Inadequate infrastructure has long dogged many markets on the continent, but governments are alive to the opportunities that improvements and upgrades to energy and transportation networks can unleash,” notes the Knight Frank report.
Even though several government interventions have been put in place to spur the growth of manufacturing and trade, statistics show that there still remains a shortage of high-quality, international warehouse facilities to satisfy the growing demand.
This perhaps can be attributed to the lack of adequate land for setting up warehouses in areas that are close to large populations. Then again land that is available is very expensive and prohibitive for development, especially for smaller companies. It is worth noting that an e-commerce fulfilment centre needs three times more space than traditional brick-and-mortar models. Ideally, these operations also need to be close to larger urban areas for same-day or next-day deliveries.
As prime locations near cities and transport hubs become harder to find due to the prohibitive costs, retailers are looking at building distribution centres in secondary locations that are far away from general populations.
This move is, however, always a compromise, because what can be gained in cheaper rent and space can be lost in higher transport costs, reduced supply of labour and longer delivery timelines.