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
Navigating the path to net zero: An interview with Jill Rutter
12 Nov. 2020
There is a large gulf between the concept of ‘net zero’ and the practical policies that will deliver it. Jill Rutter, senior fellow at the Institute for Government, takes a hard look at the UK’s progress towards the 2050 target.
Real assets and net zero: Now for the hard part
29 Oct. 2020
There is no lack of willingness among investors in real assets to play their part in helping countries reach net zero by 2050. But much needs to change – and quickly, as Laurence Monnier explains.
Remote working is on the rise, but the office remains indispensable
26 Oct. 2020
While the COVID-19 lockdown has highlighted the possibilities of home working, bringing people together in offices is still the best way to spur innovation and productivity, says Jonathan Bayfield.
Overcoming underwriting obstacles in a pandemic and beyond
16 Oct. 2020
The near-term disruption caused by the coronavirus has been testing for real estate borrowers seeking finance and originators. Gregor Bamert explains why new deals are still possible for those able to look through short-term uncertainty.
When equity becomes debt: The untapped potential of amortising-lease real estate
9 Oct. 2020
Pension schemes seeking alternatives to bonds may find amortising leases a compelling option, writes Luke Layfield.
Fit for the future: Unboxing ESG in real assets
5 Oct. 2020
Recent events have highlighted the importance of the environmental, social and governance characteristics of real asset investments – not only as part of COVID-19 recovery programmes, but also as a way of futureproofing portfolios.
Fibre broadband: The need for speed
9 Sep. 2020
Lockdown measures imposed during the COVID-19 pandemic have highlighted the importance of digital connectivity. Tim Perry looks at the investment opportunities and challenges associated with European economies transitioning from copper to faster fibre broadband networks.
Swipe right: The Tinder effect on real estate
24 Aug. 2020
It can be hard to perceive how society, and consequently our use of real estate, is changing. Sometimes, major structural trends are hiding in plain sight, says Chris Urwin.
Five charts that show Manchester is a city of the future
20 Aug. 2020
In this short, visual article we present five charts that show why Manchester is such a rich, vibrant and economically prosperous city. Our view is that the ingredients of connectivity, culture, talent, scale and scientific heritage make the city well-equipped to thrive in the coming years and decades.
The new rules of client engagement
18 Aug. 2020
As the coronavirus pandemic reshapes our working lives, asset managers must find new ways to interact with their clients, says Apiramy Jeyarajah.
Electric avenue: EVs and the transformation of autos
13 Aug. 2020
In the latest instalment of our editorial series, Link, experts from our infrastructure, credit research and equity teams discuss why efforts to ‘build back better’ as economies recover from COVID-19 could further accelerate investment in electric vehicles and associated infrastructure.
Education, entrepreneurship and biological age: An interview with Andrew Scott
6 Aug. 2020
In part two of our interview with Professor Andrew Scott from London Business School, we look at how policy will shift to take account of people living for longer and how service providers will respond.
Longevity, policy and technology: An interview with Andrew Scott
6 Aug. 2020
Living longer brings enormous opportunities to reshape how we spend our time. But in the first of a two-part interview, Andrew Scott from London Business School explains how advances in longevity and technology have not been matched by innovation in social structures or our approach to financial planning.
Reality bites: Retailing in a health crisis
5 Aug. 2020
In the latest instalment of our editorial series, Link, experts from Aviva Investors’ credit, equities and real asset teams discuss the consequences of COVID-19 on the retail sector and their implications for investors.
How to build back better, greener and faster: A 10-point plan for UK infrastructure
14 Jul. 2020
Boris Johnson has called for an ‘infrastructure revolution’ to help lift the UK economy out of its coronavirus-induced malaise. Private capital could and should play a large role alongside the public purse in delivering on that ambition, as Darryl Murphy sets out in a blueprint for the industry.
Real Estate: The Last Dance for gut feel investing
7 Jul. 2020
Commercial property investors could learn a lot from the data-led revolution that has taken place in basketball in recent years, as Chris Urwin explains.
Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). As at 11th January 2019. Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.
In the UK & Europe this material has been prepared and issued by AIGSL, registered in England No.1151805. Registered Office: St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Authorised and regulated in the UK by the Financial Conduct Authority. In France, Aviva Investors France is a portfolio management company approved by the French Authority “Autorité des Marchés Financiers”, under n° GP 97-114, a limited liability company with Board of Directors and Supervisory Board, having a share capital of 17 793 700 euros, whose registered office is located at 14 rue Roquépine, 75008 Paris and registered in the Paris Company Register under n° 335 133 229. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH, authorised by FINMA as a distributor of collective investment schemes.
In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1Raffles Quay, #27-13 South Tower, Singapore 048583. In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 30, Collins Place, 35 Collins Street, Melbourne, Vic 3000, Australia.
The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) and commodity pool operator (“CPO”) registered with the Commodity Futures Trading Commission (“CFTC”), and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606