The logistics industry is in a state of flux due to rapidly-developing technologies and the increasing demands of consumers. A strategy which focuses on the demand and supply fundamentals of local markets is required to cut through this uncertainty.
3 minute read
In line with broader economic trends, new technologies and business models are transforming the logistics sector. The rapid growth of online shopping is driving change, with the Office for National Statistics estimating online now accounts for almost 20 per cent of all retail sales in the UK, up from less than five per cent in 2008.1 Meanwhile, rising expectations on the part of employees, business partners and particularly consumers are forcing companies to develop more reliable and responsive supply chains.
With the growth of e-commerce in its infancy, this is no short-term phenomenon. Online sales, for example, continue to grow at a double-digit pace. In addition, many products that are still purchased in physical stores appear vulnerable to further e-commerce penetration. This is especially the case for routine purchases where speed, efficiency and price are the chief concerns.
Strong rental growth but new technologies could disrupt
Landlords of logistics and industrial space have been clear beneficiaries of investment in supply chains, with the sector enjoying robust rental growth in recent years. According to the IPD Monthly Index, rents have been on an upward trend since the middle of 2013; the longest period of growth since the late 1980s. Over this period, average rents across the UK have risen by around 22 per cent.
While continued growth in delivery volumes appears probable, an array of new technologies could potentially disrupt the logistics sector.
While continued growth in delivery volumes appears probable, an array of new technologies could potentially disrupt the logistics sector. These include the Internet of Things, 3D printing, augmented reality, bionic enhancement, cloud logistics, robotics and self-driving vehicles. It is even possible technology might allow logistics sites to be used more efficiently, leading to a reduction in the amount of floorspace dedicated to this function.
Identifying markets with strong demand and restricted supply
The potential for technological change to disrupt the logistics markets creates an uncertain outlook for major players in the logistics sector, including occupiers, landlords, developers and planners. We are taking a two-pronged approach to adapt to the uncertainty, focusing on local markets with robust demand and supply fundamentals.
In terms of demand, this means assessing the factors determining where occupiers choose to base their facilities. Of key importance in these decisions are access to consumers and the availability of labour. Consequently, we have analysed demographic and drive time data to gain a clear understanding of the catchment populations of logistics locations across the country; combining this with a detailed assessment of supply and demand in local labour markets.
We also seek to identify markets with significant barriers to entry for new supply by analysing the local planning and policy backdrop and availability of land.
This analysis has identified various markets, detailed below, which we believe have the greatest potential for long-term rental growth.
Greater London presents a mixed picture in terms of demand-side indicators.
Greater London presents a mixed picture in terms of demand-side indicators. Positively, it is particularly attractive in terms of access to consumers. But it cannot compete with the West Midlands in providing access to consumers on a country-wide basis. However, the scale and economic strength of the region mean that, within shorter drive times, it provides access to by far the greatest concentration of spending power. This ensures strong occupier demand. But high land values and demand for residential conversion mean logistics sites are scarce with existing sites at risk of change of use.
Due in particular to the scale of its local catchment, Greater Manchester scores highly on the demand-side analysis, while Manchester City Council is generally supportive of economic development where the case is strong. However, its dense urban character means there are limited opportunities for development within its local authority area.
The West Midlands scores highly in terms of demand-side fundamentals, with Birmingham particularly strong.
The West Midlands scores highly in terms of demand-side fundamentals, with Birmingham particularly strong. Around 90 per cent of the UK’s population can be reached within a four-hour drive. Only the South-East and the North-West provide access to more consumers and spending power in terms of a one-hour drive time.
In addition, the West Midlands scores well in terms of labour supply, with Birmingham offering the country’s largest pool of skilled and unskilled labour. On the supply side, the region is characterised by local authorities that are generally pro-development.
M1 Corridor from Luton to Rugby
Geographic and connectivity advantages mean markets in this corridor offer particularly good access to consumers at a country-wide level. As a result, they rank especially highly as potential locations for single-let logistics operations. Moreover, councils are generally not opposed to development.
M27 Corridor from Southampton to Portsmouth
Our focus on this market derives heavily from its supply-side constraints. Geography, the nature of surrounding areas and restrictive planning policies all serve to limit logistics development. On the demand side, the region does not provide the best access to consumers on a country-wide basis, but it does have good access to southern England with the wider urban area ranked as the eighth-largest metro area in the country.
- 'Comparing bricks and mortar store sales with online retail sales', Office for National Statistics, August 2018
Read the full paper: Safe as warehouses?
Building resilient logistics portfolios in uncertain times
Want more content like this?
Sign up to receive our AIQ thought leadership content.
From trials and tribulations to the best opportunity in a decade: The outlook for multi-asset real assets
21 Nov. 2022
James Tarry and Luke Layfield assess the impact of recent market volatility across real assets and highlight the wealth of investment opportunities for multi-asset investors that could emerge in 2023.
Building better: Investing in the climate transition through real assets
15 Nov. 2022
Investors in real assets can propel the transition to a more sustainable future while also benefiting from portfolio diversification and attractive returns, says Mark Meiklejon.
ESG considerations for social housing
28 Oct. 2022
Social housing plays a pivotal role in providing affordable housing for those most in need of it, benefiting local communities and countries as a whole. But investors considering an allocation to the asset class must pay close attention to the ESG implications, argues Mikhaila Crosby.
From needs-based to service-based: How the property market is being transformed
27 Oct. 2022
Property owners can no longer passively sit back and take steady rental income for granted. To build a successful real estate portfolio, a more active, customer-driven approach is required, explains Jonathan Bayfield.
Rates, rents and resilience: The outlook for real estate debt
20 Oct. 2022
Gregor Bamert discusses the health of UK commercial real estate debt and the effect rising interest rates are having on the asset class.
Resilience and selectivity: The outlook for real estate long income
5 Oct. 2022
Renos Booth, Isabel Gossling and Kris McPhail from our real estate long income team discuss the strengths of long-income strategies in a period of high inflation and rising rates.
Inflation, volatility and net zero: The outlook for real estate equity
12 Sep. 2022
Ben Sanderson and James Stevens from our real estate team discuss risks and opportunities for property investors amid changing work patterns, rising inflation and the race to net zero.
Conflict, inflation and energy security: An updated outlook for infrastructure investors
6 Sep. 2022
Darryl Murphy and Sean McLachlan from our infrastructure team assess how Russia’s war on Ukraine, fears over energy security and surging inflation have changed the prospects for infrastructure investors.
Inflation, recession – or both? Real estate investing through the market cycle
30 Aug. 2022
Runaway inflation and monetary tightening could trigger a recession. It’s time for the real estate market to press the reset button, argues Daniel McHugh.
What does the data say? Real Assets in focus
26 Aug. 2022
In this month’s instalment of our visual series on topical themes, we look at some of the key recent trends in the real asset universe.
Illiquidity premia in real assets: Q2 2022
9 Aug. 2022
Our real assets research team crunch the data to see whether the effects of rising inflation and interest rates are being reflected in private market returns.
Our progress towards net zero in real assets: A Q&A with Ed Dixon
30 May 2022
One year on from publishing our 2040 net-zero pathway for real assets, Ed Dixon talks through some of the key highlights, challenges and priorities for 2022.
Off balance and out of step
16 Mar. 2022
Daniel McHugh explains why real estate strategies need to change with the times.
Real assets: An alternative way to hedge inflation risk
3 Feb. 2022
As inflation soars to levels not seen in years, the costs of hedging against it via traditional liquid market securities are becoming prohibitively expensive. Real assets might offer institutional investors a better option, argues Luke Layfield.
The time for action is now: Incorporating carbon into private markets
13 Jan. 2022
Our real assets research analysts explore the whys and wherefores of understanding and managing the carbon footprint of their portfolios.
That déjà vu feeling: The outlook for UK infrastructure
6 Jan. 2022
Darryl Murphy assesses the current state of the UK infrastructure market and the likely drivers of activity in 2022.