• UK Real Estate

The logistics sector: Safe as warehouses?

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

warehouse interior

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

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.

Greater Manchester

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.

West Midlands

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.

References

  1. '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.

Thank you for subscribing to AIQ Investment Thinking.

Please enable JavaScript in your browser in order to view this feature.

I acknowledge that I qualify as a professional client or institutional/qualified investor. By submitting these details, I confirm that I would like to receive thought leadership email updates from Aviva Investors, in addition to any other email subscription I may have with Aviva Investors. You can unsubscribe or tailor your email preferences at any time.

For more information, please visit our privacy notice.

Aviva uses your personal data as set out in our Privacy Policy. We use Google’s reCAPTCHA technology to protect our websites from spam and abuse. The Google Privacy Policy and Terms of Service apply to reCAPTCHA.

Author

Related views

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). 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. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

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: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

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 27, 101 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 based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

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”) 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.