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.
Out with the old: Why real estate investors need to work harder, smarter, better
30 Mar 2023
Faced with a more challenging outlook for returns, real-estate equity investors must get more sophisticated and active, argue Ben Sanderson and David Hedalen.
The investment implications of peak fossil fuels
24 Mar 2023
Energy analyst Kingsmill Bond considers if peak fossil-fuel consumption has been reached and whether investors appreciate the implications.
Access all areas: Multi-asset investing in real assets
20 Mar 2023
Zoe Austin makes the case for a multi-asset investment approach in real assets.
Gas versus renewables: Does natural gas have a future?
8 Mar 2023
The war in Ukraine has thrown up huge uncertainties around the role of gas in the energy system. Experts from our credit, ESG and real assets teams discuss the implications for traditional energy and renewables companies.
To build or not to build, that is the question: Decarbonising the built environment
28 Feb 2023
We assess the financial and environmental pros and cons of developing new buildings versus retrofitting old ones.
Finding a new equilibrium: What’s next for real estate debt?
24 Feb 2023
Gregor Bamert discusses what lies ahead for the sector in 2023.
Illiquidity premia in real assets: Q1 2023
23 Feb 2023
Our real assets research team crunch the data to see how rising inflation and interest rates are reflected in private market returns.
Pragmatism, policy and pace: An interview with Julie Hirigoyen
20 Feb 2023
The chief executive of the UK Green Building Council sets out her blueprint for a net-zero-aligned property and construction industry. Words by Miles Costello.
When equity becomes debt: The untapped potential of amortising-lease real estate
15 Feb 2023
Institutional investors seeking alternatives to bonds may find amortising leases a compelling option, writes Mark Wells.
Why London remains the ultimate city of the future: Assessing the prospects for London real estate in a post-Brexit, post-COVID world
30 Jan 2023
Brexit and the post-COVID shift in working patterns have changed the landscape of London real estate. But the city remains well-positioned as a key hub in the global knowledge economy, as Jonathan Bayfield, James Stevens and Ed Atterwill explain.
Why infrastructure investors better beat beta: End of cheap-money era brings risks and opportunities
25 Jan 2023
Benign macroeconomic conditions have boosted infrastructure investments over the past decade. But with higher interest rates, investors in the asset class will have to show they can create true value, says Darryl Murphy.
Resilience, renewables and rates: The prospects for infrastructure debt in 2023
12 Jan 2023
Infrastructure demonstrated characteristic resilience in 2022 in the face of significant headwinds. Sinéad Walshe and Florent del Picchia from our infrastructure debt team expect more of the same this year.
The (re)price is right – how long-term investors can capitalise on a turbulent time for real estate
11 Jan 2023
Despite the ongoing turbulence in commercial real estate, Daniel McHugh discusses why market repricing represents an opportunity for long-term investors.
Building to net zero: The outlook for climate transition real assets
8 Dec 2022
James Tarry and Luke Layfield explore how the accelerating climate transition is creating risks and opportunities for real assets investors.
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.
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.