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
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
- '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.
Author
Related views
-
Real Assets
Building better: Opportunities for DC schemes to invest in the climate transition through real assets
22 Mar 2024
By investing in climate-aligned real assets, defined-contribution pension schemes can help propel the transition to a more sustainable future while also benefiting from portfolio diversification and attractive risk-adjusted returns, says Mark Meiklejon.
-
Real Assets
Resilience and recovery: The outlook for real estate long income
21 Mar 2024
Renos Booth, Isabel Gossling and Kris McPhail from our real estate long income team consider the outlook for long-lease assets after a challenging period for investors.
-
Real Assets
Rents, rates and the refinancing gap: The outlook for real estate debt
19 Mar 2024
After a challenging 12 months for real estate debt investors, Gregor Bamert discusses what lies ahead for the market in 2024.
-
Real Assets
Illiquidity premia in private debt: Q4 2023
12 Mar 2024
In our latest real assets deep dive, our research team crunches the data to see how evolving macro conditions are reflected in private debt returns.
-
Real Assets
Des res: Opportunities in rental housing for institutional investors
25 Jan 2024
Jonathan Bayfield examines the fundamentals of this asset class, as well as the opportunities and risks for real-estate investors.
-
Responsible Investing
Common ground: Earning a social licence to operate in real asset investing
18 Jan 2024
Successful real asset investing requires acceptance of asset managers’ practices and procedures from a variety of stakeholders. We explore what this means for managers, their clients and investment outcomes.
-
Pensions
Plus ça change…The outlook for infrastructure debt in 2024
11 Jan 2024
Infrastructure demonstrated characteristic resilience in 2023 in the face of significant macroeconomic headwinds. Darryl Murphy from our infrastructure team explains why he expects current themes to persist in 2024.
-
Real Assets
Tech, trees and tailwinds: The outlook for climate transition real assets
9 Jan 2024
In this Q&A, James Tarry and Luke Layfield explore the themes shaping the landscape for real asset investors with a climate transition focus.
-
Responsible Investing
Changing course: Creating a stable investment framework for offshore wind
30 Nov 2023
Better market mechanisms and grid connection arrangements are essential to restore a stable investment environment in the offshore wind sector, as Nick Molho explains.
-
Real Assets
Illiquidity premia in real assets: Q3 2023
17 Nov 2023
Our real assets research team crunch the data to see how evolving macro conditions are reflected in private market returns.
-
Real Assets
It’s time to think about nature: Biodiversity and real estate funding
1 Nov 2023
Although the consideration of biodiversity risks remains limited for most assets so far, their longer-term impact is undeniable and needs to be considered when funding real estate.
-
Real Assets
Against the current: Seeking resilience in real estate equity
19 Oct 2023
A broad-based recovery in UK and European real estate looks unlikely in 2023, but discerning investors can still find value, say Imogen Ebbs and George Fraser-Harding.
-
Real Assets
Rates, repricing and relative value: The outlook for multi-asset real assets
11 Oct 2023
James Tarry and Luke Layfield from our multi-asset real assets portfolio management team discuss the outlook for real estate and infrastructure and how shifts in UK climate policy may affect the push for net zero.
-
Real Assets
As one door closes… How changes in long income are creating value opportunities
3 Oct 2023
Renos Booth, Isabel Gossling and Kris McPhail from our real estate long income team discuss the importance of selectivity to uncover opportunities and how new buyers can fill the void left by DB pension schemes.
-
Real Assets
Relative value in real assets: Q2 2023
14 Sep 2023
Our real assets research team drill into proprietary data to compare risk and return across sectors, drawing out those showing most relative value.
-
Responsible Investing
Deals delayed and crowded trades…But investors can still find value in infrastructure debt
4 Sep 2023
Private infrastructure debt still offers a broad spectrum of opportunities, but investors face complex challenges. In this Q&A, our infrastructure debt team contemplate the current state of the market and where it goes from here.