How e-commerce is changing the real estate landscape

Tapping into e-commerce growth opportunities

In South Africa, e-commerce-based companies currently represent nearly 25% of all new industrial-zoned leasing, from less than 5% five years ago.

South Africa's e-commerce adoption, which is still in its early stages, experienced a significant acceleration during the Covid-19 pandemic lockdown period of 2020-2021.

E-commerce companies suddenly accounted for a large percentage of industrial property absorption as consumers preferred online shopping for the most part instead of in-store shopping to avoid spreading the virus.

In 2021, South Africa's e-commerce grew by 66%. Deloitte research reveals that over 70% of South African consumers shop online.

Mobile penetration among local consumers is higher than ever, which translates into online sales growth. A Geopoll survey in 2020 indicated that 45% of South Africans browsed the internet on their phones for a few hours a day. By January 2022, there were 41.19-million active internet users in the country.

The integration of wallets, banking, and shopping apps has made browsing through virtual shopping isles easier than ever before. From a survey of South African consumers, Mastercard concluded that online shopping would continue to grow, with 71% of respondents saying they will continue to shop online post-pandemic.

E-commerce growth

Online shopping in South Africa dates back more than two decades when Naspers launched kalahari.com in 1998, becoming the country's largest online retailer.

However, it has taken years for e-commerce to become a mainstream platform. The South African real estate sector is only starting to deal with the soaring demand for real estate that underpins the online retail ecosystem.

Global online retail behemoth Amazon which plans to launch in South Africa in early 2023, according to Business Insider, which quoted leaked documents, will compete with Takealot [Kalahari.com descendent], traditional retailers with an online presence and other e-commerce platforms.

Furthermore, Amazon reportedly plans to launch its Fulfillment by Amazon service in South Africa for third-party sellers. This service will significantly affect smaller e-commerce distributors using Amazon's platform to grow their online markets.

As South African consumers become more comfortable with online shopping, their appetite for other e-commerce solutions is growing.

Logistics real estate (a category that falls under the broader industrial market) is one of the recipients of this behavioural shift. Today, e-commerce-based companies represent approximately 25% of all new industrial-zoned leasing, from less than 5% five years ago.

Growth is surfacing in multiple categories, from large dedicated big-box warehouse facilities to small last-mile depot facilities and everything in between.

While most real estate analysts associate logistics real estate with big-box warehouses, the logistics property sector that has shown the most growth is the last-mile delivery sector which caters for small and medium-sized companies (SMEs). ?

Research done by McKinsey reveals that SMEs make up 98% of businesses in South Africa and employ between 50-60% of the workforce. This is the real estate sector market that will grow the most aggressively.

The focus on last-mile logistics reflects the pressure to reduce delivery times from warehouses to consumers. In recent times, growth has been faster in this sector while demand for larger logistic facilities holds steady.

The businesses that occupy logistics spaces are encapsulated in five broad categories:

Megabrands

These are the world's largest online retailers, including Takealot in South Africa, and hopefully soon joined by global giant Amazon.

Takealot's online revenue grew to R13bn in 2021 from R9.6bn in 2020. This translates to shipping an average of more than 5 million packages per month [166,000 per day] - a considerable fulfilment challenge that ramps up higher during the holidays.

Mega brand occupiers need substantial logistics facilities near highways and airports. They favour larger and more functional structures, and new buildings and pre-existing facilities are increasingly in demand.

LARGE BRANDS

These are often large retailers with established omnichannel offerings to enhance customer experience. Retailers like Pick n Pay, Shoprite Checkers, Woolworths and online-only operators like Netflorist and Yuppiechef are examples.

Large brands have considerable fulfilment challenges, and many still leverage their existing supply chains and store networks. Ultimately, many will develop dedicated e-fulfilment logistics sites.

Small and new brands

Newer and small businesses are experiencing dramatic online growth and distribution challenges. These include companies such as Veldskoen shoes, Forever New, Evetech, Raru, Mantality and ASOS, as well as dark kitchens and dark store spaces.

These tenants need small last-mile hubs in major urban markets. Their size requirements vary, with larger and newer brands often taking logistics space measuring more than 5,000m2.

3PLs with e-fulfilment capabilities

Outsourcing is commonplace for companies such as Imperial Logistics and Nexus Fulfilment. 3PLs have expertise in a complex field and help online retailers execute e-fulfilment. Their real estate requirements vary widely depending on the 3PL customer's needs, which naturally follow the mega, large and newer-brand business requirements.

Parcel delivery companies

These businesses are critical partners to online retailers, including companies like Courier Guy, ParcelNinja FedEx and UPS. These businesses have seen material growth as business-to-consumer delivery expands rapidly. Occupiers have various real estate needs, and depot locations are growing. The greatest demand is for last-mile logistics facilities ranging from small to large spaces.

With all these emerging trends and growth in e-commerce, the logistics sector will remain a high-growth real estate category.

Compared to other commercial property assets, industrial and logistics properties have retained the classical characteristics that?investors know and love: simple and fast construction cycles, low upfront investment, low re-tenanting costs, and healthy demand from occupiers.

In a world fast becoming dominated by e-commerce, industrial assets are a safe investment haven. After all, even goods sold online must be made and stored somewhere, and local supply chains remain necessary regardless of whether people work from home or shop from their phones.

The nondescript fa?ades of industrial and logistics buildings mask an increasing world of complex networks, automation, cutting-edge mobility, and some of the largest and most sophisticated landlords and tenants on earth.